Residential Magazine

To the Rescue with the Right Loan at the Right Time

Picking up on the correct cues can help you prospect investor clients

By Tom Davis

Despite the struggles of the real estate industry, property investors continue to build their portfolios at a fast clip. Last year, 25% of home purchases were investor transactions, according to CoreLogic. Moreover, according to U.S. Census data, real estate investors own and manage approximately 49.5 million units.

Given this appetite for investor properties, it’s important to understand some of the circumstances that signal an individual or limited liability company (LLC) is an attractive candidate for a non-qualified (non-QM) business purpose loan. Non-QM mortgages are loans that cannot be purchased by the government-sponsored enterprises or federal government.

Understanding who could be that candidate allows brokers to be more proactive in their prospecting and to stay ahead of the competition by being there with the right loan at the right moment. That starts with listening for the right cues during conversations with these potential borrowers.

First, a quick definition: A business purpose loan is one that helps investors — whether they are individuals or limited liability companies (LLCs) — finance properties for a commercial reason, such as income generation. For example, a mortgage originator could be networking at a Chamber of Commerce event with a self-employed management consultant who mentions their intent to buy a single-family rental but worries about getting a mortgage without traditional proof of employment such as W-2 forms.

As of January 2023, there were 16 million self-employed workers in the U.S., many of whom could be in situations like the one the management consultant is facing. Debt service coverage ratio (DSCR) loans, which are specifically for real estate investors, could enable individuals to purchase an income property based on its cash flow or rental income, bypassing their need to supply more traditional documentation or employment information. Bank statement loans, where 12 to 24 months of bank statements replace documentation such as W-2s, could be another option.

Informed questions

A number of variables, such as how many properties an investor owns, their tax strategy and the types of properties they invest in, can all come into play here. More basic indicators such as how quickly they need a loan may steer the type of non-agency or non-QM loan that best suits their needs as well. Again, asking candidates a little more about their situations could be all it takes to successfully sell to another non-QM borrower.

Currently, the agency loan limit on financed investment properties is 10. Those investors who have been around for a long time are typically well-aware of their financing options. But newer investors poised to exceed the 10-property limit will often find themselves scrambling to procure financing, especially if they are in a competitive situation and need to get the deal done fast. A DSCR loan could be a lifeline for them and typically offer a streamlined approval process.

In addition to the 10-loan limit restriction, Freddie Mac and Fannie Mae have created tighter definitions of what qualifies as a warrantable condo. For example, they disallow condos in communities that have timeshares and at least half of the development’s units must be owner-occupied. Limitations also include that no single person or entity can own more than 10% of the units and no more than 25% can be used for commercial purposes. Investors often don’t have access to this information until after they’re well down the path for a conventional loan. This is another opportunity to come to the rescue with a business purpose loan or a non-QM loan that allows non-warrantable condos.

Professional circle

Equally as important as understanding these factors and why they create a strong case for a non-QM loan is knowing who these property investors turn to for advice when they are seeking financing. As businesspeople, it’s often someone within their professional inner circle. This could be their attorney or accountant. For higher wealth investors, perhaps their financial adviser.

Putting in the effort to educate these professionals on when a non-QM loan may be an appropriate option significantly increases an originators’ chances of ‘getting the call’ when the time comes. The more detailed understanding of the products and the buyers, the better. For example, cash-out and interest-only options as well as general knowledge of the different types of properties that non-QM loans can be used for (multifamily properties, Airbnb vacation homes, etc.) will help them provide more informed guidance to their property investor clientele. It just takes some attentive listening.

Author

  • Tom Davis

    Tom Davis is chief sales officer of non-QM lender Deephaven Mortgage. He joined Deephaven in 2022 and has more than 20 years of experience helping lending partners with their non-QM and agency needs. He holds a bachelor’s degree from Florida Atlantic University, where he double majored in finance and management. Deephaven was founded in 2012 and led the formation and development of the non-QM market. Reach Davis at tdavis@deephavenmortgage.com or visit deephavenmortgage.com.

You might also like...