Understanding Non-QM Lending and DSCR Loans

All right. So, yeah, so we're going to this morning, we're going to be presenting to a group of realtors at this firm that I have an AA with. So if you could, you could just go ahead and introduce yourself and then you can take it from there. Tell them a little bit about your background, where you're from. I think they'll be interested to hear that. So if you could just give that information and then we can go from there. OK, thank you so much, Sean, for having me come in to. As I say, spread the good word about the products that we have to get more buyers into homes. My name is Chris Barker. I'm with Angel Oak Mortgage Solutions. We're an investor for Sean and his team at Movement Mortgage. I've been doing outside-the-box lending. It's been named different names here and there, but now it goes by non-QM. I've been doing that for 23 years. I'm a top producer nationwide. I have been every one of those 23 years. And the reason I tell you that is it's very important when you are working outside the box of non-QM. And what I'm talking about there is something that's not your basic vanilla full dock, meaning tax returns, pay stubs, verification of employment, transcripts, all those W-2s, updated pay stubs, all those things. When you get off of that path, you need to have a professional on your team. that will hold your hand from literally the structuring of the loan to the pre-qual to the initial submission all the way to closing, which, by the way, we close them on average in 23 days. Now, some of the loans that I'm going to talk to you about today, I've closed as fast as nine or 10 days. And that's the DSCR loan. And I'm going to save that one for last. But I am from Virginia, so I know your area well. I play baseball at Virginia Tech. I'm from Abingdon. Still live in Abingdon about half the time, the other half the time I live in Charleston, South Carolina. I've been with this company for nine years. Now that's super important because I know where everything is. I know where to find the broom in the closet. I know where to find the guideline about gift of equity on bank statement loans. Is that allowed? I have run into it so many times that I know it like the back of my hand. I really don't have to look at the guidelines very often because I just look at so many loans. per day and per month. With that being said, you are in good trusted hands when you go to Sean because he's going to come to me and we can even do a three-way call if there's something really complicated that's off that beaten path. And I'll be able to guide you guys from, like I said, from beginning to end to get that transaction closed and to get your buyer happy. And really, I think the coolest and best part of this is you're going to be able to do things that other people in your area just can't do because they didn't attend this meeting and they really aren't students of the industry or didn't have the opportunity. I won't say, you know, really talk too badly because some of them maybe just didn't have the opportunity to learn what we're going to talk about today. So with that being said, what we are going to talk about today is how to take care of self-employed buyers. Okay. And in that Uh, there's really three programs we have for self and really four, uh, really five, actually, as you can see there, my mind starts going. Um, but the programs we're going to talk about are bank statement lending. Again, anything I'm getting ready to talk about, no tax returns. Okay. No tax returns. You can burn them, shred them, forget them. I must say that 10 times a day, every day, forget about them. Just, I don't even care if you had filed taxes. We are going to determine your income. By looking at 12 months of bank statements, it's super easy. We're not looking at what's going out, what's coming in, this and that. We literally just take the deposit number at the top right corner of the statement, add up all 12, divide them by 12, and there's your income. So instead of the basic W-2 income you would have on a conventional type loan, you got the bank statement income. You plug that in on your loan application, you calculate your DTI, and off you go. or you tweak it. And I'm going to get into that in a second. Another option we have, let's say those bank statements for whatever reason don't work. Let's say you've got three months where you went zero, or you've got 30 insufficient funds during that 12-month period. We can switch you to a P&L program where we get a tax preparer. Now notice I didn't say CPA. It does not have to be a CPA. It can be tax service near me. You could Google it. get them to fill out the P&L. We then take two months of bank statements to verify that that P&L is legitimate. And those numbers are within 15% of what that P&L bottom line says. The other option we have is 1099 only. Additionally, as my mind went through there, also for self-employed people, we can do DSCR loans on investment properties, and we can do an asset qualifier. I'm not going to get into those today, but please know we have them. I think... anytime, and what I want you guys to take from this meeting today, anytime you feel in your heart and you see in your mind that a buyer has the ability to repay and you can paint that picture. For example, let's say husband's a self-employed roofer, wife is W-2, works at Walmart. I can take the self-employed roofer's bank statement income, add the W-2 income to it, Nobody else can do that. We call it a bank statement, W-2 hybrid. Put those two incomes together and let's say, oh my, the DTI is still at 56%. Is that a dead deal? No. We can actually draw down against assets to supplement more income to use as income. Now you're at 49.99% DTI and Sean Allen is the only guy in the region that knows how to close that loan because he had this phone call today. Okay. So- The two products I really want to talk about are bank statements for self-employed. And when I say bank statements, that includes P&L and 1099. All the guidelines are the same. And the other one is the DSCR product, which people call that the sexiest product out there, which I think is the worst name on earth for that product. It should be called the most bulletproof loan in real estate. And I'll prove to you why when we get to that second. phase of the discussion. So with that being said, I normally don't do recordings, so I'm going to act like you guys are live. So I want you to raise your hand when I ask questions when you see this, okay? So here's the first question. Well, first, let me tell you, we do not do Fannie, Freddie, FHA, USDA, or VA. Sean can do all those things, okay? But I'm not going to talk about those today. I'm going to talk about this. But here's where I ask the one question. Raise your hand if you have ever done a VA loan. Everybody in the room's done a VA loan. Raise your hand if you have ever done a bank statement loan. Probably a third of the room has raised their hand just now. All right. Why am I asking this question? And I am not. There's no slight against the VA product. I love it. I'm glad we have it. It is a wonderful purpose. Don't take it the wrong way. My point is this. I'm going to give you three reasons why you should be great at bank statement lending. Number one, did you know that there are more self-employed and 1099 people in the United States than there are veterans? I bet you didn't know that one. My point is this, if you're good at VA, you should be great at bank statement lending. Number one, because there's more people out there that are self-employed and 1099. So those marketing dollars that you're spending on advertisements, maybe you should be advertising. that you are a self-employed buyer expert, self-employed buyer specialist. Now, you don't have to be. Sean does, and I do. And you can always call us, and we'll take care of that for you. Okay, so reason number one at being great at bank statement lending, there's more of them out there. Reason number two, it's an underserved market because we don't have phone calls like this. We don't have meetings like this where you discover, here's how I do these loans. And at the end of this call, you're going to feel pretty comfortable and confident about how to get these done. Number three reason to be great at this, rich people do not work for the man. You know what I mean by that? Think about that. Anytime you're seeing a high priced value on a purchase, it is usually a self-employed, like I said, a roofer, a guy who owns a construction company, a law firm owner. things like that. That's where the people who are making a lot of money, who are smart and affluent and utilize the U.S. tax code to their fullest benefit, meaning they write everything off. With that being said, let me ask everybody in the room this question. If you write off your home office, cell phone, car, any of those things, raise your hand. If this is a group full of realtors, everybody in the room just raise their hand. Because you can. You are entitled to do that per the U.S. tax code. So let me tell you a story, and this will sink in and it might hurt a little bit as I tell it. Have you ever in your real estate career... had a buyer, a potential buyer, reach out to you and say, hey, Saturday, I'd like to go look at these houses in this price range in these neighborhoods. Can you take me around and show me five or six houses? And you go, yeah, I'll meet you at this place and we'll hop in the car and go look around. But what you don't say is you're missing your kid's soccer game or you're missing your other kid's birthday party or a friend's birthday party. And so you take that person around and you show them five or six houses. And on Monday, and they told you, oh, yeah, I'm a self-employed plumber. I own a restaurant. I own a nail salon, whatever it might be. I'm a 1099 truck driver, whatever it might be. But on Monday, you turn that buyer, potential buyer over to Sean. And Sean looks at the tax returns and he says, hey, you told them you were making 135 grand a year. but your tax returns show $13,000 a year. So we got a little problem here. Now, Sean knows how to take care of those loans now because we can do a bank statement loan or a 1099 only or a P&L. We've got multiple options. But let me tell you a story