how to check if someone has a FHA or VA and USDA loan for us to assume?
Highlight: Fannie Mae and Freddie Mac now allow transfer of properties to single-member LLCs after closing.
No, that wouldn't work. The underwriter would still see the obligation tied to your personal credit. It wouldn't offer any benefit other than asset protection, but it wouldn't be a negative either. We can still use the income if it's a pass-through. Fannie Mae and Freddie Mac now allow transfer of properties to single-member LLCs after closing.
For the longest time, as we're aware, they did not allow it. People still used to do it. In the 5,000 loans I've closed, a good portion of people still transferred properties to an LLC. In my career, I've heard of two people getting a notice stating, "Hey, we noticed you transferred to an LLC, you've got 90 days to transfer it back to your personal name or pay off the loan." Now, as mentioned, about three or four years ago, that changed. You're actually allowed now to do it, which is good for investors. The government, Fannie, Freddie, they realize transferring to an LLC is an asset protection measure, and they now allow it.
So firstly, DSCR loans: the full meaning of them is Debt Service Coverage Ratio loan. Basically, what that means in English, is the major requirement for these new loans for investors is that 100% of the gross projected rents cover the principal, interest, taxes, and insurance. Let's assume that a property rents for $2,000 a month and the PITI payments are $2,000 a month. Well, that would be a one-to-one DSCR. Generally, that's the base level requirement for these loans.
As you can imagine, the advent of these loans into the market three or four years ago was very well received. Just because as investors, people were either capped out at 10 Fannie Mae loans, right? Or we have a lot of clients, as you do, all your clients that are self-employed, that have lots of entities and maybe get a little aggressive on their taxes and they may not qualify. So these DSCR loans kind of take that out of the mix. They're non-income driven and also they don't have limits on the financed properties.
Now, DSCR loans, as you can imagine, right? It's an amazing product, but of course, you pay a premium on the interest rate and fees over, let's say, a conventional Fannie Mae.
Is there any limitation then as far as the loan size?
Generally, no. I mean, these will go up to about one and a half to 2 million depending on the DSCR investor that we work with. And most clients we're working with are in that high-end range, would be the 1.5 to 2 million loan amount, for a short-term rental, so it covers most everything we deal with.
Got it. So if I'm applying for a DSCR loan, what I heard you say is, income's really not an issue 'cause it's all based upon the income generated from the property. A lot of individual investors always think, "Well, do I make enough W2, do I not show enough on my 1040?" This removes that. How about the personal guarantee side? Because no one wants to be on the hook, in case it turns out to be a dog of an investment they bought.
Yeah, these loans still do require a personal guarantee. You do have the ability to close in the name of an entity, like an LLC, for the title, but you are still personally guaranteeing the loan and it will still show up on your credit report. That's really how they're able to offer these attractive terms on these loans. Although they're higher than conventional, a lot of times you're paying less than a 1% premium to have this loan as an option. So it's a great loan option out there, but it does cost a little more, of course.
Right, so something else I think's important that people should know about. Let's say that you're not a real estate investor. Maybe you want to get started in real estate investing and you're looking to get in the market with house hacking, which is renting out a room in your house. Now the limitation we're finding right now, of course, is that when it comes to buying properties, a lot of people just can't qualify because interest rates have gone up. But if they could get into one of those lower interest rate loans that used to be out there, then it opens up a door for them. So what I've been told is that you could do an FHA or a VA loan, or USDA, I think is the other one, loan where you can actually assume the seller's mortgage. Can you speak to that?
Yeah, and you know, that's a great point for people unaware of it. Make sure you listen loud and clear. For customers that own homes, that already have FHA, VA, or USDA loans, those loans come with an assumable feature, which allows the prospective buyer to come in. You still have to qualify for the loan, right? But assuming you do, the interest rate and the terms of that loan that the seller had, you can basically assume and take over, which as you can imagine, I think it's 70% of the country's under a 4% interest rate right now. So even if that means paying market value, or paying a little premium over market value to be able to assume this loan, with let's say a 3.5 or 4% rate is a huge, huge windfall because where market rates are in the mid-sevens, the payments essentially almost doubled than what it is at a 4% rate. So that is a very, very good point. A good tip. It is obviously, as you can imagine, there's a lot of people out there, trying to find those properties that have those types of loans. So it may be a little competitive out there in finding them, but I don't think the world is aware of what you just said, right, that these loans exist out there that you can assume someone's loan into whatever rates they got, right? A lot of times it's going to be under 4%.
Now is there any way that you know, where you could say research title and discover whether or not that's an FHA loan or a VA loan that's on the property? So I could do some background search, before I start putting in offers and that way I can target specific properties directly?
Yeah, that's a great question and yes, that type of information is public information, generally. If you were able to pull a title report on the property, you would see a lot of times, whether the loan is FHA, VA, or conventional. So yeah, there are definitely means to kind of consolidate the search field to properties that meet that requirement and have those types of loans.
