All Forum Posts by: Joseph Zanazan

I am a direct lender and broker in Los Angeles and am expanding my business outside of my surrounding counties of Orange, San Diego, etc over to Central and Northern California counties. 

Our marketing efforts are going above and beyond just our back yard and we are looking to more consistently have a footprint throughout the state. As a result of growth, we look to establish relationships with reputable appraisers that we can send business to on any of our purchase or refinance deals.

I'm reaching out to the realtors because i don't think there is anybody out there that has their finger on the pulse and is more aware about whats going on in their part of town more than realtors do. I'm hoping my realtor friends can point me in the right direction and help me send business to their fellow licensed professionals in the area so we can keep our referrals flowing, maybe even get a referral for myself one day, who knows.

I need an appraiser in the Sacramento Area and in the Santa Barbara area...

Thank you for everyones' time and all referrals are appreciated.

For your business you would decide if you are a Schedule C Sole Proprietor or Schedule E S-Corp or LLC. Whether you are Schedule E or Schedule C, you have very distinct set of income calculations and subsequent allowable add-backs. The way you asked your question was all jumbled up and i think that's why it raised some confusion.

Rental income is AUTOMATICALLY filed under Schedule E along with all your other businesses that arent independent contractor businesses where you personally receive a 1099. By the sound of things you would be filing LLC along with all your rental properties under SCHEDULE E.

As a schedule C sole proprietor you are allowed to add back the following:

-Amortization/Casualty Loss

-Business Use of Home

-Depreciation

-Depletion

-Total Mileage Depreciation

Remember, LLC means you are Schedule E for business income. Not to be confused with the above mentioned business add-backs that you had mixed up in your question. Schedule E business add-backs are limited to:

-Royalties Received

-Depletion

Now that we have some clarity on the business income we can address the rental income. Rental property addbacks are significantly liberal and if you are dealing with an investor friendly broker or lender, they can help interpret your tax returns and allow add-backs to take you from a high risk to a low risk borrower. Rental income addbacks are:

-Mortgage Interest

-Hazard Insurance premium

-Depreciation (typicall, straight line method)

-One-time extraordinary expenses

-HOA fees

99% of lenders out there follow the traditional Fannie Mae/Freddie Mac framework and this is how the underwriters treat income.

HELOCS are a portfolio product that a Big Box Bank (bbb) would offer where they would lend their own money as opposed to a MORTGAGE product where they can package, sell off the note and ultimately wipe their hands clean of any future possible risk. This suggests that they are going to hang on to the tradeline on the books and service it themselves. This is a different type of risk ultimately forcing their lending decision to be substantially more conservative. 

Its customary for the bbb to evaluate their collateral in a HELOC application without an actual inspection or appraisal . As opposed to a traditional mortgage application where you must get an actual unbiased appraisal done, during a HELOC transaction, its customary for your bbb to conduct a more cost efficient desktop review of title and market data instead. When making such decisions, especially in the volume that they do, its customary to apply a haircut to value only to protect themselves. This ultimately allows the bbb to arrive at an arbitrary figure which is not surprisingly at least 5 to 10% more conservative than what the market suggests it to be. Its been that way since day 1, im sure people who have had equity lines through the 2000s and even after the great economic recovery can attest to that.

With that being said, assuming you have owned this home for years and are now trying to access some of your hard earned equity through a HELOC, expect the bank to cap you out at 80% of the already conservative value they have given your property in the desktop evaluation to begin with. That means they are allowing you to access UP TO 80% of your equity on a value that's already 5-10% lower than what its really worth. That means you're possibly only able to access 70-75% of what your property value truly is. Don't forget the banks can turn your HELOC privileges on and off if they feel you are over-borrowing without any restrictions. If you don't mind that all you get to borrow is 70% of what your true property value is then i suppose a HELOC isn't the worst way to go.

In your situation, expect the bank to base their lending decision on what you paid for the property 6 months ago. The bbb gets to decide what they feel the home is worth and you cant do anything about it. Don't expect them to give you the benefit of doubt or take the more liberal approach to approving you for an equity line because they have less risky applications now in their pipeline that they need to get to and approve besides yours.

If you're looking for cash, a straight cash out loan is the real way to go. We would appraise your home to be able to get that full current value. That's the only way to go.

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I think the answer to your question lies in the details of your personal situation. For example, average borrowers' who are trying to pay off credit card debt , 9 out of 10 times will opt for a HELOC first and then years later end up doing a cash out consolidation loan to combine their first with the 2nd (HELOC). Investors would potentially be a little more strategic and well-orchestrated with their moves.