about not Sean. Let me tell you a story about what I call Joe Blow the LO. He's the guy that wasn't in this meeting, wasn't in this room, and doesn't know how to get this transaction done. And he gives the worst advice that I've ever heard a loan originator give to a self-employed buyer, like yourselves, and here's this advice. So on Monday, they look at those tax returns and they go, well, based on your income of $13,000 a year, you won't DTI for anything. So here's what I want you to do, Mr. Self-Employed Buyer. See that door over there? I want you to walk out that door. They're gone forever. As soon as those words come out of their mouth. So I want you to walk out that door and I want you to stop writing off that home office and cell phone and car. And let's just say that's about $30,000 a year. And I need you to do that two times because Fannie and Freddie, whoever they are, they want two years of tax returns to show higher income. So I want you to forfeit $60,000 of tax refund that you're entitled to. Oh, and by the way, you're also going to lose two years of home appreciation because if I could have gotten you into this now, that house would be worth $60,000 more two years from now. So I'm advising you to lose $120,000 and the inconvenience cost of living in your mom's basement or the RV or wherever it is that you don't want to be and why you're talking to me. So you've lost that customer for good. Or. we could close a bank statement loan in three weeks. Which do you prefer? And what always happens is that self-employed person goes, I want to close in three weeks. I want out of my mom's basement. I want the appreciation on that home. And I do not want to go back and amend my tax returns or wait two years and not file what I'm entitled to per the tax code. That's crazy. I'm not doing that. So close the bank statement loan in three weeks. And normally in person, I always stop right there and say, does anybody have any questions? And when I do, the same question gets asked hundreds of times. And that is, hey, wait, hold on a second. You can close a bank statement loan in three weeks. Why haven't we been doing this with all self-employed people? Three months ago, I lost this deal because so-and-so. Six months ago, I lost this deal because the tax returns didn't work. So I know the burning question in your mind right now is this, why aren't we doing that? The rate must be through the roof, right? That's what you're all thinking underneath is this. This is too good to be true. The rate's got to be terrible. The truth of it is the rates are right in line with conventional, especially at 80% LTV or less. Okay. We might be a quarter higher. We might be three eighths higher. We might be a quarter lower depending on the LTV and the credit score. It depends on. how good of a borrower you have, and how badly we want that in our portfolio. Now, where the rates are going to get a disparity is over 80% LTV, there is no MI on these loans. So the truth of it is the MI is baked into the rate. So when you go to 85 LTV or 15% down or 10% down, that rate's going to go up maybe a percent higher than conventional, but the payment will be the same. And guess what? The interest is tax deductible. for a borrower who does some tax deducting, okay? So they don't really mind at all, and it gets them in a house now, and they're never going to stop taking that tax refund because that's what they're using for their down payment, okay? These loans are fantastic for self-employed people. Now, you might be thinking already, how do I market to these people? How do I get the word out? You ever seen that movie, Field of Dreams? If you build it, they will come. If you market to self-employed people, they will come. I want you to put these four words down and put them on all of your advertising. Put it on your radio show, on your billboard, on your business card, on your website. Here's the four words. Self- employed buyer expert, self-employed buyer specialist. Now, I know what you're saying. Hey, I've been talking to this guy for 10 minutes or listening to him for 10 minutes. I'm not a self-employed buyer expert. You don't have to be. Sean does. I do. I am. I close 35 of these every single month. I used to, back in the day, I could close 100 of these a month. So I'm very familiar with the product. Any question that you may have about qualifying the borrower, or structuring the loan to work, believe me, I have seen it and done it for 20 some years, and I will get you to the closing table. The minimum loan amount on these loans, again, it's for a little bit more affluent buyer, because that's who these people are. The minimum loan amount is $150,000. The minimum credit score requirement is 640. The maximum loan amount on these is $4 million, and we see those loans. Now, I know- You guys might say, I might not see that very often. If it's in your area, you should walk in there to whoever has access to list these properties and go, I'm the person that can get that deal done. I know how to do it. I can do $4 million with no tax returns. There's not many people in Virginia that know how to get that deal done. So I would go market that. Also, when you're marketing based on those numbers. Start thinking about who your client base is. It may not necessarily be the nail technician, but it is 100% the owner of the nail salon. The reason I say this, with $150,000 loan amount minimum, those borrowers need to deposit about $4,400 a month in order for the DTI to work and the residual income to work. Now, I'm not gonna get too much into the details of the underwriting because I just wanna sell the sizzle today. So you guys know how to go out and market this and deliver those to Sean so we can dig into the underwriting minutia and make sure they work. But in your target marketing, and we have customizable flyers where you can put your logo, your picture, you can co-brand it with Sean, phone number, all that good stuff. And you can start marketing to these borrowers, buyers, and get these loans in the door. Now, another thing I want to tell you about, you might say, and I get it. ask this occasionally by a hard thinker, how do you apply an expense factor to what this borrower does? You can't just give them all the deposits. Here's how it works. If you give me both business bank statements and personal bank statements, I will give you 100% of the personal bank statements. We do that because we believe or think commonsensically. that you're going to pay all your expenses, the light bill, the water bill, salaries, wages, inventory out of the business account and then sweep that profit into the personal. So I'll give you all the deposits in the personal, no problem. Now, if you give me business bank statements, I'm going to apply an expense factor that makes sense. Meaning I'll give you two ends of the spectrum. Let's say you're a realtor and you work from home and you have no employees. and no inventory carried. I'm going to put you in a 15% expense factor and count 85% of your deposits. So that's pretty free there. It gives you a lot of usable deposits. Now let's take the other end of that spectrum. You're a restaurant owner. You have two brick and mortar locations, 40 employees, very high food costs, very high beverage costs, very high labor costs. I'm going to hit you as hard as I can possibly hit you for a 70% expense factor and only count 30% of your deposits. You know how many deals that's killed for me? Zero. You know why? Those type people, you own two restaurants, they are flowing like $300,000, $400,000 a month through that business bank account. They are left with, after counting 30%, oh, you only make $100,000 a month. I have never lost a deal where the buyer was in the 70% expense category because they are all dropping major deposits. So that is how that loan works. Again, when you walk out of the door after this meeting today, I want you to feel like you got a value from this. And the biggest value to take with you is... you get creativity back in your game again. Up until this meeting today, everybody kind of had the same commodity, right? Fannie, Freddie, FHA, USDA, VA, inside the vanilla box of lending. With this, if you see that the borrower can exhibit ability to repay, again, if you feel it in your heart, feel it in your soul, and you know that borrower's gonna make the payment, if you can paint the picture to Sean and Sean paints it to our underwriter, we're gonna close that deal for you. This is a $27 billion hedge fund where 20% of the loans that we close don't meet our own guidelines. What does that really mean? That means if you can paint the picture, if you can make it make sense, we will close that loan for you. And again, we're not talking about ridiculous, exorbitant rates on these. I closed three yesterday with rates in the sixes, and those are investment properties and bank statement loans and things like that. These are really good loans. They're all 30-year fixed. We can add interest only to them. That, by nature, is what makes a loan non-QM versus QM. QM stands for qualified mortgage. A qualified mortgage cannot have interest only on it. A qualified mortgage has to look at things like tax returns and have other really kind of small differences, but I think it allows us to get loans done that otherwise you just can't get done. With that being said, I want to move on to the DSCR product. As I said before, people call it the sexiest loan out there because it's really a no-doc loan. There is no income, no employment, no debt-to-income ratio, none of that. So who is this loan good for? It's good for everybody, to be honest with you, and I'm going to prove to you why in a minute. But it's investment property only, so let me scare you. NODOC loans are illegal on primary and secondary homes, but not on investment properties. Well, why is that, Chris? Because investment properties uniquely have the ability to exhibit ATR, ability to repay, not from the borrower's ability to repay, but from the property's ability to repay. Not from the old school DTI ratio, debt to income ratio, but from Debt service coverage ratio. Okay. Well, holy cow, that's a mouthful of words. Debt service coverage ratio. What does that really mean? Write that down on a piece of paper. D-S-C-R. Then take those letters