The Truth About Lending: Part 1

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Hi BP family!  I have been reading and absorbing lots of fantastic info from this great community, and I have learned a lot from you all.  Time for me to give back.

A quick story about me, I love real estate.  I just love it.  Everything about it.  From walking through a property, to buying it, to owning it, to financing it, to selling it....every property is different, every person is different, and so it will never be the same thing twice and it never gets old.

My primary business is that I have been a residential loan originator for the past 17 years. I have been a broker, correspondent, and worked directly for a major bank. I have owned my own company, and I have been just a loan officer. So I have been on all sides of Conventional, FHA, VA, and Subprime lending (back in the day).

I have been reading many posts and replies here on BP, and it seems that many people really do not understand what can and cannot be done with lending (which is expected), and while most people are giving great info, some are not.  So I wanted to write an unbiased thread about the truth, and if there is enough interest, I will continue to provide as much info and new topics as I can.

Part 1 of this series is going to be called "Overlays". What is an overlay you ask? An overlay is a lender imposing their own guidelines on top of the actual guidelines from Fannie/Freddie/FHA, etc. Many banks & lenders do this to protect their risk in lending to borrowers. Why? Well there are many reasons, but mostly financial (isn't everything driven by money?). These overlays allow for the lender to write only the highest quality loans, which in turn can help their profits, stock, default percentage, etc.

Overlays come in many shapes and sizes.  It can be the FICO credit score requirements, Loan-to-Value, asset requirements, and/or many other non-numerical lending guidelines.  The list is long for all of the possible overlay opportunities, as the underwriting guidelines are hundreds of pages.

Here's an example.  Fannie Mae (conventional 1-4 unit lending) allows up to 10 financed properties.  But you call your bank, and the loan officer tells you that you can only have 4 financed properties, and then tells you that you need to get a private/hard money loan.  In reality, that bank has an overlay, and you are getting bad advice without even knowing it.  And the worst part it is, that an uneducated loan officer for that bank may not even know that Fannie allows 10 properties, and they don't even know that they have an overlay or what an overlay is!  That lender has decided that they do not want the exposure of borrowers who have more than 4 mortgages in their lending portfolio.  But there are lenders out there that do not have any overlays to the Fannie guidelines, or just a few of them, and will lend on 10 financed properties.

Many of these overlays started after the mortgage meltdown, as lenders wanted to take less risks, and try to improve their default percentages.  Overlays have been around longer than that, but that's when it kicked into overdrive.  Subprime and most Alt-A went away, and suddenly it appeared no one was lending because of all the overlays.  As we distanced ourselves from that time, the foreclosures cycled through, borrowers decreased default, and lenders removed and/or reduced many of their overlays.  But not all of them.  In fact, not even most of them.  Most banks and lenders still have them, and the overlays vary per lender.  Most brokers still have them, because they are actually underwriting to those same bank's/lender's guidelines.

As a borrower, you need to find a good, qualified, educated loan professional to align yourself with that has a strong product line with little or no overlays, especially as an investor.  Many people think they need hard money or private money, and don't know they can qualify for a conventional product.  Do your homework.  Ask questions.  Get referrals.  Use BP and network, this is a fantastic place to find quality lenders.

Hopefully you find this topic useful and informative.  Best of luck and happy investing!

A couple of questions, Zack.  How long does it take you to get approve a conventional purchase loan from the time you have app and docs?  And how long does it take to get to close/funding, typically?

Hi @Jon Klaus , thanks for the question.  Most lenders can close a purchase in 30 days, and I'm no exception.  Although many of the major banks run at longer turn times due to their volume, since their underwriting resources are not just their own retail, but also correspondent and wholesale from brokers.  If anyone tells you they can close a conventional loan in less than 30 days, especially 15-20 days, be careful they aren't just selling you to get your business, and surprise, you aren't closing on time.  The approval process can vary widely per lender, some submit to underwriting right away, and some wait for the appraisal and verifications to come back first and then submit.  It's always best to be upfront about your situation and ask questions.

