All Forum Posts by: Zach Wain

@Reggie Rearden - I think meeting people in person is the best way to build and form long lasting partnerships as well.  But, when it comes to rental properties, we as lenders can only use a few things for income calculations.  If you rented the property in previous years, we must go off of the previous years tax returns.  There is a form 1038 we have to fill out.  Rent rolls can not be used, 100% based off tax returns.  If its a new rental property, we can use 75% of the rental income off of a lease.  That is pretty much it...

We have almost no leeway when it comes to income numbers.  Some lenders know how to review the information better than others, or have looser guidelines than others.  We do not make the rules,  but we have to follow them.

@Ryan Gardent - there is only so much we as Loan Officers/Lenders can do when it comes to income analysis. Most lenders can use basics - W2 wages or if you are business of self; tax returns will show that income. On occasion, we can get creative and use assets held in Trust accounts as income, or for borrowers that are 59.5 or older we can use their IRA/retirement assets as income. Those are the two big ones.

@Ian James - Front DTI can go as high as 45% for those scenarios. If your ratios are anywhere around 28%/28% front and back, you should be a slam dunk!!

@Danielle Coleman - We work with many financial advisors, and the vast majority agree with the math of leveraging.  If you can take out a loan at 3%-4% on your primary home and you use that for some investing purpose that will generate you more than 4% in annual gains (stocks, real estate, etc), than you are absolutely making the right call.

Having a home free and clear is great, but only if you have plenty of free cash for investing.  Otherwise, you are holding yourself back.  What to invest in?  That is up to you, rental properties in growing markets, stocks, etc???

If you want the best rates possible, you can refinance your home as a primary home (rather than a rental), but that means you will sign loan disclosures stating its your intent to occupy the home for the next 12 months.  Otherwise, call it a rental property, but that comes with a higher interest rate.

@Jaxon - that is a difficult position to be in, and you are not alone!  But, you are at the mercy of the builder.  A few notes.  The increase to second/vacation home rates is being implemented by the FHFA, Federal Housing Finance Agency.  The lender does not make more money, the builder certainly does not, it goes right to the FHFA.   Also, it is for loans delivered to Fannie Mae/Freddie Mac by 4/1, and after a loan closes it takes a couple weeks to deliver it to Fannie/Freddie.  So that means some lenders already have these hits in place.  We have 1 lender that stated if you close on 3/14 or before, the new second rate increases will be waived.  But on 3/15 and after, there rate hike will be in full effect.

In my experience, there is nothing you can do to incentive the builder.  They want to sell the home to you ASAP so they can get paid and stop paying interest on their Corporate loans and/or go build more homes.  The builder is losing money too.

Unfortunately, all you can do is check in with your realtor and the builder and ask for updates.  If they give you an option of taking a less than upgraded kitchen because the other cabinets are on back order, that might be all you can do to close early...

Ask the clients CPA what they adjusted the cost basis too when the property became a rental.  I am not a CPA, but I believe when a property converts from a primary residence to a rental home, that tax year you list the current value of the home and that becomes the new cost basis.  Definitely a CPA question!

@Emy Bernardo All good questions! Here are my thoughts. The true investors that want short term rentals will still be buying even with higher rates, but this may squeeze out the casual investor that wants a vacation home and to STR and was hoping the STR would cover a big chunk of their mortgage costs.

I think more borrowers will look at Jumbo loans vs high balance loan sizes, but that will only be for specific scenarios.  Cash out, low loan to value, primary and second homes.  

Keep in mind, the high balance cash out price hits have always been there. There are just going up slightly from 100bps to 125-175bps depending on the loan to value.

Bad policy?  I think so, specifically on high balance loans.  I understand why they may want to tax vacation homes, but I strongly disagree with the high balance price hits

Second Home and High Balance loan rate increases

FHFA, the Federal Housing Finance Agency (parent of Fannie Mae/Freddie Mac) is implementing new “price adjustments” to all second/vacation homes and High balance loans effective 4/1/22. How does this impact you and your local market?

First, lets talk second homes. One of the key guidelines for a property to be considered a Second/Vacation home as defined by Fannie Mae, the borrower must occupy the home for some portion of the year. There are a few other rules, but that is a big one. Some portion of the year... Second home purchases have been popular for borrowers that want to use a home for vacation purposes, then rent it out on a short term basis when the home is not being used. That is perfectly acceptable for a second home. Once in awhile, the FHFA changes the price hits for certain loan programs or property types. Their planned price increases are going to hit second home rates very hard. The avg second home purchase or refinance will see major price adjustments that could translate into a 0.5%-0.75% interest rate increase when March 31st turns into April 1st.  For a 10% downpayment scenario, the price hit is roughly equivalent to a 1% increase in interest rate.

The later, high balance loans, are designated for high cost counties like Los Angeles, San Francisco, San Diego, etc. They apply to loans above the national conventional loan limit of $647,200 and within the “high balance” loan limit which is county specific, with a max loan size of $970,800 or lower for certain for counties. Over that amount and the loan is considered a “jumbo” loan. FHFA is adding 2 specific price adjustments. Higher pricing in general for all high balance loans that may translate to an increase of 0.125% on average. For cash out refinances, expect another 0.125%-0.15% in higher price adjustments. 

Why is this happening? The thought is that FHFA wants to generate more revenues from these 2 specific product groups to have been better financing for first time buyers or lower income areas. But, we have not seen any plans put in action yet. Mortgage and real estate groups are already lobbying and trying to oppose the new price hits, as it seems like a direct tax on people who purchase second homes and everyone that lives in a high cost area. Many borrowers in high cost areas that apply for a high balance loan are median income households, but as of right now FHFA is moving forward with these added price hits.

Best regards,

Zach Wain
Wain Capital, LLC

@Severino Cuison Most lenders and underwriters prefer longer term leases.  There is not a specific rule against month to month leases that I can find, but some individual lenders may want a longer term.  Lease term is a bit of a gray area in my experience. 

@Severino Cuison - the same appraiser analysis is done for a newly built home or an existing one.  Because you do not actually close your loan until the new home is completed, it is the same analysis.  The appraiser will give you their opinion of market rents, but it is usually based off of normal long term leases in the area.  They will not do a room by room or an AirBnB analysis.  But yes, you can use that rental analysis.

The confusing part becomes, this only works when the subject property is the purchase property.  So when you go to buy another home, you will need leases in place to be able to count that rental income on a 'non subject" rental property.  Even if its room by room, that is fine, but I highly recommend you get leases in place.  I have seen this done before.  I will protect you.  My 2 cents, 100% get leases signed even if its room by room