backwards. Okay. And the R, think of it as rent. Does the rent cover or service the debt? Okay. Got that? So here's how it works. I'm going to show you again, the bulletproofness of this loan. I'm going to give you three examples of how a DSCR loan works. In each example, the nut to crack, the target to hit, the mortgage payment is $1,000 a month. Okay, so the debt, let's take that again backwards. Rent, does the rent cover or service the debt? The debt is P-I-T-I-A. Holy cow, so many acronyms. P-I-T-I-A, principal interest taxes insurance. A is for homeowners association. Woo! Let's call that the mortgage payment, okay? That's what it is. The mortgage payment is $1,000 a month. Here's how we determine if the rent will cover or service that $1,000 a month debt. Sean orders the appraisal. The appraiser goes out there. He says, in my professional opinion, you get a 1007 market rent analysis. The appraiser says, in my opinion, looking at 2,500 square foot, three bedroom, two and a half bathroom. comparables this property should rent for. What was the number we had to hit? A thousand bucks. Rent for a thousand bucks a month. That is a one-to-one debt service coverage ratio. Okay. So 100% covers the cost of the mortgage. Bam, off to closing we go. No tax returns, no transcripts, no VOE, no pay stubs, no W-2, no updated pay stubs, no articles of incorporation. I can close that loan in 10 days. And you're saying, what? Wait, what? I can close it in 10 days. Think about it. Because there's nothing to verify. No VOE, no pay stubs, no W-2, no 45060. None of that. The property pays for itself. Off we go to closing, okay? Now let's prove the bulletproofness of this loan, like I said. So three examples. Example one is a basic vanilla DSCR one-to-one ratio. Example two, if you're writing this down, put point. eight, zero to one. And in example three, put no DSCR at all. Here we go. This time, Sean orders the appraisal. The appraiser goes out there. He says, in my professional opinion, looking at the comparables, again, our target hits $1,000 a month. This property should rent for $800 a month. Uh-oh, uh-oh, we're underwater. The rent doesn't cover the debt. Will we still close that loan? Yes, as long as you have a 700 credit score and the down payment goes now. to 75% LTV or 25% down. In the world of investment properties, a lot of people are doing that anyway, so it really doesn't matter. Bam, off to closing you go, right? All right, here comes tier three. I call this the deep, dark, scary place of DSCR. This time, Sean orders the appraisal. The appraiser goes out there. He says, in my professional opinion, again, the target hits 1,000. the appraiser does the worst job in the history of appraising. And he comes back and says, this property should rent for nothing. Won't rent for a thing. You're like, what? How is that possible? Will we still close that loan? Most bulletproof loan in real estate, we will still close that loan if you have a 720 credit score and you put 30% down. Okay. So Bulletproof loan. Now, let's be real. Does that ever really happen in the real world? No, that has never happened in the real world. I'm using that as an example so that it'll burn in your head of, I can get that done through Sean. He knows how to get it done. So here's what really happens. Your target to hit is $1,000 a month mortgage payment. The appraiser comes back and says, hey, I think this thing will rent for 950. Uh-oh, I'm not at a one-to-one. What does a smart real estate agent, what does a smart loan originator do to bring that $950,000 up to $1,000 or bring that $1,000 down to a $950,000? Think about it. There are six ways that I've come up with over the last years to get that back in line to go to closing. Let's say you've got a 680 credit score and you don't have more than 20% to put down. That's it for you. Okay? So... Number one, the first two I'm going to give you, nobody wants to do them because they cost money. Number one, put more money down. Number two, buy the rate down to drop that mortgage payment. They don't want to do that because it costs money. Number three, the loan originator goes to the insurance company, negotiates the homeowner insurance down 50 bucks. That's number three. Number four is do a rebuttal through the realtor. Have the realtor find two or three cops that show, hey. This thing is really renting for a thousand bucks a month. Can you do an update to the appraisal given this new information? Every single time that appraiser's free and cool about it and says, I got new information. I'll change that to a thousand. That works. So that's number four. Number five, these loans do have prepayment penalties on them. Okay. Prepayment penalties, don't get confused, are illegal on primary and secondary homes. So we don't put them on primary and secondary. And we can also not put them. on investment properties. We offer a five-year, four-year, three-year, two-year, one-year, and no-year. However, the prepay penalty can help you by getting a lower rate by committing to being in that loan a little bit longer with us. So I normally do them with a three-year prepay. If you went to a five-year prepay, let's say your rate drops a quarter. Now your $1,000 payment goes to $950, bam, off to closing. So there's five ways of fixing this loan. Number six is the easiest one. Just go interest only. So instead of your target being 1,000 P-I-T-I-A, you're at 950 interest only, just I-T-I-A. And you can do a combination of all six of those to bring those numbers back in line. So this loan is truly bulletproof. I mean, how do you kill it? How do you kill that loan? Let me tell you how to kill it. It's bulletproof, but not bombproof. Here's what will kill that deal. There are savvy investors out there who know about the debt service coverage ratio product, and they will try to exploit it. Here's how they try to exploit it. Let's say they live in a $200,000 primary occupancy home, and they want to go out and buy an $800,000 investment property 10 miles away. Does that make sense? What are they really doing? They are circumventing debt to income ratio requirements and job requirements to improve their primary occupancy from a $200,000 to an $800,000 or a $600,000 new primary. They're going to be moving into that. That is occupancy fraud, and I am not going to jail for anybody that tries to pull that. We will kill that deal in a flash. So do be on guard for that. It is a bulletproof loan, but it is not bombproof. If they're trying to upgrade to a primary, we're not going to touch it. So watch out for that. Now, let's talk about rates. Three years ago in March, Fannie and Freddie came out and said, of our total portfolio of loans, no more than 7% should be or could be or will be. I'm about to sneeze. Okay. Sorry. Okay. Excuse me. Thank you. Should be investment properties in second homes. Okay. So how do you manage that total portfolio of loans down to only 7% second homes and investment? Excuse me. It's spring down here in Charleston. So the way to do that, the way you manage it down to 7% is through a nasty little acronym called the LLPA. That is a loan level price adjustment. So what Fannie and Freddie did. is, hey, we'll do your investment property, we'll do your second home, but you're going to pay for it through points. Sometimes I've seen as much as three and a half, four points just to get a par rate. So why are they doing that? They're doing that because they got into, after 2008 during the mortgage crisis, they had to get into the entire mortgage lending industry. second homes, investment properties, primary occupancies, to prop it up from complete collapse. Okay, so let me ask you a question. Have you ever seen a Ford Explorer on the road? Yes, everybody's seen that. Have you ever seen a Fannie Mae Explorer or a Freddie Mac Explorer? Never, because it doesn't exist. It doesn't exist because the government does not belong in the auto industry, and the government does not belong in the auto industry. does not belong in the second home and investment property industry either because there are the Chevys and the Cadillacs of mortgage lending are here to take care of that business. Now, in 08, we got out. I was part of that. First time I've ever been unemployed in my career, that lasted about nine to 10 months, but it was a tough time. But so what's going on is the real estate industry has healed up and it's so strong now that they're like, we're going to get out of that and let the... Companies like Angel Oak, Movement Mortgage, all these companies get back in there and get that business and fund it and service it on their own. With that being said, what you'll find on a DSCR loan in terms of rate is our rates are actually better than conventional. When you get down to 75, definitely at 70 LTV, meaning 25 or 30% down payment. When you get down in there, you are going to see rates in the sixes. And guess what? There's no LLPAs anywhere. Even at 80% LTV or 85% LTV, meaning 20% down or 15% down, I don't even know what an LLPA is in my world. I can't spell MI. I don't know what these things even are. So these loans, instead of being a bailout position, should really be your go-to number one position. And I see so many people in the mortgage business now. If it's an investment property, they're going right to the DSCR product. They know the rate's going to be great. They know it's going to be easy to close. They know it's not going to be a lot of document collecting and buyer harassing. Hey, I need your articles of incorporation. Hey, I need this. I need that. I need this. We don't need that. We need to know, can the property itself pay for itself? And if it can't, do you have great credit and good down payment? And we understand you're buying that property not for cash flow. but for appreciation. So we will fund that loan. Now let's talk about interest only one quick second. On these loans, interest only is available. Let's say that you are a part-time realtor and a part-time whatever it might be, whatever you want to do, right? And so for three months, you don't close any real estate transactions. But let's say the other job is you're an investor, you're a real estate investor, you own three properties. Why do people buy investment properties? Two reasons. They want cash flow