Yeah, 'cause I think it's really important. If I was someone in that position, I'm looking to get started using a house hacking strategy, since I have to treat it as my personal residence, to assume that loan, I would definitely be looking for that. And then bringing that up in the conversation with the seller. And I think you stated, "Hey, maybe you give 'em a little premium, 'cause they're going to have to go through some steps, I assume, to transfer that loan over to you. Q
And there's always that fear that they're still going to be on the hook, but they're not going to be on the hook are they, once they transfer the loan to you?
No, yeah, once the seller sells the property and you assume the loan, it has nothing to do with that seller anymore. You just have that very, very low interest rate, of course. And as you mentioned, to where incomes are and where housing and rates are, a lot of people can't enter the housing market, right? Even if they make 150 grand a year, it's not enough. So these assumable loans are a great way to obviously have houses become affordable and now participate in the housing market.
Great. All right. Now let's switch back to the investor. So if I'm an investor and like you, you have 20 properties and I've been holding onto these properties, I have a lot of equity in them and I want to tap into that equity and use that equity to start buying more real estate. One of the challenges that people run into a lot, is that they have to go through and they think they have to attain one conventional loan, one cash-out refi in each individual property. What do you say to the investor that says, "Hey, I just want to put up five properties as collateral." Let's say, between those five properties I have a million dollars in equity. What should I be doing? What should I be looking for?
That's another good question. And the cross-collateralized loans, are a great product for the right situation. For the longest time, up until probably seven or eight years ago after the crash, we were really limited to offering just these conventional Fannie Mae, up to 10 loans to an investor. And after that, probably six or seven years ago, these cross collateralized loans started coming out started kind of being an outlet for people over 10. And they were very, very popular because they allowed cross-collateralization across, they allowed and almost required it, right? For new acquisitions, they required you to be purchasing three to five doors for three to 500,000 at a minimum. What we've seen is with the DSCR programs coming out, they've really replaced the need for those cross-collateralized type loans.
Now, they do offer benefits, as you mentioned, such as getting one loan that encompasses all your properties. However, there's a bit of a misnomer that you're going to save because of that.
Generally, you're still paying the title fees, escrow fees, recording fees, and appraisal fees for each of your properties, say, in a cross-collateralized loan of five properties.
You might think you would save on the lender and processing fees since you're getting one loan instead of five. However, what we've generally seen is that this is not the case. Since they are processing five loans, their lender fees and processing fees tend to be a lot higher than it would be for a single loan transaction.
So, it's important to analyze each deal individually. We've seen a big drop in people utilizing cross-collateralized loans with the advent of DSCR loans. For an investor with, say, 50, 80, or a hundred properties, there's a time factor to consider. It would probably take less time to get one loan over 20 or 30 properties, as opposed to 20 or 30 individual loans. That's where you would really see the benefit in this market. It wouldn't be in better terms or lower fees, but in time savings for a larger investor.
Regarding five individual loans for cash-out, can you do a DSCR cash out on your properties?
Yes, absolutely.
But would that mean five credit hits then? One for each loan, as opposed to just one credit hit for a single loan?
That's a great question. The answer is it will still only be one credit check, at least with us as a lender. We use the same credit report generally for up to four months, whether the transactions are concurrent or not. So, an investor might come in with five properties at once, using just one credit check, and then two months later, they might have another three properties. We would still use the same credit report we pulled two months prior. So, there's not really a difference or an impact there.
I've heard you talk about a cap of 10 properties for conventional loans, like Freddie, Fannie stuff. What strategies do you recommend for investors who are building their portfolios and facing this borrowing limit?
Absolutely, another really good question. Many aren't aware, but Fannie Mae and Freddie Mac have a cap of 10 financed properties per individual. A strategy to maximize this, effectively doubling it to 20 properties, involves dividing and conquering with your spouse and potentially your children. Conventional wisdom suggests joining everything when you get married—bank accounts, mortgages, car loans.
However, that's often the wrong approach for mortgage qualifying. If the primary wage earner is making most of the money, the strategy is to put most, if not all, of the debt in their name. For the primary home, if spouse number one can qualify, put the mortgage solely in their name, along with car loans, credit cards, etc.
This allows spouse number two, who might work part-time or have a smaller income, to also participate in the market and buy up to 10 properties independently. Qualifying for a mortgage is largely based on the debt-to-income ratio. You don't need a high income to buy investment real estate, but you do need a minimal debt load. Let's say spouse number two makes $20,000 a year, has no car loans in their name, is only an owner on the title of the primary home (not on the mortgage), and has a small credit card debt. Their monthly debt is negligible, allowing for a favorable debt-to-income ratio. Additionally, we can use rental income from the new purchase to offset the debt, further aiding in the qualification process for spouse number two.