@Zack Karp

Reading the discussion here made me think of a question. Assuming there is not a property in place and a buyer would like to be pre-approved. How long does it typically take you to get a pre-qualification letter in place?

Zack Karp in your experience of monthly payments are being made on time do most backs call the due on sale clause? And if they do how did they find out of the title change?

Hi @Zack Karp

Thanks for sharing your insights with us! Financing and all that comes with it is still a scary thing for most of us newbies, so gaining more knowledge helps a lot. 

I have a somewhat related question that you might be able to answer. Husband and I may switch to being 1099 contractors from our W2's soon which makes traditional financing for our first property difficult. We've looked into Fannie Mae's delayed financing and buying the property cash instead. Are there any difficulties getting delayed financing with 1099 income?

@Colin Smith

Typically a preapproval letter can be done within minutes.  Some companies and loan officers operate differently, but I can only speak from my own experience.  After pulling credit and getting all of the income, asset, and other pertinent information, I run automated underwriting, and if approved I email the preapproval letter to the buyer within minutes.  Time is money when you are making offers!

@Zack Karp

I for one would love for you to keep posting on here Zack. This information is very valuable. As you can imagine the minute people here from their lenders that 4 or 5 mortgages is the maximum many will not think to keep trying knowing there are lenders out there that do not have the overlays you mentioned. This would certainly help create more business and save people money. 

@Eddie T.

While I would love to tell you the answer you are hoping to hear, I cannot give you any advice other than to follow the contract that you are signing, otherwise known as a mortgage, that states you cannot transfer title without the lender's written permission (except for several events allowable by law, see the Garn-St. Germain Act, which allows transfer to a land trust).  What you do from there is your own business.  Lenders can certainly find out, it's public record, and they also have deeper pockets than you.  And a disclaimer, consult with an attorney, as I cannot give any legal advice.

@Zack Karp - Thanks for sharing your knowledge of the systems and processes. This info is really appreciated and it certainly opens our eyes to the possibilities that exist.

I/we look forward to your future info laden posts. I know you are already working on Part 2.

Hi @Kate H.

Ah, one of the many pitfalls in our business.  Going from a W-2 to a 1099 position makes you self-employed in the lending world.  You would not be able to qualify for conventional financing if you are just switching, and make sure you have an exit strategy if you are buying cash so you don't get stuck because you can't refinance using delayed financing.

This is a great opportunity to discuss another overlay.  So I'm guessing that almost every conventional lender is telling you guys that you need to have 2 years tax returns once you become self-employed.  Freddie Mac actually approves loans with only 1 year of tax returns for self-employed borrowers, as long as you get AUS approval.  But most lenders still want 2 years tax returns, and that makes it an overlay.  I have approved and funded self-employed borrowers with just 1 year tax returns.  However, in order to use rental income, for that you still need 2 years tax returns.  So for most of us in the real estate investor world, it would not work with just the 1 year return.  But for those just starting out that don't have an investment property yet, you may be able to get in the game a year sooner than you thought.

@Zack Karp

If you are planning on penning the instalments in this series as a collection of separate forum posts, perhaps you could be persuaded to upload them as a series of BP blog posts - and perhaps just link them into this thread.

This would make it easier to reference them as a collected work in the future.


For years, many BP folk have been gently prodding @Bill Gulley to pen a similar series of blog posts on lending and regulation ... maybe your series will serve to prod him along.

Originally posted by @Zack Karp :

Hi @Kate H.

Ah, one of the many pitfalls in our business.  Going from a W-2 to a 1099 position makes you self-employed in the lending world.  You would not be able to qualify for conventional financing if you are just switching, and make sure you have an exit strategy if you are buying cash so you don't get stuck because you can't refinance using delayed financing.

So for delayed financing (and what about after 6 months of seasoning, like with a cash out refi?) you'd still need to show W-2 income or at least a year of 1099 income?

Great info btw with regards to 1 vs 2 years of tax returns!