from the property and appreciation on the property. Okay. Appreciation should take care of itself. In terms of cashflow, how do you maximize or optimize the cashflow for that part-time realtor, part-time investor? Well, there's only two ways, increase the rent on the renter or decrease the payment on the owner. Okay. Increasing the rent on the renter is painful. You know how that goes. Decreasing the payment on the owner is very easy. You select interest only. and your payment is just the interest-only portion of the payment. All right? So hold on, and I hear this every time I talk about interest-only. They're like, that's great, but what if I want to pay something down towards principal? Let's take that realtor. They don't sell anything for three months, and then month four, they kill the elephant, and they make 40, 50 grand on a commission, and they want to pay something down towards that investment property. Can they do that? Absolutely. And here's what happens when they do. Let's say month four hits. They throw $10,000, $15,000 towards the principal of that investment property. We automatically recalculate, recast, and reduce the next month's payment. And every single time they make an additional payment towards principal, we reduce the next payment over and over and over and over again. A conventional loan cannot and will not do that. So... For someone in that type of situation or any investor who wants to maximize cash flow, minimize outpay, decrease their payment, and pay off their mortgage faster, that is the product for them. And now those of you who were paying attention five minutes ago when I said there's prepay penalties on these loans, your red alert should be going off going, hey, he said pay this thing off, but he also said prepay penalties. Again, prepayment penalties are only allowed on investment properties. You can do a five, a four, a three, a two, a one, or a zero. Let's say you took a five. You wanted the lowest rate. You can pay up to 20% off each year with no penalty. It is also against the law to penalize on any more than 80% of the principal balance. So, for example, you go interest only, you're maxing your cash flow. Every year you make a 20% down payment towards principal for five years. At the end of five years, house is paid off. Your payments are minimum. No penalties. Wow. Fannie can't do that. Freddie can't do that. And they certainly can't do it at the rates we're doing it at. Or as easy as we do it. That is DSCR. And you got to get great at it because everybody around you either already is or is getting there quickly. That's all I have. Chris, that's awesome. Um, so I did, I wanted to ask just a few questions since, you know, we are recording this, but I feel like there's going to be some questions that people are going to have. So I wrote down just a few questions and if you could answer these, it'd be great. Um, so on the DSCR, um, do you already have to own a home in order to purchase the investment property? You have to own a home, but not necessarily a primary occupancy home. For example, This is not for a first-time homebuyer. Back to that story about the bomb proof. Have you ever heard those little Johnny jokes? Little Johnny's the bad kid in the classroom, and he hits the teacher in the back of the head with the spitballs and all that stuff. You know, bad kid. Little Johnny lives in mom's basement, plays video games all day, doesn't have a job, and he finds out that Sean offers this no-doc loan, no income, no employment, and can put you in a house. Again. This product is only for investment properties. It is not for people trying to circumvent income and employment to get a house. Now, we do not ask for those things, but it's got to make sense. So the borrower needs to either own a primary of greater or equal value to the subject property that we're looking at, or, and this is okay too, borrower rents their primary but owns other investment properties. in the same ballpark of value, meaning they rent their primary, they own a $350,000 investment, a $300,000 investment, and they're going to buy another $350,000 investment, that's totally okay. Because if they were going to move into a $350,000 investment, why didn't they already do it? They already own one. They've owned it for two years. If they were going to do that, they'd just move into the other one. Now, What can get you in trouble there is all of a sudden they want to buy a $600,000 investment that's within 10 miles of where they're renting. Come on now. We know what you're doing. But yes, you don't have to own a primary, but you do have to own a home and it does have to make sense. Perfect. And so you had mentioned that, you know, like we order the appraisal, we have to wait for the appraisal to come back so we can get the ratios. So is it fair to say that the underwriting essentially doesn't start until we get the appraisal back? That's for the most part, pretty accurate. Now, what we do underwrite right off the bat is purchase contract. We get the disclosures out so everybody knows what the rate is, what the costs are, the purchase contract, driver's license, assets to close, three months reserves on subject property only. Let's say there are gift funds involved. We're going to make sure that the gift funds, which are allowed, gift funds are documented. Let's say 6% seller concessions are allowed, which they are. We're going to document that, get that in the file. Then we're just waiting. for that appraisal to come back. Let's say it comes back seven, eight days later. Again, the target hit was a thousand rents for a thousand. Boom. I mean, that is how it goes off to closing. You go. Perfect. All right. And then, you know, you had mentioned the interest only option. So generally how long are those interest only options? 10 years. So the loan, the full loan term is 30 years on a DSCR loan. So you get 10 years of interest only. And then it becomes a regularly amortizing 20-year fixed after that. Everything we do is fixed. It's either a 30-year fixed interest only or a 40-year amortization with 10 years of interest only. Then it becomes a 30-year fixed. But none of these are arms. They're not going to adjust. They don't adjust after 10 years when the interest only changes. There's no balloons, nothing tricky, nothing wonky. This is good, clean, straight-up lending. You know what you got the day you close and it doesn't change. Perfect. All right. And then is there a fee? You mentioned the recast. And so if they're paying it down, is there a fee? Is there a subsequent fee for the recast? No. And that's I meant to say that no fees, no charge to recast. You actually on an interest only loan, you have to recast it when the borrower makes payment towards principal. It's just we won't do that on a regularly amortizing loan. We will, but you can only do it one time a year and it's got to be at least a $10,000 payment towards principal on interest only. You can do it every month if you want to. That's awesome. All right. And so then, so you mentioned, you know, the asset drawdown method. So what is the drawdown method on assets? Meaning, so like, is there a certain percentage? So like if you have a million dollars. worth of assets? Is there a certain percentage of that that you can use? How do you calculate what that income would translate to? So when you're looking at assets, we're looking at stocks, bonds, mutual funds, 401k, IRA, all those things. And the retirement part of the assets are given a value based on if you're over or under 59 and a half years old. But we've got a spreadsheet, Microsoft Excel spreadsheet that I can email to you. and you literally input what their assets are, they have to have held them for at least six months. So this is not for somebody who just won the lottery or they just inherited that money. We want to know that they can hold on to money for at least six months without blowing it. But I give you a spreadsheet, you input the figures, and it will give you at the top a big green pass or a big red fail in terms of underwriting. And then it'll give you a monthly value that you can use for income. based on the asset total. So let's say you put in a hundred grand. It might give you value of income on that if you were to draw it down of $150 a month. Let's say it was a million. It might give you a value of $2,000 a month income. So as I'm looking at these loan applications and I look in that asset box and I see a 56, 53 DTI, whatever it might be, I'm either, there's a bunch of things going through my mind, but if it's an investment property, I'm immediately going to DSCR in my mind. If it's a primary occupancy or second home, I'm immediately going to asset depletion in addition to the income that I've already documented through either the bank statements 1099 and or the co-borrowers W-2. There's another thing I didn't tell you about. On DSCR, and we just changed this two weeks ago, we now use the higher of the two middle scores if there's two borrowers on a loan. So let's say you got one borrower with a 780. and one with a 680, holy moly, that's a huge difference on rate. I'll take the 780 and use it. On bank statement loans and full dock loans and any loan where we're determining the income, we use the primary wage earners middle score. So same thing. One's got a 780, one's got a 640. I'm going off the 780. So that's an advantage that you're going to have that everybody who was not in this meeting will not know and will not have. That's awesome. Well, that's all the questions that I had. This has been amazing. I think it's safe to say that today we've all made a little more money this year. We all ourselves were raised by having taken the time to be here with you today. So I greatly appreciate your time. Well, thank you so much. And, you know, above all, no to call you. I want everybody that watches this to call you and you please call me and we will find a way to. win that loan. We will find a way either to figure it out then and there or to guide them on how to get it done pretty quickly. I mean, that's what we're in business for is to make these transactions go. And thank you so, so much for having me on here. And thank you all for your time. All right. I appreciate it, Chris. Thanks so much. All right, Sean. Thank you. Take care. Bye.

