How to Finance a Rental Property: DSCR Loans vs. Conventional (Ep. 287)

"I will very much say, 'I am by no means a credit specialist. I don't charge you anything for this call. It's completely free. It's just solely based on the information that I have' — on the probably 3,000-plus credit reports I've seen in my lifetime at this point, and what I've been able to help people do. So it does require you to do the work. I'm not writing letters and calling people on your behalf, but I'm giving you more information than probably what you had coming into the phone call. So yes, I would 100% recommend that, because I can give you a more detailed — essentially what I'm saying on this podcast, but specific to whoever's calling me."

Hello, hello, and welcome back to the podcast. Thank you very much for being here. She's back. I am so excited. Jordan Nutter was here just a few weeks ago actually, and we did not finish our conversation. So she is back. And if this is your first time listening — we're gonna talk not so much about personal lending today as much as investment lending, and some credit score stuff, and assuming loans.

But if you want information on personal home loans, that sort of thing, tune in to our last podcast, which was — I don't even know the number, you guys. I'm not that organized. It was like, I don't know, four or five podcasts ago. Okay. So tune in there. But again, we have Jordan from Creator Collective at NFM Lending. Or you could just go to anutterhomeloan.com and you can find her there. But thank you, Jordan, for coming back.

Thanks for having me. I'm so excited. Our last time was really good, so…

It was…

When you asked me to come back, I was like, "Of course I will."

Yeah, I am excited. It's all about education for people, right? Because there's not a lot of people doing it.

This is true.

So let's talk about credit scores first. When I watch your videos, I just shake my head, like, "How do people not know this?" But there's a lot around credit — not to buy things — and we touched on that a little bit last time. But if I have a bad credit score, what do I have to do? What should I look for? Just some kind of tips and tricks around credit score.

Sure. So anytime somebody does an intro call and they're like, "I don't have great credit. What do I need to do?" — without seeing whether it's TransUnion, Experian, whichever one, I kind of give a generic list.

And so what that list looks like is: no late payments. So even if you're currently late, whatever you're currently late on, if you can find the means to bring it back up to where it's no longer late, that is a big factor. Because late payments, when reporting on the credit bureaus, can be 30 days, 60, 90, 120, 120-plus. So the longer your late is, and the more of them there are, the harder it will have an impact on your credit. So if we can avoid it, obviously — but if that's not the case, get rid of continuing with the late payments. That's a big hindrance to credit.

The second thing is going to be utilization. So when I say utilization, this specifically applies towards revolving lines of credit, AKA your credit cards, right? So there's two types of credit we look at. There's installment debt and there's revolving debt. Revolving debt strictly has to do with your credit cards, because every month the balance can revolve, right? You could pay it off, there could be a balance, whatnot. But installment debt always has an end date, so that's essentially pretty much every other type of credit — car, auto, student loans, mortgages, personal loans. And so utilization we don't look at on those, because the balance is continuing to go down.

Utilization on credit cards, though, is what really can have an impact on the credit. And so that utilization is tiered. So if, let's say, the limit on your credit card's $1,000 — that tier, whatever credit card you have, is going to be at 100-plus, right? So if you have a $1,000 balance plus on there, then 90% or $900, 70%, $700, 50%, $500, 30%, $300, and then 10%, which is $100. So ideally, you want to get into the lower tiers. And I do understand we don't always have the means to just wipe out our credit cards overnight. But if you can get it down a tier or two and continue to bring it down, that would be the goal.

So: avoid late payments or get out of them. Bring the utilization down, lower tiers. Please stop co-signing on debt that is not yours. Okay? Please stop doing that. Because if you co-sign with your brother, and you go to buy a house, and your brother hasn't made the car payment, that impacts you — not only from the fact of your credit will be impacted, but also the fact that we will more than likely have to hit you with that auto loan payment every month. So please don't co-sign with anybody.

And then additionally, there are collections that people do have. And there's collections and charge-offs. They're essentially one and the same. A collection is a debt that you had with a creditor, but it was sold to a third party. And then a charge-off is a debt that you did not pay that still sits with that original creditor.