As previously mentioned, a HELOC will be predominantly adjustable. Some investors feel comfortable with their rate tied into an adjustable index because they understand their current market conditions. They understand that as long as the Chinese economy continues to suffer and the price of a barrel of oil stays at record lows due to a high supply and low demand, that more often than not interest rates tied into indexes like the CPI will reasonably keep short term rates low for a while. They're aware of their timelines and how long they will have to carry this debt and will tackle projects accordingly. These projects typically have a turnaround of a year, give or take a few months. They will leverage the low maintenance accessibility to their advantage by getting in and out of the loan before the circumstances become less than favorable. This typically works in "flip" type situations where you earn a return on your investment along with the money you've invested fairly quickly without carrying extra risk. In this situation, ease and cost free accessibility will favor an equity line any day of the week. Short term rates, as in the rates tied into indexes that are the most sensitive to economic shift will move before the 30yr fixed loan rates would. For an informed borrower, there should be enough time to make a move on a cash out consolidation loan. Typically, when indicators like the yield on our 10 year Treasury bill starts to rise, it's time to fix your rate.

You however mentioned that you're looking to use this money as a down payment for an investment property. This suggest that your strategy is a long term or buy and hold strategy. In this situation credit score can play a huge role. Depending on strong your fico score is and the loan amount, a loan level pricing adjustment like CASH OUT will typically have an adjustment of an eighth to a quarter percent. As mentioned, depending on your loan amount, this difference in rate can mean only a few extra bucks on the payment at the end of the month. Some investors would consider this a more conservative approach to their investment simply because they don't intend on paying the loan off organically anytime soon. Instead of rolling the dice on a possible cash out consolidation loan down the line that might be necessary due to the borrower's inability to pay off the HELOC organically, a cash out loan today would guarantee that the net cost of money is no more than only an eighth or quarter percent. By agreeing to pay an extra couple bucks of interest today, you would eliminate the possible scenario of interest rates going up years down the line at a time where you need to do the consolidation, aka the cash out refi loan the most.

The second mortgage, although typically a fixed product, will have an interest rate higher than the rate on your first trust deed. This would be purely a mathematical decision upon evaluating the proportions of the loans in respects to their potential interest rates. Cash out on one loan vs 1st and 2nd option. More often than not a HELOC will be more favorable in a flip situation vs a 2nd loan anyway due to the ease of accessibility so it’s really usually between the Cash Out one loan vs the HELOC option.

In order to be the best strategy, you would have to evaluate these situations individually. The philosophy behind it is fairly standard. If your credit is good and you're looking to buy a rental property, chances are a cash out loan today will be a better move. If your project requires a rehab and/or flip for example with the exit strategy sometime in the foreseeable future, a HELOC would perhaps be more convenient

The good news is that it’s a business decision at the end of the day and an answer to this question can be formulated in a pretty objective manner. Always keep in mind that the ratio of your first trust deed in respects to the new cash out amount. The real answer to your question would have to be on a case by case basis to truly be the most accurate. A lot of it is in the math folks, and how long you plan on carrying the debt. There is no right or wrong answer.

A HARD money loan would basically be just like cash. Transactional lenders, just the same, will gladly allow you to do a rate and term or a cash out refinance the next day on a property that was purchased cash. The next day rate & term will allow you to finance the property up to 97%, the next day cashout will allow you to finance the property up to 70%. Delayed financing wont require a new appraisal, it will just use the lower figure between the sale price and the original appraised value and is called Delayed Financing. Aside from Delayed Financing which is private money, for the standard cashout guideline of 80% to be allowed (Fannie Mac/Freddie Mac), a new appraisal and a 6 month seasoning is required. How much money you can pull is essentially predicated upon how patient you can be. Most will take their allowed 70% immediately, sit on the property for 6 months, and then do the traditional cashout refi and pull the additional 10% with a conventional loan or 15% with an FHA loan.

As long as you recognize the allowed and limited practices to rate & term and cashout guidelines, you can address any uncertainty pertaining to it. If you must pay off debt in excess to the hard money loan, like say an additional $20,000 as mentioned, this would most certainly make it a cashout transaction since you're borrowing more than what's owed on the first trust deed. Referring to the above guidelines, as long as your new requested loan amount to borrow is 70% or less than the lower of the two values, you can do a cashout loan immediately.

When lending, the decision will be made based upon risk. Since the hard money loan is basically cash, the success of the transaction will be based on one important merit, equity position. The equity in the deal will absorb the risk. The premium to pay is the high interest rate + the 10% limitation in cash out capability. Its obviously a much easier loan to close since it doesn't need an appraisal, credit, nor income & tax documentation. The 6 month refi cashout will need all of that. The absorbed risk in that scenario will be spread-out over all those parameters instead of just on the equity position. The benefit then would be a far more competitive rate of course and a far more stable long term financing option.

You must promise the FHA that you intend on occupying the property, that's the first postulation. If after moving in within the first 60 days, you decide that you must sell, you're free to do so. Nobody can make you live in a property that you don't deem fit for your family or your finances. If you're in a position where you must sell and relocate, then the lender cant keep you anywhere against your will. The property can be sold at anytime, there are no restrictions that limit your ability to sell and pay off the money you've borrowed to your respectable lender. You just financed, as a part of your payoff, a 1.75% UFMIP. They will gladly allow you to pay that loan off.

~verbatim

"At least one borrower must occupy the property and sign the security instrument and the mortgage note for the property to be considered owner-occupied. Our security instruments require a borrower to establish bona fide occupancy in the home as the borrower's principal residence within 60 days after signing the security instrument with continued occupancy for at least one year."