I think they'll be interested to hear that. So if you could just give that information and then we can go from there. OK, thank you so much, Sean, for having me come in to.

As I say, spread the good word about the products that we have to get more buyers into homes. My name is Chris Barker. I'm with Angel Oak Mortgage Solutions. We're an investor for Sean and his team at Movement Mortgage. I've been doing outside-the-box lending.

It's been named different names here and there, but now it goes by non-QM. I've been doing that for 23 years. I'm a top producer nationwide.

I have been every one of those 23 years. And the reason I tell you that is it's very important when you are working outside the box of non-QM. And what I'm talking about there is something that's not your basic vanilla full dock, meaning tax returns, pay stubs, verification of employment, transcripts, all those W-2s, updated pay stubs, all those things.

When you get off of that path, you need to have a professional on your team. that will hold your hand from literally the structuring of the loan to the pre-qual to the initial submission all the way to closing, which, by the way, we close them on average in 23 days. Now, some of the loans that I'm going to talk to you about today, I've closed as fast as nine or 10 days.

And that's the DSCR loan. And I'm going to save that one for last. But I am from Virginia, so I know your area well. I play baseball at Virginia Tech.

I'm from Abingdon. Still live in Abingdon about half the time, the other half the time I live in Charleston, South Carolina. I've been with this company for nine years.

Now that's super important because I know where everything is. I know where to find the broom in the closet. I know where to find the guideline about gift of equity on bank statement loans.

Is that allowed? I have run into it so many times that I know it like the back of my hand. I really don't have to look at the guidelines very often because I just look at so many loans.

per day and per month. With that being said, you are in good trusted hands when you go to Sean because he's going to come to me and we can even do a three-way call if there's something really complicated that's off that beaten path. And I'll be able to guide you guys from, like I said, from beginning to end to get that transaction closed and to get your buyer happy. And really, I think the coolest and best part of this is you're going to be able to do things that other people in your area just can't do because they didn't attend this meeting and they really aren't students of the industry or didn't have the opportunity. I won't say, you know, really talk too badly because some of them maybe just didn't have the opportunity to learn what we're going to talk about today.

So with that being said, what we are going to talk about today is how to take care of self-employed buyers. Okay. And in that Uh, there's really three programs we have for self and really four, uh, really five, actually, as you can see there, my mind starts going. Um, but the programs we're going to talk about are bank statement lending. Again, anything I'm getting ready to talk about, no tax returns.

Okay. No tax returns. You can burn them, shred them, forget them.

I must say that 10 times a day, every day, forget about them. Just, I don't even care if you had filed taxes. We are going to determine your income.

By looking at 12 months of bank statements, it's super easy. We're not looking at what's going out, what's coming in, this and that. We literally just take the deposit number at the top right corner of the statement, add up all 12, divide them by 12, and there's your income. So instead of the basic W-2 income you would have on a conventional type loan, you got the bank statement income.

You plug that in on your loan application, you calculate your DTI, and off you go. or you tweak it. And I'm going to get into that in a second.

Another option we have, let's say those bank statements for whatever reason don't work. Let's say you've got three months where you went zero, or you've got 30 insufficient funds during that 12-month period. We can switch you to a P&L program where we get a tax preparer. Now notice I didn't say CPA. It does not have to be a CPA.

It can be tax service near me. You could Google it. get them to fill out the P&L. We then take two months of bank statements to verify that that P&L is legitimate.

And those numbers are within 15% of what that P&L bottom line says. The other option we have is 1099 only. Additionally, as my mind went through there, also for self-employed people, we can do DSCR loans on investment properties, and we can do an asset qualifier. I'm not going to get into those today, but please know we have them. I think...

anytime, and what I want you guys to take from this meeting today, anytime you feel in your heart and you see in your mind that a buyer has the ability to repay and you can paint that picture. For example, let's say husband's a self-employed roofer, wife is W-2, works at Walmart. I can take the self-employed roofer's bank statement income, add the W-2 income to it, Nobody else can do that.

We call it a bank statement, W-2 hybrid. Put those two incomes together and let's say, oh my, the DTI is still at 56%. Is that a dead deal?

No. We can actually draw down against assets to supplement more income to use as income. Now you're at 49.99% DTI and Sean Allen is the only guy in the region that knows how to close that loan because he had this phone call today. Okay. So- The two products I really want to talk about are bank statements for self-employed.

And when I say bank statements, that includes P&L and 1099. All the guidelines are the same. And the other one is the DSCR product, which people call that the sexiest product out there, which I think is the worst name on earth for that product. It should be called the most bulletproof loan in real estate.

And I'll prove to you why when we get to that second. phase of the discussion. So with that being said, I normally don't do recordings, so I'm going to act like you guys are live. So I want you to raise your hand when I ask questions when you see this, okay? So here's the first question.

Well, first, let me tell you, we do not do Fannie, Freddie, FHA, USDA, or VA. Sean can do all those things, okay? But I'm not going to talk about those today. I'm going to talk about this. But here's where I ask the one question.

Raise your hand if you have ever done a VA loan. Everybody in the room's done a VA loan. Raise your hand if you have ever done a bank statement loan.

Probably a third of the room has raised their hand just now. All right. Why am I asking this question?

And I am not. There's no slight against the VA product. I love it. I'm glad we have it.

It is a wonderful purpose. Don't take it the wrong way. My point is this.

I'm going to give you three reasons why you should be great at bank statement lending. Number one, did you know that there are more self-employed and 1099 people in the United States than there are veterans? I bet you didn't know that one.

My point is this, if you're good at VA, you should be great at bank statement lending. Number one, because there's more people out there that are self-employed and 1099. So those marketing dollars that you're spending on advertisements, maybe you should be advertising. that you are a self-employed buyer expert, self-employed buyer specialist.

Now, you don't have to be. Sean does, and I do. And you can always call us, and we'll take care of that for you.

Okay, so reason number one at being great at bank statement lending, there's more of them out there. Reason number two, it's an underserved market because we don't have phone calls like this. We don't have meetings like this where you discover, here's how I do these loans.

And at the end of this call, you're going to feel pretty comfortable and confident about how to get these done. Number three reason to be great at this, rich people do not work for the man. You know what I mean by that? Think about that.

Anytime you're seeing a high priced value on a purchase, it is usually a self-employed, like I said, a roofer, a guy who owns a construction company, a law firm owner. things like that. That's where the people who are making a lot of money, who are smart and affluent and utilize the U.S. tax code to their fullest benefit, meaning they write everything off.

With that being said, let me ask everybody in the room this question. If you write off your home office, cell phone, car, any of those things, raise your hand. If this is a group full of realtors, everybody in the room just raise their hand. Because you can. You are entitled to do that per the U.S. tax code.

So let me tell you a story, and this will sink in and it might hurt a little bit as I tell it. Have you ever in your real estate career... had a buyer, a potential buyer, reach out to you and say, hey, Saturday, I'd like to go look at these houses in this price range in these neighborhoods. Can you take me around and show me five or six houses? And you go, yeah, I'll meet you at this place and we'll hop in the car and go look around.

But what you don't say is you're missing your kid's soccer game or you're missing your other kid's birthday party or a friend's birthday party. And so you take that person around and you show them five or six houses. And on Monday, and they told you, oh, yeah, I'm a self-employed plumber. I own a restaurant. I own a nail salon, whatever it might be.

I'm a 1099 truck driver, whatever it might be. But on Monday, you turn that buyer, potential buyer over to Sean. And Sean looks at the tax returns and he says, hey, you told them you were making 135 grand a year. but your tax returns show $13,000 a year.

So we got a little problem here. Now, Sean knows how to take care of those loans now because we can do a bank statement loan or a 1099 only or a P&L. We've got multiple options. But let me tell you a story about not Sean. Let me tell you a story about what I call Joe Blow the LO.

He's the guy that wasn't in this meeting, wasn't in this room, and doesn't know how to get this transaction done. And he gives the worst advice that I've ever heard a loan originator give to a self-employed buyer, like yourselves, and here's this advice. So on Monday, they look at those tax returns and they go, well, based on your income of $13,000 a year, you won't DTI for anything.

So here's what I want you to do, Mr. Self-Employed Buyer. See that door over there? I want you to walk out that door.

