Mortgage loan products during recessions

[Joe Nguyen]

With recession looming (I believe we're in it already - early phase), what are some of your strategies to combat high interest rates when it comes to borrowing from the bank? I'd love to hear directly from mortgage brokers/lenders on this forum as well as the veterans who've been through these economic downturn before. Personally I'm thinking of ARM loans to combat short term rate hikes and refi when possible (within 5 to 7 years). This is a bet for sure and nothing will guarantee rates won't be higher when 5/7 years time is up.

Appreciate all the inputs and hopefully there isn’t already a similar thread.

[Erik Browning]

Hi @Joe Nguyen,

For investors: Investors are sophisticated buyers who know that while interest rates play a factor in their purchase, it's really not as important and doesn't have as much influence on their decision. Investors care about acquisition of a performing/soon to be performing asset, cash flow, future value. Whereas non-investors care about bragging to their coworkers that they received a super special rate because of their "advanced business acumen." Real, actual investors focus on the buy and invest their money on an actual deal. If the rate is 6% but they bought the home at 40%, so be it. 

For non-investors: As mentioned above, non-investors are surrounded by people that consistently share how smart they think they are by disclosing they have a 2.5% rate from 18 months ago. However in reality, banks and lenders capitalize on this FOMO attitude by advertising these low numbers, but then hiking up the origination fee to get paid on the back end. News flash for non-investor home owners: if you are getting mail for anything below a 4.5% in this market, you are getting screwed on fees or points paid. Work with a broker that gets paid from the lender instead of from you.

As far as products Joe, I'm an advocate for renovation loans - especially for the entry-level investor. I used one myself starting out and it allowed for me to go through the entire reno process with clear deadlines and guardrails to ensure safe, complete work. The bank was my partner and I was very happy with the end result.

For more seasoned investors, they still have access to the regular vanilla Fannie/Freddie/Ginnie products - and they will continue to use them up to 11 properties (including their primaries). Like I mentioned earlier, seasoned investors will find a good deal first and then worry about the rate - they are not scared of a rate and will not close up shop because they see a $200 price difference from 18 months ago. They realize that it's on them to get creative on the buy side and be a shark in a sea of minnows.

AMRs - yes. I support the use of ARMs, but only if the buyer/investor clearly understands how they work. Every ARM deal I've done, a buyer will bring it up first, not me, and then I will facilitate that request on their behalf. Again, the sophisticated buyer gets the deal first and then explores the mortgage product 2nd. They also know that they have to refinance prior to the ARM adjustment once and attractive 30year rate comes available. Again, these are for educated, sophisticated buyers.

Lastly, we still have the regular old DSCR loans available. Even in this relatively higher rate environment, investors are still purchasing/refinancing using their bank statements and will continue to do so. Again, they bought the property correctly - so a higher rate will not scare them.