I've personally never had a client come back and say, "Hey, I was able to get a charge-off removed." I've had clients, though, say they were able to get collections removed. And I think the big misconception when it comes to collections is they assume that, "Hey, if I pay off this collection of $100, I'm good." But unless it actually gets removed — you know, you do a pay-to-delete or pay-to-remove with the collection company — it doesn't help your credit score. It still shows up as a negative line item. So that's a big one that I see a lot, especially with individuals that went through a difficult time: bankruptcy, divorce, things like that, where accounts just kind of fell behind and they went into collections.

So you just don't pay the collection company?

Yeah. So you can pay the collection company. But what most people will do is they'll call and they'll say, "Hey, ABC Collection, I have this account. It's $100. I'd like to pay it off." And they'll be like, "Okay, great," and they'll take your money happily.

The other way you should go about doing it is — one, you wanna make sure, obviously, you have the means, 'cause if you don't have the means and you start calling around, they're gonna keep calling you. "Hey, ABC Collection Agency, I have an outstanding balance." They're gonna say, "Yeah, I see it's $100." You then want to negotiate, right? 'Cause they didn't buy this debt for $100. They bought it for pennies on the dollar. So you would ideally want to negotiate. And once you come up with a dollar amount that you're comfortable paying, before making that payment, you wanna ask for what's called a pay-to-delete or pay-to-remove letter.

Oh.

And they're not required to do it. It would have to be a company policy. But once you get that letter, it says something like, "Once this account has been satisfied, we will report to the bureaus 30 to 45 days after." And that's what you want, because you want it to be removed. If you just pay for it, they're not just gonna, out of the kindness of their heart, remove it from the credit bureaus. They're just not gonna do that.

Why wouldn't they, out of the kindness of their heart? I mean, they're collections. That's affecting your credit. That's not part of their required duty?

As of right now, no, which is wild to me.

I know. Our credit system is really… And people don't know that.

Our credit system really frustrates me, and so I have to have these very difficult conversations with clients, and sometimes they get mad. And I'm like, "I hear you, and I don't wanna give you this information just on the fact of, like, you're gonna get upset. And it's not my rules. I'm just trying to help you."

Right.

Get around what's out there, and try to make it better for you. And I understand there's credit people that I follow on social media, and they'll say to write a dispute letter and all of that. And you can, right? If the debt's not yours, or if you didn't authorize it to be sold — and that's a whole nother avenue.

But I'm solely talking for the case of, you're ready to buy. And if you've disputed all of these accounts, most loan programs — if you have a certain amount of debt that's being disputed, either we can't do the loan for you, or we have to downgrade your file, which then impacts your down payment and impacts your interest rate.

And so I'm not saying go out and pay all of your collections necessarily. There are other ways. There's a bunch of credit people, like I said. I'm just saying for the fact of qualifying for a mortgage — 'cause I know someone will probably reach out to me and say, "That's not the right information." This is solely meant for mortgage purposes.

So if I want to get a mortgage and I have some credit stuff, is the best step to just call you first, before I do anything wrong?

Correct, yes. There's specifically a link on my calendar that says credit help needed. Like, not trying to buy, not trying to refinance, I just need credit help.

And I will very much say, "I am by no means a credit specialist. I don't charge you anything for this call. It's completely free. It's just solely based on the information that I have" — on the probably 3,000-plus credit reports I've seen in my lifetime at this point, and what I've been able to help people do. So it does require you to do the work. I'm not writing letters and calling people on your behalf, but I'm giving you more information than probably what you had coming into the phone call. So yes, I would 100% recommend that, because I can give you a more detailed — essentially what I'm saying on this podcast, but specific to whoever's calling me.

Well, if you guys are listening and you need credit help, I would go ahead and do that before I convince her she needs to charge for that call. Because that's crazy, Jordan. That's wild. And that's a lot. I don't care if it's even 15 or $20 — like, that's still your time. And then, I don't know. I don't have that much faith in people that they'll be like, "Oh, now I'm committed to doing my loan with Jordan."

I think of it like I'm just paying into the good-moving-forward kind of pot of life.

I know. I do a lot of stuff for free too.

And I've had quite a few people come back like, "Oh, you helped me. I've worked on this." And it's not necessarily the credit part. I've had a lot of people come back more so 'cause there's another calendar that you can book, like if you're six months-plus out from buying or refinancing. And most of those people will come back and say, "Hey, we spoke in April," or January, or, "I talked to you last year. I'm finally ready." The credit ones are like a toss-up, but at least I give them… And I feel like that's probably 'cause they either aren't doing the work, or they're just not in a position to be able to do the work. But I do have some that come back.