They're gone forever. As soon as those words come out of their mouth. So I want you to walk out that door and I want you to stop writing off that home office and cell phone and car. And let's just say that's about $30,000 a year.

And I need you to do that two times because Fannie and Freddie, whoever they are, they want two years of tax returns to show higher income. So I want you to forfeit $60,000 of tax refund that you're entitled to. Oh, and by the way, you're also going to lose two years of home appreciation because if I could have gotten you into this now, that house would be worth $60,000 more two years from now.

So I'm advising you to lose $120,000 and the inconvenience cost of living in your mom's basement or the RV or wherever it is that you don't want to be and why you're talking to me. So you've lost that customer for good. Or. we could close a bank statement loan in three weeks.

Which do you prefer? And what always happens is that self-employed person goes, I want to close in three weeks. I want out of my mom's basement. I want the appreciation on that home. And I do not want to go back and amend my tax returns or wait two years and not file what I'm entitled to per the tax code.

That's crazy. I'm not doing that. So close the bank statement loan in three weeks.

And normally in person, I always stop right there and say, does anybody have any questions? And when I do, the same question gets asked hundreds of times. And that is, hey, wait, hold on a second. You can close a bank statement loan in three weeks. Why haven't we been doing this with all self-employed people?

Three months ago, I lost this deal because so-and-so. Six months ago, I lost this deal because the tax returns didn't work. So I know the burning question in your mind right now is this, why aren't we doing that? The rate must be through the roof, right? That's what you're all thinking underneath is this.

This is too good to be true. The rate's got to be terrible. The truth of it is the rates are right in line with conventional, especially at 80% LTV or less.

Okay. We might be a quarter higher. We might be three eighths higher.

We might be a quarter lower depending on the LTV and the credit score. It depends on. how good of a borrower you have, and how badly we want that in our portfolio.

Now, where the rates are going to get a disparity is over 80% LTV, there is no MI on these loans. So the truth of it is the MI is baked into the rate. So when you go to 85 LTV or 15% down or 10% down, that rate's going to go up maybe a percent higher than conventional, but the payment will be the same. And guess what? The interest is tax deductible.

for a borrower who does some tax deducting, okay? So they don't really mind at all, and it gets them in a house now, and they're never going to stop taking that tax refund because that's what they're using for their down payment, okay? These loans are fantastic for self-employed people.

Now, you might be thinking already, how do I market to these people? How do I get the word out? You ever seen that movie, Field of Dreams?

If you build it, they will come. If you market to self-employed people, they will come. I want you to put these four words down and put them on all of your advertising. Put it on your radio show, on your billboard, on your business card, on your website. Here's the four words.

Self- employed buyer expert, self-employed buyer specialist. Now, I know what you're saying. Hey, I've been talking to this guy for 10 minutes or listening to him for 10 minutes. I'm not a self-employed buyer expert.

You don't have to be. Sean does. I do. I am.

I close 35 of these every single month. I used to, back in the day, I could close 100 of these a month. So I'm very familiar with the product. Any question that you may have about qualifying the borrower, or structuring the loan to work, believe me, I have seen it and done it for 20 some years, and I will get you to the closing table.

The minimum loan amount on these loans, again, it's for a little bit more affluent buyer, because that's who these people are. The minimum loan amount is $150,000. The minimum credit score requirement is 640. The maximum loan amount on these is $4 million, and we see those loans. Now, I know- You guys might say, I might not see that very often. If it's in your area, you should walk in there to whoever has access to list these properties and go, I'm the person that can get that deal done.

I know how to do it. I can do $4 million with no tax returns. There's not many people in Virginia that know how to get that deal done. So I would go market that. Also, when you're marketing based on those numbers.

Start thinking about who your client base is. It may not necessarily be the nail technician, but it is 100% the owner of the nail salon. The reason I say this, with $150,000 loan amount minimum, those borrowers need to deposit about $4,400 a month in order for the DTI to work and the residual income to work. Now, I'm not gonna get too much into the details of the underwriting because I just wanna sell the sizzle today.

So you guys know how to go out and market this and deliver those to Sean so we can dig into the underwriting minutia and make sure they work. But in your target marketing, and we have customizable flyers where you can put your logo, your picture, you can co-brand it with Sean, phone number, all that good stuff. And you can start marketing to these borrowers, buyers, and get these loans in the door.

Now, another thing I want to tell you about, you might say, and I get it. ask this occasionally by a hard thinker, how do you apply an expense factor to what this borrower does? You can't just give them all the deposits. Here's how it works.

If you give me both business bank statements and personal bank statements, I will give you 100% of the personal bank statements. We do that because we believe or think commonsensically. that you're going to pay all your expenses, the light bill, the water bill, salaries, wages, inventory out of the business account and then sweep that profit into the personal. So I'll give you all the deposits in the personal, no problem. Now, if you give me business bank statements, I'm going to apply an expense factor that makes sense.

Meaning I'll give you two ends of the spectrum. Let's say you're a realtor and you work from home and you have no employees. and no inventory carried.

I'm going to put you in a 15% expense factor and count 85% of your deposits. So that's pretty free there. It gives you a lot of usable deposits.

Now let's take the other end of that spectrum. You're a restaurant owner. You have two brick and mortar locations, 40 employees, very high food costs, very high beverage costs, very high labor costs. I'm going to hit you as hard as I can possibly hit you for a 70% expense factor and only count 30% of your deposits.

You know how many deals that's killed for me? Zero. You know why?

Those type people, you own two restaurants, they are flowing like $300,000, $400,000 a month through that business bank account. They are left with, after counting 30%, oh, you only make $100,000 a month. I have never lost a deal where the buyer was in the 70% expense category because they are all dropping major deposits.

So that is how that loan works. Again, when you walk out of the door after this meeting today, I want you to feel like you got a value from this. And the biggest value to take with you is...

you get creativity back in your game again. Up until this meeting today, everybody kind of had the same commodity, right? Fannie, Freddie, FHA, USDA, VA, inside the vanilla box of lending. With this, if you see that the borrower can exhibit ability to repay, again, if you feel it in your heart, feel it in your soul, and you know that borrower's gonna make the payment, if you can paint the picture to Sean and Sean paints it to our underwriter, we're gonna close that deal for you. This is a $27 billion hedge fund where 20% of the loans that we close don't meet our own guidelines.

What does that really mean? That means if you can paint the picture, if you can make it make sense, we will close that loan for you. And again, we're not talking about ridiculous, exorbitant rates on these.

I closed three yesterday with rates in the sixes, and those are investment properties and bank statement loans and things like that. These are really good loans. They're all 30-year fixed.

We can add interest only to them. That, by nature, is what makes a loan non-QM versus QM. QM stands for qualified mortgage. A qualified mortgage cannot have interest only on it.

A qualified mortgage has to look at things like tax returns and have other really kind of small differences, but I think it allows us to get loans done that otherwise you just can't get done. With that being said, I want to move on to the DSCR product. As I said before, people call it the sexiest loan out there because it's really a no-doc loan.

There is no income, no employment, no debt-to-income ratio, none of that. So who is this loan good for? It's good for everybody, to be honest with you, and I'm going to prove to you why in a minute. But it's investment property only, so let me scare you.

NODOC loans are illegal on primary and secondary homes, but not on investment properties. Well, why is that, Chris? Because investment properties uniquely have the ability to exhibit ATR, ability to repay, not from the borrower's ability to repay, but from the property's ability to repay. Not from the old school DTI ratio, debt to income ratio, but from Debt service coverage ratio.

Okay. Well, holy cow, that's a mouthful of words. Debt service coverage ratio. What does that really mean? Write that down on a piece of paper.

D-S-C-R. Then take those letters backwards. Okay. And the R, think of it as rent. Does the rent cover or service the debt?

Okay. Got that? So here's how it works. I'm going to show you again, the bulletproofness of this loan. I'm going to give you three examples of how a DSCR loan works.

In each example, the nut to crack, the target to hit, the mortgage payment is $1,000 a month. Okay, so the debt, let's take that again backwards. Rent, does the rent cover or service the debt?

The debt is P-I-T-I-A. Holy cow, so many acronyms. P-I-T-I-A, principal interest taxes insurance. A is for homeowners association. Woo!