This thread however has the underlying notion that a caveat existed beyond what we've talked about already, and you guys are right, there is. Before being able to convert the property from an owner occupied residence to a true rental, you have to reside in the property for a minimum of a year. At that point you don't have any risk of the lender calling the loan due (acceleration clause for the first year), plus you can now deduct from this property (assuming its a multifamily) more effectively. More often than not, these are going to be your two hurdles you will jump in the first year. That one year of residency will allow you to get away with paying only 3.5% down for ultimately, a rental property legally and strategically.

Hope I can chime in guys...

You must promise the FHA that you intend on occupying the property, that's the first postulation. If after moving in within the first 60 days, you decide that you must sell because your neighbor plays the drums, youre free to do so. You don't want your infant daughter's sleep to be compromised, you have every right to sell and move. Nobody can make you live in a property that you don't deem fit for your family or your finances. If you're in a position where you must sell and relocate, then the lender cant keep you anywhere against your will. The property can be sold at anytime, there are no restrictions that limit your ability to sell and pay off the money you've borrowed to your respectable lender. You just financed, as a part of your payoff, a 1.75% UFMIP. They will gladly allow you to pay that loan off.

~verbatim

"At least one borrower must occupy the property and sign the security instrument and the mortgage note for the property to be considered owner-occupied. Our security instruments require a borrower to establish bona fide occupancy in the home as the borrower's principal residence within 60 days after signing the security instrument with continued occupancy for at least one year."

This thread however has the underlying notion that a caveat existed beyond what we've talked about already, and you guys are right, there is. Before being able to convert the property from an owner occupied residence to a true rental, you have to reside in the property for a minimum of a year. At that point you don't have any risk of the lender calling the loan due (acceleration clause for the first year), plus you can now deduct from this property (assuming its a multifamily) more effectively. More often than not, these are going to be your two hurdles you will jump in the first year. That one year of residency will allow you to get away with paying only 3.5% down for ultimately, a rental property legally and strategically. At that point, as an investor, you don't really care about anything more, just your return and your risk. If you can replicate this process and go owner-occ to true rental in one year, you'd be using the FHA loan as a tool. In a bullish market, that's when things can get interesting.

If you passed an FHA appraisal to purchase the property, that means its statistically closer to turn key than appraisal requirements for conventional financing. FHA has demonstrated a stricter and more conservative approach to evaluating the property. If it passed an FHA inspection, chances are the seller will ask for more money than if you were to be going in there with a cash negotiation that you can potentially have a 7 day escrow on. FHA purchase can take 30 days to close. You probably didn't buy that property with FHA financing and got such a stellar deal where you can now afford to "flip" and remain profitable. If you're going to sell its probably going to be a non-business decision like the noisy neighbor. You can sell but that's not the business strategy here. The strategy is to buy a rental for only 3.5% down.

Hello George

I congratulate you for even being in a position to think about purchasing an investment property but I think you would benefit more both short and long term if you improved your existing situation before you pulled the trigger on any type of purchase.

First of all, your 600 FICO will make your decision as to which type of loan you want to proceed with a lot easier than you think. A conventional loan will require minimum of 620 FICO (midscore). The 580 threshold for FHA loans will probably be more accommodating to you given your situation. A conventional duplex purchase will require minimum 25% down so be aware of that. An FHA purchase, the closest thing to receiving first time homebuyer incentives, will allow you to get away with a smaller down payment. It will also however make it mandatory for you to reside in the property as a buyer. Please also be very aware of those details as well. All loans are good loans and they're all like tools. Recognizing which tool you need for the job is the secret sauce.

When reaching for your 401k, just be aware of the tax implications that might apply and how it will contribute to your net profits. Now its no longer just a cash purchase with liquid capital so you shouldn't use the traditional calculations or formulas for basic cash purchases. There would be additional hits to your bottom line as a result of that so be very aware of how it ties in to your investment calculations.

Lastly, you always want to talk to an loan agent first so you can sit down and determine your buying power. Kind of like putting the horse before the carriage. Not only will most sellers require that your financing/proof of funds be in order first before entertaining any sort of offer, but you also want to know how much home you can afford based on your income. If you're self employed, your tax returns might be a little more complex than say a traditional wage earner. If you're self employed, you're undoubtedly deferring taxes on some of your earnings. That's going to to adjust your gross income and will ultimately contribute to your debt to income tolerance. Grab your last two years' of tax returns and I will be more than happy to sit down with you and spend some time trying to figure it out.

Hope that helps.

JZ

To add on Upen's insights, your cash out capabilities during delayed financing will be slightly different from a traditional cash out refinance.

Traditionally, on a Conventional cash out loan you can go up to 80%. FHA loans are slightly more liberal so they will allow up to 85%. Assuming you paid cash for a property, within the first 6 months, your cash out capabilities with delayed financing according to Fannie and Freddie are limited to only 70% on single family homes and 65% on manufactured homes.

Being a Fannie and Freddie guideline its not a typical lender overlay. It's something a lender won't be able to work their way around for the sake of the borrower. It's one of those "it is what it is" situations.