Yeah. And I do the same thing. I'm like, "Oh, it's an hour and a half, and all of a sudden you don't have any money, and we can't do infinite banking," and that's okay. But I'm gonna give you some tools to get to the next step or what have you.

Right.

Yeah, credit is definitely a big deal that I've been watching a lot. For whatever reason, the algorithm has me on all the credit people. And there's a lot to it, especially if you've never gone through it before. And now this is something new for you, and you have to go through it.

And I have had clients that have paid thousands and thousands of dollars to have help with their credit cards and those sort of things. And I'm like, to me, that's also crazy. You're in trouble, and I get why you're in trouble. But the amount of money that the people take to call credit card companies and say, "Hey, can you lower this?" Or, "I can't pay this." And you could just do those things yourself.

I had a recent one who called and said, "I spent $10,000 over the span of like X amount of years to have this credit company help, and they didn't help me." And that really hurts me. So that's kind of like another reason why I don't like to charge for the call, because I'm like, most people probably don't have the means, or they've already been screwed over by somebody else.

And I haven't found — like, if there's anyone that's watching this that truly is a credit repair specialist, I'm happy to partner up with somebody to give a reference to after I give my information. But I've just not found anybody that I feel I can attach my name to. Which is fine. You know, I give the information I can give, but I know there's a lot of people out there that want credit help and they don't wanna do it themselves. They're willing to pay for it.

I will say one extra thing, 'cause you just reminded me of when you hire a company. If you ever are in a position where you are going through bankruptcy, or you think you want to file for bankruptcy, or you talk to a credit repair specialist, or you're trying to do a debt consolidation loan, and they specifically tell you — because this does happen oh so often — to not pay your credit cards anymore, because that's the only way that they're going to be able to prove to the court, to the creditors, that you can't pay these, so you have to move forward with one of those options… I just want you to take a step back and think about it.

I just really want you to take a step back and think about it. Because I get the reasoning that they're telling you that. But that has such a hard impact on your credit when you stop — especially if it's like 10 credit cards, and you stop paying all of them, and it takes them two, three, four, five months to get an answer. That's a substantial amount of late payments. That has a big hindrance on your credit. And if you're wanting to do anything, right, buy a car, anything that requires financing, you're gonna have to probably wait a significant amount of time to move forward with something like that.

So what is a significant amount of time? Are we talking a year, two years?

Depending on the type — like, if it's credit cards, they do hit you. Late payments on credit cards, they hit you. Installment debt lates hit you harder. Mortgages, right? Those things hit you harder. And it will be dependent on the type of loan we're trying to get you, and how many lates, and what type of lates they were, right? Like, a mortgage late is looked at harder than a credit card late.

So it could be six months. If there's one late payment on a credit card, it could be six months. If there's a little bit more than that, it could be six months to a year. Also, your credit score will play a factor. I mean, I've had people that have had to wait two years because they were late on their mortgage and their auto loan and their credit cards, and I was like, "We're not gonna be able to do anything anytime soon because of X, Y, and Z."

The bankruptcy piece of it — even on the life insurance side, people don't understand that. When you go to apply for life insurance, you are not getting life insurance if you file bankruptcy for two years after your… what's it called? The release date?

Dismissal.

Yeah, until that date. You have to wait two years after that.

Oh, wow.

And so how is bankruptcy affecting… 'Cause a lot of people — there's some bankruptcy people I see online too that are bankruptcy attorneys. They advocate for it. They're like, "Oh, people are getting cars right away and whatever right away." But how long is it for a mortgage? Or even, like, we're gonna be talking about investment properties. Now you've gotten all your stuff cleaned up. You file bankruptcy, and now you maybe did learn something in that arena, but now how long is it before we can get you a mortgage?

So one, it's gonna be dependent on the loan program. And two, it's gonna be dependent on what type of bankruptcy. So the most common ones are Chapter 7, which are the ones where the debt is fully dismissed, right? It's discharged. You don't have to pay it back. Chapter 13, on the other hand, is the one that you are paying, let's say, over the next year or two years, in installments.