Let's call that the mortgage payment, okay? That's what it is. The mortgage payment is $1,000 a month. Here's how we determine if the rent will cover or service that $1,000 a month debt.

Sean orders the appraisal. The appraiser goes out there. He says, in my professional opinion, you get a 1007 market rent analysis. The appraiser says, in my opinion, looking at 2,500 square foot, three bedroom, two and a half bathroom.

comparables this property should rent for. What was the number we had to hit? A thousand bucks. Rent for a thousand bucks a month. That is a one-to-one debt service coverage ratio.

Okay. So 100% covers the cost of the mortgage. Bam, off to closing we go.

No tax returns, no transcripts, no VOE, no pay stubs, no W-2, no updated pay stubs, no articles of incorporation. I can close that loan in 10 days. And you're saying, what?

Wait, what? I can close it in 10 days. Think about it. Because there's nothing to verify.

No VOE, no pay stubs, no W-2, no 45060. None of that. The property pays for itself. Off we go to closing, okay?

Now let's prove the bulletproofness of this loan, like I said. So three examples. Example one is a basic vanilla DSCR one-to-one ratio.

Example two, if you're writing this down, put point. eight, zero to one. And in example three, put no DSCR at all. Here we go. This time, Sean orders the appraisal.

The appraiser goes out there. He says, in my professional opinion, looking at the comparables, again, our target hits $1,000 a month. This property should rent for $800 a month.

Uh-oh, uh-oh, we're underwater. The rent doesn't cover the debt. Will we still close that loan? Yes, as long as you have a 700 credit score and the down payment goes now.

to 75% LTV or 25% down. In the world of investment properties, a lot of people are doing that anyway, so it really doesn't matter. Bam, off to closing you go, right?

All right, here comes tier three. I call this the deep, dark, scary place of DSCR. This time, Sean orders the appraisal. The appraiser goes out there. He says, in my professional opinion, again, the target hits 1,000.

the appraiser does the worst job in the history of appraising. And he comes back and says, this property should rent for nothing. Won't rent for a thing.

You're like, what? How is that possible? Will we still close that loan? Most bulletproof loan in real estate, we will still close that loan if you have a 720 credit score and you put 30% down. Okay.

So Bulletproof loan. Now, let's be real. Does that ever really happen in the real world? No, that has never happened in the real world. I'm using that as an example so that it'll burn in your head of, I can get that done through Sean.

He knows how to get it done. So here's what really happens. Your target to hit is $1,000 a month mortgage payment.

The appraiser comes back and says, hey, I think this thing will rent for 950. Uh-oh, I'm not at a one-to-one. What does a smart real estate agent, what does a smart loan originator do to bring that $950,000 up to $1,000 or bring that $1,000 down to a $950,000? Think about it. There are six ways that I've come up with over the last years to get that back in line to go to closing. Let's say you've got a 680 credit score and you don't have more than 20% to put down.

That's it for you. Okay? So...

Number one, the first two I'm going to give you, nobody wants to do them because they cost money. Number one, put more money down. Number two, buy the rate down to drop that mortgage payment.

They don't want to do that because it costs money. Number three, the loan originator goes to the insurance company, negotiates the homeowner insurance down 50 bucks. That's number three. Number four is do a rebuttal through the realtor.

Have the realtor find two or three cops that show, hey. This thing is really renting for a thousand bucks a month. Can you do an update to the appraisal given this new information?

Every single time that appraiser's free and cool about it and says, I got new information. I'll change that to a thousand. That works. So that's number four.

Number five, these loans do have prepayment penalties on them. Okay. Prepayment penalties, don't get confused, are illegal on primary and secondary homes.

So we don't put them on primary and secondary. And we can also not put them. on investment properties.

We offer a five-year, four-year, three-year, two-year, one-year, and no-year. However, the prepay penalty can help you by getting a lower rate by committing to being in that loan a little bit longer with us. So I normally do them with a three-year prepay. If you went to a five-year prepay, let's say your rate drops a quarter.

Now your $1,000 payment goes to $950, bam, off to closing. So there's five ways of fixing this loan. Number six is the easiest one. Just go interest only. So instead of your target being 1,000 P-I-T-I-A, you're at 950 interest only, just I-T-I-A.

And you can do a combination of all six of those to bring those numbers back in line. So this loan is truly bulletproof. I mean, how do you kill it? How do you kill that loan? Let me tell you how to kill it.

It's bulletproof, but not bombproof. Here's what will kill that deal. There are savvy investors out there who know about the debt service coverage ratio product, and they will try to exploit it. Here's how they try to exploit it.

Let's say they live in a $200,000 primary occupancy home, and they want to go out and buy an $800,000 investment property 10 miles away. Does that make sense? What are they really doing?

They are circumventing debt to income ratio requirements and job requirements to improve their primary occupancy from a $200,000 to an $800,000 or a $600,000 new primary. They're going to be moving into that. That is occupancy fraud, and I am not going to jail for anybody that tries to pull that. We will kill that deal in a flash. So do be on guard for that.

It is a bulletproof loan, but it is not bombproof. If they're trying to upgrade to a primary, we're not going to touch it. So watch out for that. Now, let's talk about rates. Three years ago in March, Fannie and Freddie came out and said, of our total portfolio of loans, no more than 7% should be or could be or will be.

I'm about to sneeze. Okay. Sorry.

Okay. Excuse me. Thank you.

Should be investment properties in second homes. Okay. So how do you manage that total portfolio of loans down to only 7% second homes and investment?

Excuse me. It's spring down here in Charleston. So the way to do that, the way you manage it down to 7% is through a nasty little acronym called the LLPA. That is a loan level price adjustment.

So what Fannie and Freddie did. is, hey, we'll do your investment property, we'll do your second home, but you're going to pay for it through points. Sometimes I've seen as much as three and a half, four points just to get a par rate.

So why are they doing that? They're doing that because they got into, after 2008 during the mortgage crisis, they had to get into the entire mortgage lending industry. second homes, investment properties, primary occupancies, to prop it up from complete collapse.

Okay, so let me ask you a question. Have you ever seen a Ford Explorer on the road? Yes, everybody's seen that.

Have you ever seen a Fannie Mae Explorer or a Freddie Mac Explorer? Never, because it doesn't exist. It doesn't exist because the government does not belong in the auto industry, and the government does not belong in the auto industry.

does not belong in the second home and investment property industry either because there are the Chevys and the Cadillacs of mortgage lending are here to take care of that business. Now, in 08, we got out. I was part of that. First time I've ever been unemployed in my career, that lasted about nine to 10 months, but it was a tough time.

But so what's going on is the real estate industry has healed up and it's so strong now that they're like, we're going to get out of that and let the... Companies like Angel Oak, Movement Mortgage, all these companies get back in there and get that business and fund it and service it on their own. With that being said, what you'll find on a DSCR loan in terms of rate is our rates are actually better than conventional.

When you get down to 75, definitely at 70 LTV, meaning 25 or 30% down payment. When you get down in there, you are going to see rates in the sixes. And guess what?

There's no LLPAs anywhere. Even at 80% LTV or 85% LTV, meaning 20% down or 15% down, I don't even know what an LLPA is in my world. I can't spell MI.

I don't know what these things even are. So these loans, instead of being a bailout position, should really be your go-to number one position. And I see so many people in the mortgage business now. If it's an investment property, they're going right to the DSCR product.

They know the rate's going to be great. They know it's going to be easy to close. They know it's not going to be a lot of document collecting and buyer harassing.

Hey, I need your articles of incorporation. Hey, I need this. I need that.

I need this. We don't need that. We need to know, can the property itself pay for itself? And if it can't, do you have great credit and good down payment? And we understand you're buying that property not for cash flow.

but for appreciation. So we will fund that loan. Now let's talk about interest only one quick second.

On these loans, interest only is available. Let's say that you are a part-time realtor and a part-time whatever it might be, whatever you want to do, right? And so for three months, you don't close any real estate transactions.

But let's say the other job is you're an investor, you're a real estate investor, you own three properties. Why do people buy investment properties? Two reasons. They want cash flow from the property and appreciation on the property.

