All Forum Posts by: Julee Felsman

Hi @Joe Stubbe,

I work for a company that's stayed pretty aggressive with regard to down payment/LTV during COVID (we still have a 5% down jumbo program for instance) and we're currently requiring a minimum 20% down for a second home on our jumbos. If you're going to rent it out more than very incidentally, it would be considered non-owner occupied you can expect something more like 25% down.

Cheers!

Julee

HI @Wendy S.,

The standard "occupancy" requirement for owner-occupied financing mandates that you move in to the property within 60 days of closing and have the intent to live there for a year.

If you are within 90 days of satisfying the 1 year on your current loan and it takes 30 days to close on the purchase, things should line up nicely.

You can expect that a lender may ask you to write a letter of explanation (if you want to sound "in the know" on mortgage terms, our shop-talk jargon is "LOE" or "LOX") with regard to your intent to move and/or why you're moving so soon after refinancing. 

This letter will be especially important if the place you are buying isn't as nice or big as your current place -- or if you're moving from a house to a plex. You need to make sure your move make sense to the underwriter. So be sure and point out any reasons you'd want to live there in this letter...  "I want to get owner-occupied financing" isn't an explanation underwriting is generally happy with, do look for any tangible... closer to work? Better layout? Nicer area? Better schools?

And as an aside, I've had a lot of clients secure approval to move sooner than 12 months. Just closed last week for a client who refinanced her primary residence in March. She's a real estate broker and showed a home that her client didn't want, but she fell head over heels in love with. Her LOE was a "love letter" about the house... and because it was honest and the whole story made sense, the underwriter believed her intent was honest when she closed on the refi and approved a new owner-occupied loan.

At 9 or 10 months the plausibility of something changing between when you signed the statement and now is greater.

Hope that helps!

Julee

Hi @Michael McClearn!

I'm both a lender and an OG house-hacker (two of my first three homes were duplexes and I kept all three as rentals when I move on).

I'd be happy to answer questions from both sides of the fence -- either here for the general good, or feel free to DM me. 

Cheers!

Julee

Hi @David Alder!

As @Eric Veronica mentioned, there is a hard and fast rule to which very nearly universal. Pre-COVID I worked with three programs that permitted gift funds for the down payment on a rental. Only one of them is still up and running (COVID has change the lending landscape a good bit) -- but it's far from the best-priced option.

In terms of creative workarounds, I have an idea for you:

If your folks own the property free and clear, they could sell it to you on a private note (owner carry). You'd be eligible for a rate/term refinance with no waiting period. You could immediately refinance into a new long-term loan that would pay of their loan to you.

Before pursuing this, I would strongly suggest you get pre-qualified for the loan you'll need. That way you don't get stuck (or really your folks won't get stuck) with something that was intended to be a short-term situation for longer than you both intended. 

You should also do some recon on the likely appraised value of the property -- again to head of any surprises.

If your folks don't own the property free and clear you could still pursue this option by paying off their mortgage (maybe using a HELOC on another property).

If they don't own the property and/or can't pay it off, you could still write up a private contract (in theory) and "wrap" it around their loan, but it would be a risky move, as their sale to you without paying off the loan would trigger their due-on-sale clause if their lender catches wind. 

Another (slower) option: have them add you to the title of the property. Once you've been on title for 6 months, you'd be eligible to pursue a cash-back refinance to pay off your folks' old loan and pull out extra money to buy out their interest. Cash back refinances, however, come at higher fees and allow you to borrow a lower loan-to-value ratio than a purchase or rate/term refi. 

Once you've  been on title for 12 months, you can pursue a rate/term refinance that includes the money needed to pay off the existing indebtedness plus and amount needed to buy out your folks' interest.

These buyout guidelines are most often used in cases of divorce (one ex-spouse wants to keep a property and has to buy out another), but they can be used in any instance that parties own a property together and one wants to buy out the other's interest.

Hopefully these notes make sense, but happy to clarify if not!

Julee

@Blake Furtick, if your debt-to-income ratio is too high that would preclude another purchase regardless of the Fannie/Freddie limit (or lender-imposed overlay). 

If you don't have a high degree of confidence that the lender you've been speaking with is experienced and adept at working with investors, moving on to another lender/loan officer to get a second or third opinion is a good idea. 

There are even DTI overlays right now, so working with a lender with minimal overlays will give you the best chance at making the numbers work.

If you look at my post history you'll see one I wrote yesterday that lays out some detail on how lenders should figure the DTI relative to your real estate, but of course, there's more to your DTI than that. The only way to get a solid answer is to apply for pre-approval (with a lender you feel confident knows their stuff), share all of your information, talk to them about your goals and see how things shake out.

Julee

@Marie M.!

It depends... every refinance should involve a cost/benefit analysis. You need to share your goals for a new loan with a lender who can help assess the options.