So if you are going with a Chapter 7, the most common mortgage loan people get after a Chapter 7 bankruptcy is an FHA loan. And as of right now, FHA has a two-year waiting requirement. So that doesn't mean you can't talk to me for two years after it's dismissed or discharged. We can have the conversation the very next day, and we can come up with a game plan. But technically, you can't have a contract written and fully executed until two days and one… two years and one day after your discharge or dismissal date. So it's very important that you know that date, especially if you're ready to hit the ground running. Because if you go under contract before, it won't work. You have to cancel the contract and do a new contract.

And that's only through FHA.

That's only through FHA.

At two years and one day.

Yep. Conventional is a four-year waiting period.

Oh. Oh my. Okay.

When it comes to a Chapter 13, where you pay it back — during COVID, I had done refinances for people that were currently active in a Chapter 13. With a Chapter 13, you just have to have, again, most programs, a 12-year history — or 12-month history — of paying your bankruptcy payments on time. And we have to get the trustee to sign off on it in most cases.

The first one I did, no problem. They signed off. Okay, the interest rate's so much lower. We get it. It's gonna lower her debt. The other one was a purchase, and that county trustee was a real pain in the butt and would not sign off until after we were under… They wouldn't consider looking at it until after we were under contract. And they said, "Once we get it submitted, it takes about 30 days." And I'm like, "Well, a contract normally is 30 days, so I'm gonna have her put earnest money down and pack her stuff up, on the chance that you might say yes?" We just had to wait until after she was out of bankruptcy, 'cause she was too stressed out to wait and see if they would say yes or not.

The moral of the story…

So most of them are two years, but some can be as high as four years.

Wow, that's a long time. I mean, I can see why, but that's a long time.

I don't worry about my credit score 'cause I don't really need to, but it's always, like, never super good. Because — and this is something that I didn't know, because I've never had to worry about it — I don't overspend, I pay my credit cards off every month, but I hit the limit. Like, I'm at 80% of the charges amount, or I'm at 70 or 90 or 100, depending on if I'm putting on a conference or whatever.

The first time I maxed it out was like three years ago, when I was putting on a client event for my clients, and all the credit card charges, everything, were happening at the same time. And holy moly, my credit score dropped immediately. Even though I paid it off immediately. The payment amount — the fact that I don't pay it off, that doesn't matter? It's just how much was charged per month?

No. So it's funny, 'cause probably once a month I'll have someone that says, "Oh, I pay my credit cards off every month. I don't have any debt." And nine times out of 10, that is not true, in the sense when it comes to credit reporting.

So I'll give you an example. Let's say you have a Discover card. My Discover card due date, the payment every month is due on the 2nd, okay? But my statement doesn't come out until the 7th. So there's a five-day period between the due date and the statement date. And so what happens is, most people will pay it off — they'll have a big expense, they'll pay it off, not think anything of it, or they'll just pay it off on the due date.

So let's say you have a $1,000 limit and you spend $1,000, and you're like, "Hey, I can pay this off today." So you pay it off on the 2nd, 'cause that's when it's due. But then on the 3rd, and the 4th, and the 5th, and the 6th, you spend on that credit card. So when your statement comes out on the 7th, whatever is there on that date is what they are reporting to the bureaus. So it doesn't matter that you paid it off on the due date, except for the fact that you paid off the minimum, and that's wonderful. But whatever that balance is — so if you spent another $1,000 in those four or five days, it's going to report that you have reached your limit. You are maxed out on that credit card.

And the only credit card that I know, because I have this credit card, where the due date and the statement date are essentially the same day, is Apple. But outside of that, like my Discover, my Chase, my Amex — there's always days in between the due date and the statement date. So that's where that gets lost. And again, I know it shouldn't be this hard. But it is. So that's why I'm giving you the information, to help educate.

It should not be this hard.

Right.

I was remodeling one of our long-term rentals before we sold it, and I was like, "Oh, I'm gonna turn it into a short-term rental, so I'm gonna redo cabinets, flooring, vanities," the whole thing, right? And I had a specific credit card just for short-term rentals. Well, they didn't have my limit where I needed it, so I had to buy something and then pay it off, and then buy something and then pay it off. And just to keep record keeping, right?

Oh my gosh, my credit score was fantastic, because I was constantly paying that card off the second I charged on it. And then I had to go online, and I was listening to all these people say, "Pay it on the 15th, and then pay it two days before it's due," or something. Like, you kind of need to pay it twice a month. And it's hard to keep track. I'm busy. I don't really have time, nor do I care. So I would just go in and pay it off right away. And man, my credit score jumped significantly, and it was fast. And I thought, "Well, this isn't that hard to build your credit score up," because if you're doing all these things, it's jumping quite quickly. Like, within a couple of months. It was crazy.

