All Forum Posts by: Chris Mason

HELOCs aren't based on Fannie and Freddie guidelines. Each HELOC lender gets to have whatever they want as their rules. And HELOCs are low profit, so mostly the loan originators you talk to are the 'order taker' types who aren't going to be able to give you clear answers on what that particular bank's rules are. If that LO could communicate well and give clear answers to their guidelines, etc, then they wouldn't be 'order takers' working on HELOCs, they'd be 'rain makers' doing mostly 30YF first position mortgages.

But there is a relationship between rates and how conservative they tend to be. Higher rate HELOCs tend to be more liberal, closer to Fannie. The absolute rock bottom rate HELOCs are, of course, going to be more conservative. 

Requiring 2 years of rental income on tax returns to 'count' it is an example of being very very conservative. So I'm sure the HELOC application you just had denied had a great rate.

Any time you use a VA loan, unless you're a disabled veteran, you will pay another funding fee. VA loans are amazing to get you into that first house with no down payment and no PMI. And, after you are in, after you've financed that fee, they will almost always have the lowest rates of any loan type out there, so in all probability you'd be refinancing into a higher interest rate if you went conventional instead of VA.

After that though, once 20% down is a realistic option on the table, VA loans aren't necessarily magic any more.

For example, you could do a VA cash out refi for the 20% down... but that refi would involve the funding fee again.

And you could refinance into conventional, to free up your VA entitlement... great, so you're "free" to pay another VA funding fee.

For your scenario, I'm guessing the best bet would be to leave your VA loan in place, get a HELOC, and boom now you have 20% down, and can once again buy with no PMI, except this time you also will not have that VA funding fee. In a competitive market where the seller has multiple options to choose from, Conv 20% down is #2 in line, #1 is of course cash buyer. VA, unfortunately, and it's stupid, and I could rant about this because I think it's immoral and wrong, is somewhere around 5th place, above down payment assistance but below Conv 5% down, hanging out with the FHA bad credit buyers.

Unless, in theory, in that particular market, a 1000 3/1 SFR w/ an ADU actually sells for more than a 1600 sq ft 4/2 SFR.

Depending on how this housing crisis continues to pan out, we may just see that day. But, in most markets (I mostly see the big CA markets, Oakland, San Diego, Sacramento, etc), that day is not today.

The big difference between those two hypothetical homes is interior access between the spaces, and the 2nd kitchen. The market currently views the lack of interior access as a bigger 'con' than the 'pro' of the 2nd kitchen. 

This is actually an argument to buy the SFR w/ ADU, rather than build it. Viewed from a rent perspective, that ADU has huge value, but 'the market' doesn't see it that way. Excellent! That means that you, seeing the value of that rent, can get it for a 'discount,' relative to if the market gave that same value to that rent.

Someone out there is frustrated that their 3/1 SFR with a 1/1 ADU isn't selling for what they thought it would sell for. They just converted it a year ago, then their spouse divorced them, and the judge is making them sell. Perfect! There's your seller, there's your house, go buy it.

Between the labor issues, the supply chain, bla bla bla, driving up costs of "downgrading" an SFR into a SFR w/ ADU, and the fact that on the existing home market it is viewed as a "downgrade," there's no argument in favor of building. Buy someone else's folly, instead (& don't get divorced a year later! This only works if you will actually own it long enough for that rent to add up).

 I think your expectations are out of alignment. 

Agency loans (non-portfolio) are characterized by back end profits from Fannie/Freddie, which (being that they are now gov't run) amounts to a big fat subsidy from the taxpayer. In COVID world, where both the Fed and Treasury are trying to pump up real estate with printed money (or, think of M1 Garand rifles in 1942, gov't is paying 20% over the normal rifle profit margin), those back-end profits are usually something like 5x to 10x the borrower paid fees on an Agency loan, meaning that if you pay $1500 in lender fees for a $500k loan at whatever rate, I'd expect the bank's back end net profit to be in the $10k to $15k range.

Portfolio loans have no back end profit or subsidy. So for it to make sense to lend you any money, at all, rather than lending it to someone seeking an Agency loan, that lost profit needs to come from you, some way or another. You are starting off with a $10k to $15k deficit by not checking the Agency boxes, that deficit needs to be zeroed out one way or another (fees, rate, terms, etc) before the portfolio lender can even consider making an actual profit (relative to the other opportunity, lending that $500k to a vanilla ho-hum W2 couple buying a primary residence, etc, where there's an automatic guaranteed freshly minted $10,000 bill [it's a two-party bill, btw,  Trump and Biden's faces both appear on this $10,000 bill together] guaranteed to come their way).

The sticker shock is sufficient that I try to avoid quoting non-Agency portfolio rates/fees/etc entirely, unless someone specifically requests it. 

It's not quite that simple. Depreciation is added back, for example.

If there's a net loss, they only count the net loss against you. Not the full PITI.

I have a "top 3 things to do and not do" presentation for CPAs with REI clients, and that's one of the items. You purchased the property in November, but had 365 'fair rental days' out of those last 2 months in the year? Hmmm. I guess that means next year, I should expect to see that you got 2190 fair rental days out of it in 1 year consisting of 365 days? Excellent job, please share that trick with me! :P

Jokes aside: 

For context, there's a wide range of values for 'fair rental days,' and anything in that wide range (tax pro could chime in, IIRC it's 15 days to 365 days) results in the exact same tax bill for many scenarios. So if we conceptualize the CPAs job as a) preventing audits while b) saving you as much money as possible, then it follows that from that POV c) it makes zero difference if it's 30 or 180 or 365 fair rental days, so it's not on their radar to be exact with. Some CPA software packages default to 360, some default to 365, but that auto-populate will remain unless it's manually changed. 

Something proactive the lurker can do is, when giving all your paperwork to your tax professional, include the dated settlement statement from the purchase and specifically communicate that you want 'fair rental days' to be accurate, even if it makes no 'tax difference.'

Pragmatically, OP, many lenders understand this gap, and if you share your settlement statement with them, they will at least only be dividing by the number of months you owned it. This still isn't perfect, b/c it may have taken a month for you to turn the property over and put a renter in, but if the real number is 6 months, it's better that they divide the rental income by 7 months than 12.

 It's also illegal for the LO to take a pay cut to 'make things right.'

Do your thing and all, but FYI this looks more like incompetence than malfeasance. 

Does the person's NMLS number start with a 0, a 1, or a 2? The 2 series is the folks that were baristas until March 2020.

What type of property was it originally (when you started the process), and what type of property is it now?

For example if you said upfront it was a SFR w/ an ADU, and it's now coming back (according to the appraiser, according to title work, etc) that it's legally a duplex, that would be considered a valid change of circumstances. Another example would be a house that's actually legally a condo, etc.

It's also possible the rate/fees weren't locked. The disclosures will tell you if the rate/fees are, or aren't, locked.

FYI it's illegal for that LO at LD to get paid $1 more, or less, because of your rate, fees, lender credits, etc. So intentionally screwing you over to enrich themselves is fairly improbable. The news about LoanDepot pertains to getting as many loans done as possible (cutting corners where necessary), it's not about screwing specific borrowers over (https://www.nytimes.com/2021/0... ). 

SFRs w/ADUs have no problems being financed; they are financed (at the point of purchase) no differently than any other SFR.

I'd need to see the full tax returns to comment on the specific case, but no that is not an example of the math that will be done or the logic that would be used.