With as low as rates are right now, you may be able to shorten your loan term to 15 years and keep a similar (or lower) payment. 

But there are lots of other reasons to refi. I'm refinancing a couple of properties with about 7 years to go on the existing loans to a new 20 year loan. I'm taking cash back and will be able to pay off the loans on several other properties. I'll be lowering my interest rates and improving my cash flow by thousands of dollars a month. I will probably keep paying my old payment to stick to a quicker payoff, but I love the flexibility that a lower minimum payment will give me.

Debating another refinance to take cash back and build an ADU at another of my rentals.

My advice, share your goals with a pro and have them run some numbers for you!

Julee

Hi @Blake Furtick!

Are the lenders you are talking to telling you the issue is the number of mortgages or properties you own? If so I'm a little puzzled.

For 1-4 unit properties, Fannie Mae and Freddie Mac both allow you to secure a loan so long as the aggregate number of mortgaged, 1-4 unit properties that you and any other borrowers on the loan own doesn't exceed 10.

I've spent this morning working on the file for a client who owns 10 properties. I'm helping him refinancing 3 of is rentals and purchase a new home with proceeds of selling one property. 

The rentals are all vested in the name of an LLC. I'm using Fannie Mae financing for all 4 loans.

Cheers!

Julee

@Stella Guan The only other thought I'd add is to look for a private contract. Owner carries can be a little harder to come by, but your financial picture sounds strong and you won't need the seller to carry for very long.

A lot of programs offer an exception to the usual 24 month self-employment requirement once you are 12 months self-employed and have your prior year's taxes filed.

You should, of course, do some leg-work with a lender ahead of time and make sure you can check any other boxes required for such an exception. Often, for example, you'll have to show you're making as much or more income self-employed versus at your last W2 job.

Since you don't have self-employed taxes filed yet you might want to get some insight on how your income will be figured. If you PM me I can send you some useful info. Knowing this stuff ahead of filing your taxes can put you in better stead when it comes to where you place certain expenses. 

And self-employment income must also undergo a cash flow analysis due to COVID (brand new "fun" as of the past couple of weeks), so make sure you have separate business banking and keep tidy books!

Hi @Michael Osborne! 

Rents are calculated one of two ways... the 75% rule you mentioned is one of them. For each property your lender will subtract 75% of the rents from your PITI/HOA.

$4451 - $3900 = $541 rent loss

PITI on new primary + 541) / monthly W2 income = DTI

(Although in the real world this math is run per property... but the aggregate numbers would be the same.)

The 75% rule applies to any property you've acquired recently (or put into rental use recently) such that it doesn't yet show up on your tax returns or was acquired midway through the year such that the info on your Schedule E wouldn't be representative of ongoing income and expenses).

For a property that shows up on your prior year's tax filing, we analyze the Schedule E the math goes like this:

Net Sch E income or loss + depreciation + amortization + HOA dues + mortgage interest + MI + homeowners insurance = net income

(net income / 12) = monthly income

Monthly income - PITI/HOA = rent income or loss

There's one more add-back that can go on the list above... if you've had unusual one-time expenses during the prior year (major renovations, disaster losses... pipe burst, flooding, fire) you can add those back.

If the property was out of service for a period of time due to the above unusual expense, but has been re-rented, you can sometimes make a case for going back to the 75% rule.

I should add that this goes for properties that show up on your personal tax return (whether titled to you or an LLC). If you hold title through an entity that files its own tax return, the figuring is done differently... there's a bit of an if/then flow chart we use:

If the liability is in the individual (not the businesses name) we analyze the form 8825 from that entity (the "schedule e" that a business entity like a partnership uses). If that analysis gives us a negative number, the income flows through just like it would if it were on Schedule E. 

If the liability is in the name of the entity and/or the the property is free and clear and/or the cash flow is positive, then we analyze the income using the appropriate methodology for the business entity... but I'm already deep in the weeds and some new COVID rules for self-employed folks have just thickened that plot a bit... so I'll stop while i'm behind. :)

Oh and for jumbo or portfolio loans, the worst-case average of 2 year of Schedule E income is likely what will go into the DTI (24 month average if income is trending up between the two years, 12 months if the more recent year had lower income).

Cheers!

Julee 

@Freddy Alban Fannie Mae offers renovation financing for fixer-uppers. You can purchase a property and roll renovation costs into the loan. 

The minimum down payment is 15% of the acquisition cost (total of the hard and soft renovation costs + purchase price), but loan terms (rates/costs) improve substantially with 20% down and even more with 25% down.

Max renovation budget is 75% of the after-improved value. 

For investors, this program is available only on single family homes. A property is still considered a SFR if it has an accessory dwelling unit (or you can use it to build an ADU) -- it just can't be a true multi-unit property.

Cheers!

Julee