Yeah. Whenever there's somebody that comes to me that's younger, or they're out of bankruptcy, like, they need to either rebuild their credit or they have no credit and they don't know where to start — I will say my first thing to consider is there's normally three main ones. Getting a secured credit card; looking at your utilities, hopefully you have some in your name; and a parent, spouse, or sibling that you trust 100% who is fully dialed in on their credit.

So with a secured credit card, they will only give you a line of credit for however much you put down. So if you have $50 to your name, you can call up — I think my very first secured credit card was through Discover. I know there's a bunch of banks that have it. But you would call them up and say, "Hey, I want a secured credit card," or go on their website, and you put that deposit. Like, you have to hook up your checking account, they take the money, and that is your line of credit, because you don't have credit history, or you have really bad credit history.

So that's them saying, "Okay, well, if you want a line of credit, you have to put the money up front, and that's all you can spend. You cannot go over it." Because then that way, if you don't pay for it, they already have the money sitting there to pay off your debt. So I would look at a secured credit card, and I would just start with putting either groceries on there or gas. Like something, the same thing, and just using it for that. 'Cause we always have money for gas and groceries. Those are essentials, or we try to. So just use it for groceries, put it on there, pay it off, or use it for gas. So that's my recommendation to start building when it comes to a credit card.

The second thing would be utilities. So most people don't know — one, the utility has to be in your name. So if you're younger and you're on your parents' phone bill and you live at home, this won't apply to you. But you can call your water, electric, your phone, gas, and say, "Hey, do you guys do self-reporting utilities to the credit bureaus?" And sometimes if they're bigger companies, they will very much do it. And you would ask them, right, 'cause you have to put your Social Security number in to set up these accounts. They will report to the bureaus.

Now, if you don't pay these things on time, please don't call them to ask them to put it on there. But if you pay them on time, and you have that history, that is a line of credit that you pay every month, that even when you go to purchase a home, I don't include that, 'cause we don't include utilities in your debt-to-income ratios. So I've seen all five of those, right? Gas, electric, water, phone bill, all of these things on somebody's credit, and I automatically exclude them, because we don't count them against you. So that's an option where it's a debt you're already paying every month on time, and you're not opening a new line of credit.

And then the third thing, which isn't always my favorite — it really depends on the person, but again, you have to have somebody you very much trust, who has very good credit and keeps their balance low — and you could be added on as an authorized user. The credit card goes to the account holder. So like, when I get my employee cards, they come to my house, or the office. They don't go to their house. Now, obviously, I give them their credit cards, 'cause they need them for spending. But my daughter one day, I'll put her on there, but she may not get that credit card, 'cause she doesn't need it, but it will help build her credit, and it'll start her at a young age.

Again, this only applies if you have someone that you can really trust. But it is an option. The only potential downfall when qualifying for a mortgage is if you are an authorized user and you don't want us to hit you with that monthly payment, whatever it is — especially if your parent spends $5,000 a month on their credit card, and they have a high balance or a high monthly payment — we would have to show a 12-month history of that credit card being paid on time from the account holder's account, not your account. So you couldn't be making any payments to that card, and it would have to be paid on time. But then we can exclude it. We don't have to hit you with that debt.

Or the parents could take you off, right? 'Cause if you're old enough to buy your own home at that point, wouldn't it be smart?

It could. But now we're talking, if you take them off, that credit could dip, especially if — right, like what if I put my daughter on when she's 18 on a credit card, and she buys a house at 26? That's an eight-year history that would probably be her oldest history that would just go away. And history does play a factor into your credit score.

So if you are an authorized user on a parent's card or something, and you're thinking about buying, I would recommend letting them know, like, "Hey, we're gonna start looking in the next three to six months to have a conversation with this lender. Can you try to keep that balance low when it reports? 'Cause we don't wanna have that impact us. Or are you okay showing that you've paid it from your account? Because that's the only way we're gonna be able to exclude it."

I think I added my daughter when she was 16. Is that possible? Like, 16 or 17, I put her on our personal one, which I don't charge a lot on. And she's still on there. I kind of forget about it. And she's never had to use her credit. I've been meaning to actually look up her credit score to see if it's helping. 'Cause she's 21 now, so if it's not helping, then why have her on there still?