Okay. Appreciation should take care of itself. In terms of cashflow, how do you maximize or optimize the cashflow for that part-time realtor, part-time investor? Well, there's only two ways, increase the rent on the renter or decrease the payment on the owner.

Okay. Increasing the rent on the renter is painful. You know how that goes.

Decreasing the payment on the owner is very easy. You select interest only. and your payment is just the interest-only portion of the payment.

All right? So hold on, and I hear this every time I talk about interest-only. They're like, that's great, but what if I want to pay something down towards principal?

Let's take that realtor. They don't sell anything for three months, and then month four, they kill the elephant, and they make 40, 50 grand on a commission, and they want to pay something down towards that investment property. Can they do that? Absolutely. And here's what happens when they do.

Let's say month four hits. They throw $10,000, $15,000 towards the principal of that investment property. We automatically recalculate, recast, and reduce the next month's payment. And every single time they make an additional payment towards principal, we reduce the next payment over and over and over and over again.

A conventional loan cannot and will not do that. So... For someone in that type of situation or any investor who wants to maximize cash flow, minimize outpay, decrease their payment, and pay off their mortgage faster, that is the product for them. And now those of you who were paying attention five minutes ago when I said there's prepay penalties on these loans, your red alert should be going off going, hey, he said pay this thing off, but he also said prepay penalties. Again, prepayment penalties are only allowed on investment properties.

You can do a five, a four, a three, a two, a one, or a zero. Let's say you took a five. You wanted the lowest rate. You can pay up to 20% off each year with no penalty.

It is also against the law to penalize on any more than 80% of the principal balance. So, for example, you go interest only, you're maxing your cash flow. Every year you make a 20% down payment towards principal for five years.

At the end of five years, house is paid off. Your payments are minimum. No penalties.

Wow. Fannie can't do that. Freddie can't do that. And they certainly can't do it at the rates we're doing it at.

Or as easy as we do it. That is DSCR. And you got to get great at it because everybody around you either already is or is getting there quickly. That's all I have.

Chris, that's awesome. Um, so I did, I wanted to ask just a few questions since, you know, we are recording this, but I feel like there's going to be some questions that people are going to have. So I wrote down just a few questions and if you could answer these, it'd be great.

Um, so on the DSCR, um, do you already have to own a home in order to purchase the investment property? You have to own a home, but not necessarily a primary occupancy home. For example, This is not for a first-time homebuyer.

Back to that story about the bomb proof. Have you ever heard those little Johnny jokes? Little Johnny's the bad kid in the classroom, and he hits the teacher in the back of the head with the spitballs and all that stuff. You know, bad kid.

Little Johnny lives in mom's basement, plays video games all day, doesn't have a job, and he finds out that Sean offers this no-doc loan, no income, no employment, and can put you in a house. Again. This product is only for investment properties.

It is not for people trying to circumvent income and employment to get a house. Now, we do not ask for those things, but it's got to make sense. So the borrower needs to either own a primary of greater or equal value to the subject property that we're looking at, or, and this is okay too, borrower rents their primary but owns other investment properties. in the same ballpark of value, meaning they rent their primary, they own a $350,000 investment, a $300,000 investment, and they're going to buy another $350,000 investment, that's totally okay.

Because if they were going to move into a $350,000 investment, why didn't they already do it? They already own one. They've owned it for two years.

If they were going to do that, they'd just move into the other one. Now, What can get you in trouble there is all of a sudden they want to buy a $600,000 investment that's within 10 miles of where they're renting. Come on now.

We know what you're doing. But yes, you don't have to own a primary, but you do have to own a home and it does have to make sense. Perfect. And so you had mentioned that, you know, like we order the appraisal, we have to wait for the appraisal to come back so we can get the ratios.

So is it fair to say that the underwriting essentially doesn't start until we get the appraisal back? That's for the most part, pretty accurate. Now, what we do underwrite right off the bat is purchase contract.

We get the disclosures out so everybody knows what the rate is, what the costs are, the purchase contract, driver's license, assets to close, three months reserves on subject property only. Let's say there are gift funds involved. We're going to make sure that the gift funds, which are allowed, gift funds are documented.

Let's say 6% seller concessions are allowed, which they are. We're going to document that, get that in the file. Then we're just waiting. for that appraisal to come back. Let's say it comes back seven, eight days later.

Again, the target hit was a thousand rents for a thousand. Boom. I mean, that is how it goes off to closing. You go. Perfect.

All right. And then, you know, you had mentioned the interest only option. So generally how long are those interest only options? 10 years.

So the loan, the full loan term is 30 years on a DSCR loan. So you get 10 years of interest only. And then it becomes a regularly amortizing 20-year fixed after that. Everything we do is fixed.

It's either a 30-year fixed interest only or a 40-year amortization with 10 years of interest only. Then it becomes a 30-year fixed. But none of these are arms.

They're not going to adjust. They don't adjust after 10 years when the interest only changes. There's no balloons, nothing tricky, nothing wonky. This is good, clean, straight-up lending.

You know what you got the day you close and it doesn't change. Perfect. All right.

And then is there a fee? You mentioned the recast. And so if they're paying it down, is there a fee? Is there a subsequent fee for the recast?

No. And that's I meant to say that no fees, no charge to recast. You actually on an interest only loan, you have to recast it when the borrower makes payment towards principal.

It's just we won't do that on a regularly amortizing loan. We will, but you can only do it one time a year and it's got to be at least a $10,000 payment towards principal on interest only. You can do it every month if you want to. That's awesome.

All right. And so then, so you mentioned, you know, the asset drawdown method. So what is the drawdown method on assets?

Meaning, so like, is there a certain percentage? So like if you have a million dollars. worth of assets?

Is there a certain percentage of that that you can use? How do you calculate what that income would translate to? So when you're looking at assets, we're looking at stocks, bonds, mutual funds, 401k, IRA, all those things.

And the retirement part of the assets are given a value based on if you're over or under 59 and a half years old. But we've got a spreadsheet, Microsoft Excel spreadsheet that I can email to you. and you literally input what their assets are, they have to have held them for at least six months. So this is not for somebody who just won the lottery or they just inherited that money. We want to know that they can hold on to money for at least six months without blowing it.

But I give you a spreadsheet, you input the figures, and it will give you at the top a big green pass or a big red fail in terms of underwriting. And then it'll give you a monthly value that you can use for income. based on the asset total. So let's say you put in a hundred grand. It might give you value of income on that if you were to draw it down of $150 a month.

Let's say it was a million. It might give you a value of $2,000 a month income. So as I'm looking at these loan applications and I look in that asset box and I see a 56, 53 DTI, whatever it might be, I'm either, there's a bunch of things going through my mind, but if it's an investment property, I'm immediately going to DSCR in my mind. If it's a primary occupancy or second home, I'm immediately going to asset depletion in addition to the income that I've already documented through either the bank statements 1099 and or the co-borrowers W-2. There's another thing I didn't tell you about.

On DSCR, and we just changed this two weeks ago, we now use the higher of the two middle scores if there's two borrowers on a loan. So let's say you got one borrower with a 780. and one with a 680, holy moly, that's a huge difference on rate. I'll take the 780 and use it.

On bank statement loans and full dock loans and any loan where we're determining the income, we use the primary wage earners middle score. So same thing. One's got a 780, one's got a 640. I'm going off the 780. So that's an advantage that you're going to have that everybody who was not in this meeting will not know and will not have.

That's awesome. Well, that's all the questions that I had. This has been amazing.

I think it's safe to say that today we've all made a little more money this year. We all ourselves were raised by having taken the time to be here with you today. So I greatly appreciate your time.

Well, thank you so much. And, you know, above all, no to call you. I want everybody that watches this to call you and you please call me and we will find a way to.

win that loan. We will find a way either to figure it out then and there or to guide them on how to get it done pretty quickly. I mean, that's what we're in business for is to make these transactions go.

And thank you so, so much for having me on here. And thank you all for your time. All right. I appreciate it, Chris. Thanks so much.

All right, Sean. Thank you. Take care.

Bye.

Transcript for:Understanding Non-QM Lending and DSCR Loans

Transcript for:
Understanding Non-QM Lending and DSCR Loans