So, essentially, the new property that spouse number two is going to purchase will effectively cover the mortgage payment with the rent, resulting in zero hit to that person's debt-to-income ratio. Essentially, this means that spouse number two enters the transaction with a negligible debt-to-income ratio, say about 2%. We can go up to 50%. After acquiring the new property and using the rental income to offset the debt, which we'll call a break-even payment, she leaves the transaction with a similarly negligible debt-to-income ratio. The beauty here is that we can repeat this process, allowing spouse number two to acquire up to 10 properties as quickly as she and the family are comfortable. Another advantage is in terms of security; while spouse number one is buying his 10 properties, spouse number two can be on the title of those properties without being on the loan, and vice versa. This is significant because if you go joint on mortgages, Fannie Mae counts that against each spouse. So, traditionally, if you buy eight homes jointly, each partner has eight finance slots filled, as opposed to having them separately. This logic also applies to your children; for instance, a 20-year-old child with income and no debt can also acquire investment real estate. It's a small detail but powerful in getting the best financing when growing a portfolio.
What if the spouse doesn't have an income?
That's a good question. If the spouse has no income but is on the title or mortgage of the primary home, we can qualify them for a DSCR loan. We have a product for every situation. They need a good credit history, credit score, and money for the down payment. Even if a spouse is not working and they've already reached five financed properties jointly, you can still divide the assets and use the DSCR loan product for the non-working spouse to buy properties.
It sounds like a strategy for someone with a non-working spouse would be to set up a C corporation, make money through it, and pay the non-working spouse a W-2 to create income for them. This way, they can qualify for those 10 properties. What do you think about that strategy?
It's a great strategy. They'll qualify for conventional financing. We can use any income, even if it's from managing properties. Paying a management fee to manage a portfolio can create income for the non-working spouse, and we can use that for qualification.
Regarding the 10-property limit on Freddie, Fanny loans, do you also offer asset-backed loans based on a rental portfolio or income it generates?
We do offer asset-backed loans, mainly for primary homes. The DSCR product is more attractive for investors. For rental properties, asset-backed loans are less favorable than DSCR loans in terms of terms.
If I transfer properties to an LLC and the LLC assumes the loan, can I exclude these from my obligations when seeking a new loan?
The mortgage would still be in the individual's name, so the income from the LLC wouldn't be used initially for qualifying. If the LLC is a disregarded entity, we can use the income. We review on a case-by-case basis, assuming it's just a liability structure change.
So, if I transfer my real estate to a disregarded LLC and it agrees to assume the loan, when filling out a financial statement, can I list no liabilities since the LLC assumes it?
All right, so now I want to get to the thing about being an investor and finding low interest rate loans right now. Everyone tells you there are no low interest rate loans for real estate investors, but as you know, as you told me, they're out there, there are 5% loans. You just need to know where to look to find these deals. Can you share with us how a real estate investor can find a 5% loan in today's market?
I know it sounds unbelievable, but yes, it exists. I am helping a lot of builders with those loans. The loan product is called a forward commitment program. The builder and developer initiate it. This program has been around for over 15 years. Earlier this year, it was completely changed. It wasn't very popular with builders due to carrying costs and expensive terms. The program allows builders to incentivize a block of money. They can say, "I've got $3 million worth of closings coming up in the next 90 days and I want to incentivize the rate on that $3 million for my prospective buyers." By incentivizing the rate, builders are paying points to drop the rates on these investment properties. This has a profound impact on cash flow, going from market rates of 7.5% to about 5.5%.
This program is utilized by many builders and developers. The clients, us as investors, need to find builders and developers working with this program. You can't just call in and get this program; it needs to be set up by a builder. The end client, me as the investor, we're just coming into a conventional 30-year fixed. There's nothing special about it. The builders paid 5, 6, 7 points to bring the rate down dramatically.
We're in a unique position with high rates, and sellers are feeling it. Real estate is still robust, prices have gone up nationally. People sitting on the fence, waiting for rates to drop, should realize that when rates drop, there will be a surge in buyers, driving up house prices. There is inventory now and an opportunity to participate in the housing market. You can refinance in the near future. With this program, you can get rates in the fives today for properties available with select builders and developers.
Is there anything else out there for investors in terms of financing in 2023?
Besides the products we covered, the DSCR and the builder forward commitment, there's nothing else. The reason for the elevated housing prices is supply and demand. Nationally, we're short 5-6 million homes, and that number is increasing. Real estate remains robust despite high interest rates. House prices are still strong. For investors, it's important to know that when you're investing in real estate, you're putting down 25%, and the bank is putting down 75%. If the bank believes in the transaction, that should give you confidence.
Thank you for sharing everything about lending and what investors should be looking out for. If someone wants to work with you on loans for investment real estate, can you help people throughout the United States?
Yes, we are licensed nationally for primary homes, investors, DSCR, conventional, and beyond. My website is richardadvani.com, and my contact information will be in the body. We're here to have conversations, whether you want to do something in a week, month, or year. Utilize us as a resource.
Low Interest Rates Are Available (Here's How Investors Can Get Them) | With Guaranteed Rate (Lender)
https://www.youtube.com/watch?v=OvCkw4JINDI
0:00 Intro
4:34 Assume Loan
8:29 Cross Collateral
12:16 Cap Strategy
17:53 No Income
18:50 C-Corp Strategy
20:06 Asset Security
21:07 Obligations
22:49 Financial Statements
24:52 Finding Low-Interest Rates
29:38 Supply & Demand
32:37 Outro