Originally posted by @Kate H. :

So for delayed financing (and what about after 6 months of seasoning, like with a cash out refi?) you'd still need to show W-2 income or at least a year of 1099 income?

Yes for conventional financing you would still need either W-2 income, or 1 year tax return showing enough 1099 income to qualify, for both delayed financing or a cash out refi.  But you actually don't need to wait 6 months to do a cash out refi, that's an overlay.  I have helped investors do a cash out refi at the new appraised value as soon as the rehab is completed.  If your lender says you need to wait 6 months, there are other lenders that don't have that overlay.

@Zack Karp great info.seems to be counter intuitive even based off info on the podcast. But it sound like a lot of great advice. So going forward a lot of us would probably like the idea of getting away from our w2 jobs. From a pure investment lending perspective if the work environment is not really a burden would you recommend staying with a w2 as long as possible just to allow for a broader borrowing platform? I aspire to be a buy and hold investor over the long term, small multi family. I was planning on retiring in about 5-6 years, buying properties along the path until retirement and then seeing where to go from there. But I wonder if I can just stay at my job it will allow me to potentially seek out other Geographic markets and still provide the need for conventional lending as a strategy. Your thoughts? Thanks for the great post. Subbed for future reference. I think the blog idea is a good fit for this type of info.

Wanted to make sure what I wrote in my last post doesn't get lost and deserves it's own post, especially in this BP community.

Having to wait 6 months seasoning to do a cash out refi at the new value, is an OVERLAY.

Fannie allows for no seasoning on flips and refis, it's the lenders that impose the 6 month rule.  There are some lenders that are Fannie direct and do not have that overlay.  In the spirit of keeping this informative, I will say to ask around because many people have no idea that direct lending without overlays even exists, even within the industry.  And as mentioned in the original post, many loan officers have no idea that their own product line carries overlays.  They just think that everyone has the same guidelines, especially if they have not been in the industry long, or don't know anything outside their own company and training.

Did you know that you can buy a 1-unit investment property with conventional financing for 15% down at 85% LTV? Not the 20% down that most of us have been accustomed to. That one is also huge for this community.

There are so many overlays out there that most of the industry follows.  Being a direct lender opened my eyes and I hope that I can spread my knowledge with this great BP community and help as many of you as I can to understand that you may not be as limited as you think.

@John McConnell

I am not an advocate for people quitting their W2 job prematurely.  Real estate investing is a marathon, not a sprint.  Everyone's situation is different, but yes you will limit your lending ability once you make the switch, especially in years 1-3.  Year 1, forget about it.  Year 2 is tricky, because if you are using rental income to qualify, you still need 2 years tax returns.  Even year 3 can be difficult, because if you were still ramping up in years 1 & 2, your income may still not show enough on your tax returns.  But again, everyone's situation is different.

Sounds like you have a great plan for your own personal success, best of luck to you!

HI @Zack Karp

Great information and I also look forward to Part 2.....

1-How do we know if we are getting a loan through Fannie or Freddie?

2-Understanding what overlays are, how can we determine if a lender is Fannie direct?

"There are some lenders that are Fannie direct and do not have that overlay."

I can't find it now but I was on the Fannie and Freddie web sites and found where Fannie has a max of 4 and Freddie has a max of 10. Does this sound right, wrong, differentiate between the two?

Thanks again Zack for contributing.....

@Daria B.

Thanks for the reply.  The answer to both your questions is, you won't know unless you ask.  Most lenders don't advertise that way.  When I market to realtors and borrowers, that's one of the main topics that I like to point out.  There is a difference between lenders and their guidelines, and 99% of the people outside the industry have no idea.  Most people just shop interest rate, and don't ask some of the most important questions, only because they aren't educated on what to really ask.  I thought this would be a great topic of awareness for this community.

Fannie allows up to 10 properties.  There are differences between the 2 agencies and their guidelines.  It's always best to find a great educated loan officer with many resources to partner with.  The challenge is finding the right one.  I usually find that networking and referrals are the best way to find great partners.

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