Mortgage Options critical to successful Investing in 2023 and Beyond

[AJ Wong]

When it comes to financing investment real estate, a major component is lender options and my best suggestion is research and education. 

I entered the mortgage business in 2004, and almost twenty years to the month, recently activated my NMLS Mortgage Broker License. 

It's more by design than necessity, as I have had the support of some incredible lender relationships this year, and a substantial amount of my most productive year to date as a Real Estate Broker is attributable to some excellent and aggressive lending programs and relationships with top tier mortgage talent. 

The decision to expand my Real Estate Services to include lender options is more to increase my service value than to originate mortgage loans. 2023 has taught us that markets (and the real estate profession in general) are evolving and the more effective tools and resources at a RE professionals disposal, the more likely their expertise could be sought for support. Additionally, it makes my job more efficient to know when, and what clients qualify for. In just the past two weeks, mortgage rates have dropped considerably and as of today, the future could hold a six (6%) handle on prime, primary transactions!? 

The flood or buyers are investors on the sidelines are likely to wade into the waters as financial terms continue to become more attractive. 

Some programs that stood out this year were:

- HIGH LTV Medical Professional Programs. This niche product allows anyone in the medical profession to qualify for as little as 0% down on a primary home and 5-10% on a second or investor property. Needless to say, that made the cash on cash returns quite attractive for many of my luxury clients this year. Several acquired $1M+ properties that are on pace to generate 10% of the valuation in gross annual income. Hence, a $1.5M oceanfront STR purchase with $150K down, that generates $150K+ in gross annual income. At 20-25% down the attractiveness could look a bit different or lower the price target significantly. Many of these programs even offer limited or NO PMI.

- Jumbo & Super Jumbo Loan Programs. The larger the loan, theoretically the greater the risk, but lately Jumbo pricing and qualifications are some of the best value lending options available. Consider that many niche jumbo lenders offer as low as 10% down up to $2-4M on primary residences, some on second homes and 15-20% for investment properties. Rates can be relatively attractive, and can even extend to MFR of 1-4 Units. On Primaries and Second homes seller concessions of 6% are typical and on investment properties, depending on the lender, I've seen as high as 3% concessions. So, theoretically that's a $2.5-3M acquisition with $250-300k down. Larger is not the goal, but evidently max leverage on high end homes and loans is very feasible if you search hard enough, and qualify. Usually lenders want 680+-740 credit score for the high LTV's but Jumbo loans in general can be secured with as low as a 620-640 credit score in some cases.

- Multi Family 5+ Unit 'Quasi-Commercial' Financing 5+ multi family unit financing can be quite the challenge. Generally lenders want at least 20-25% down and have some tougher appraisal and underwriting conditions. There was a great example six plex earlier this year that due to the condition of the property, was not listed as even accepting conventional financing. With a strong introduction to a local credit union, an overqualified investor was able to secure a very quality 25 year fixed erm with 25% down, with one of the units technically being 'un-financeable.' At the terms provided the deal was a no brainer.

-Prime Programs for super prime borrowers. Lots of examples of excellent 'off market' terms from clients this year. Mainly for those with at least 30% down and excellent credit and full documentation income. One client was pre qualified with a go to lender, when they were approached by their Private banker for remarkable mortgage terms that weren't available elsewhere. Another personal friend in California had to shift some assets over but on a very specific primary residence program also earned worthwhile incentive to establish a long term banking relationship. 

- True Commercial Lending. Here's where lending options can get a bit more limited and complicated, especially this past year and likely moving into 2024. Ten plus units, warehouses, mixed use, storage, auto, office, there are increasingly less lenders in this space and the rates can be prohibitive to say the least. Niche lenders provide loans from $100k-50M and typically want 25-35% equity MINIMUM for purchases or cash out. Many Commercial lenders are not necessarily nationwide, and can be highly geographical. For the moment, expect near double digit rates on most products, however several lenders offer interest only repayment which can provide some cash flow enhancement. 

- Reverse Mortgage Purchases. A growing product offering for borrowers over the age of 62 with a substantial down payment. Certainly not for every buyer, but for those with a final residence in mind, this is an option that can provide the borrower with improved monthly cash flow. It works in 'reverse' as instead of the borrower paying the monthly payment installment, the payment is added to the existing mortgage balance. Borrowers can sell or refinance, or if the borrower passes, heirs essentially have a year to pay off the home or loan. For those on a fixed income and declining purchasing power, can be a very useful product for senior borrowers to preserve reserves. There are a handful of Jumbo Reverse Lenders, particularly in Florida and California. 

Some Mortgage components for consideration: 

- Seller Concessions. When and if feasible this was a very useful way to absorb some of the additional borrowing costs for buyers. On Primary and Secondary homes most investors permit up to 6% concession towards buyers closing costs. This helped to reduce the out of pocket commitment for several borrowers on 1-2 and 3 unit acquisitions. One was a $505k Triplex with 10% down, no PMI and a 3% seller concession. $17k per door, out of pocket, first time homebuyer.

- Interest Only. With rates as high as they are, a review of a amortization schedule illustrates very little principle paid in the first 3-5 years of a conventional 30 year mortgage or ARM. They are highly front end loaded and the option to pay principle, particularly on Jumbo, Super Jumbo or specifically investment properties could increase cash flow or investment attractiveness. Most lenders want at least 15-20% equity, otherwise the I/O component could be available but cost or payment prohibitive.

-NO PMI. There are several investor programs that side step primary mortgage insurance. Several for properties of 1-4 units and specifically some JUMBO programs for very well qualified borrowers on primary and or second homes.

-Underwriting Exceptions & Interpretations. It's all about who, or what you know. The mortgage business is a lot more regulated than it was in the early 2000's, primary because of them. lol Banks are overly cautious and verify everything, however they are in the business of making loans, and often a great broker can work within the underwriting guidelines towards a make sense exception. Whether it be property classification, condition or valuation, there is usually some bandwidth within the lenders rules to bend. 

The importance of good mortgage guidance can be well expressed from a google search of its origin: "The word comes from Old French mirage, literally "dead pledge." It is so called because the deal dies when the debt is paid or when payment fails. 

Today's mortgages are based on borrower's ability and likelihood to repay as well as the asset it is secured by. If the terms of the investment are favorable enough, almost any real estate investment can eventually be positive and/or profitable. 

Any great terms, programs or professionals that helped make deals work this year?