But the utilities is good, 'cause I rent to her. Like, we bought a townhouse for her to rent, and so she pays rent every single month, but I have my name on the utilities still. So I will have to call the utilities to see if they report, and if they do, then I'm better off reducing her rent and getting utilities in her name to build her credit.

Mm-hmm.

We could go on all day about credit. There's so many things. So you guys, book your call with Jordan on the credit stuff, and again, it is anutterhomeloan.com.

So let's talk about property investing. I had some other questions I've written down, but — I wanna buy a long-term rental, I wanna buy a short-term rental. And mostly I'm just going to ask as if I'm the one that wants a loan, 'cause I'm looking for another short-term rental. But I'm looking for it close to home, not far away from home. I know all those things matter. So does it matter if it's a long-term versus a short-term?

Yes, it does. So when we look at whichever one you go with, we have to get a rent schedule, like a rent comparable to it. We get your appraisal, which we order as the lender, and then there's a rent comparable that the appraiser does. It's an added fee that we attach to it.

And so when you have a long-term rental, it's very easy for them to run the comps to be able to do that. And every investor we have that does investment property loans will do long-term rentals. However, when you are looking at a short-term rental, that adds an extra variable to things. So if it's your first time buying an investment property, some of our partners won't let you do a short-term rental. Or if they do, your credit might have to be a little bit higher, or you might have to put a little bit more down.

Generally, the property has to already be a short-term rental, so we'd have to be able to get from the seller their tax returns or something to show, right, that they've been able to rent it out at the rate they've been able to rent it out. So looking at short-term rentals — one, guidelines can change. Two, each investor has their own, what we call overlays, so additional guidelines to it. So that's gonna be kind of a gray area question, because there's so much that can go into it.

But essentially, there's two main types of loans, and I actually just posted a video about this, I think last week, that most investors go with, whether it's a first-time investor or you're coming back to me for the third time. So there's conventional financing, and then there's what's called non-QM financing — so those types of loans don't fit the mold of traditional. And one of those types of loans is called a DSCR loan. So it stands for debt service coverage ratio. And so there's pros and cons to both.

Conventional, you can put 15% down. I really don't recommend doing that, because you get hit really, really hard on the interest rate, even if you have like a 780-plus score. So I do recommend having at least 20% down, unless you're okay with a very high interest rate. With a DSCR loan, if you're a first-time investor or your credit's not great, you could have a requirement of like 25 or 30% down. So those types of loans are dependent on your credit and whether you're a first-time investor, as opposed to conventional, where everyone can put 15% down. Again, I would recommend putting 20, though.

Conventional financing, only in your name. Like, every title has to go in your personal name. But in a DSCR loan, you could put it in your personal name, or you can put it in an LLC. It does have to be real estate related. It can't just be, like, your ice cream shop LLC. It has to be a real estate LLC if you wanted to do that.

And then with conventional, we're using your personal income, we're hitting you with your personal debt, and we're using the proposed rental income, which will come from the comps that we get. But with DSCR, we literally throw everything out except for your credit score and the proposed rental income.

So with a DSCR loan, you really have to have a good agent that knows how to run comps, because we're heavily relying on them up front, before we go under contract, to give us a very concise range of proposed rental income — because that's all we're basing the loan off of. Like, if the mortgage is $2,000 and your agent says it would rent between 18 and 22, you're gonna take that toss-up of, this may work, or you may get hit really hard on the interest rate, 'cause the rental income's only gonna be 1,800. But we wouldn't know that until the appraisal comes in. So we really, really rely on having a good agent that understands the type of loan we're going with, 'cause if not, it can very easily have you losing your earnest money. So those are the main two that we look at.

So I got a lot of questions. The real estate agent, your realtor, is the one that is supposed to know this stuff?

Yeah, so they can run comps.

Even for rental properties?

Yeah, so they can do it both for rental income in the area. And I haven't seen it, but I've talked to enough agents about these types of loans. Like, you can put the zip code and the number of bedrooms, bathrooms, right? Just like if you were running it for a sales comparison. But this would be for a rental comparison. So they can run it and give me a range to kind of work off of.

Are you familiar with AirDNA?

I'm not.

Okay. So AirDNA is a big national company that will do the comps. If I'm gonna buy a short-term rental, I will go into AirDNA, and I will put in my area, and it will give me a score for that area. It'll give me comps of what people are making, potential income. Would something like that be useful, possibly?

Yeah.

Okay. What about midterm rentals? I have a lot of clients too that are doing Furnished Finder type stuff for traveling nurses, doctors. Where does that fall in if I wanna do a loan for one of those properties that's not really short-term, but not really long-term?

It would be considered more of a short-term.

'Cause it's only three months or four months or something.

Right. But if the house is in an area and we can make the numbers work based on long-term rental numbers, then we can look at categorizing it as a long-term rental. 'Cause I know there's some contracts that last six months. I've had traveling nurses last six months, or they'll extend it, right? But if we can get the numbers to work on a long-term rental basis, then that would be ideal.

What about if I don't want four or five properties, but I just want one property — when does it qualify as my second home? So I can do just a normal conventional mortgage, but I'm gonna short-term rent it when I'm not there.

So you can go the conventional route, and you can't go with a government loan, like FHA, VA. If it's going to not be your primary residence, conventional is the only type of loan as of right now that you can do that's within traditional financing.

And so with second homes, you can put as little as 10% down. Now, I will say they have cracked down a little bit, because there's a lot of people that have tried to go in this loophole of, oh, I'll put 10% down instead of 15 or 20%, and it's really not a second home. So to justify it as a second home, we'll have to do a letter of explanation.

So this could be as simple as — and there's not really a distance requirement, but there somewhat is, right? You can't buy the house three doors down and say, "This is my second home." We know that's not gonna happen. But for instance, I live 12 minutes from a lake. Now, the lake, I can get there in 12 minutes. It could take me 40 minutes if I go on the top side of the lake. So I could realistically mark that as my second home, because I don't currently live on a lake. That house is on a lake, and I'm not gonna live there more than six months and one day out of the year, right? You have to live there less than that, or else it's considered a primary residence. So I'm going to be there maybe a handful of times. I'm gonna go every other month, most of the time, for a week or two. Okay, great. That's okay.

Or I've had people that have bought in another state and their family is there, like down in Florida, and they're like, "We are gonna Airbnb it out, but Jordan, the mortgage on here is substantially less. Like, I can justify it, because when I go Airbnb something, it's like four times the price for just a four-day weekend. So why wouldn't I go buy something? Our family lives down there." So we can justify that, right?

And yes, it's a minimum 10% down to look at it, but I will let you know that the interest rate that you get is comparable to an investment property interest rate. It's not comparable to a primary residence. So primary residence is going to be your best interest rate, and then second home and investment, they're essentially one and the same for the most part.

At the time of this recording, what are interest rates like on properties? Is that kind of an easy — can you even answer that?

The average this morning I think was 6.9, 6.88.

Okay. Well, that's not so bad compared to what it was.

And obviously I'm sure most people know this, but maybe not — there's a lot of variables that go into that, right? Your credit score, your down payment, type of loan. Is it your primary? The type of property. Is it a single family? Is it a condo? Condos get hit the hardest on interest rate. Manufactured homes also get hit pretty hard. Single family homes don't get hit at all, so that also plays a factor.

Can you do loans on mobile homes?

Yes, but it has to be permanently affixed to the ground. So generally the current owner doesn't have a permanent foundation report. So the buyer would have to take that on, and those can be pretty expensive. I mean, they can be $600 up to, like, I've seen it up to $1,200. So it does have to be permanently affixed to the ground — structural engineer report, sorry, that's what it's called.

And then two, it can't be in a park, right? You have to own the land. You can't buy on leased land. Now, I know you can. I don't do those loans. I have no idea how to even begin to talk to you about those types of loans. And anytime someone's called me, I'm like, "Can you call the seller's agent and ask them who their client is financed through?" And that would probably be your best bet as to where to start.

Okay. 'Cause I do have a lot of clients — obviously, I deal with farmers, and they have a really hard time in rural America getting homes built. And so there's a lot of mobile homes being moved out onto property that they purchase. But it's hard to find financing.

Yeah, if the home is already there. Now, if you're saying like, "Jordan, we wanna go buy one, they build it, and then put it on this land," you would have to — I would recommend speaking to the manufacturer of the mobile home. And they would have financing options to look at.

Okay. So if I'm only putting 10% down on an investment property, am I still paying mortgage insurance on that then? Is there such a thing on investment properties?

Yeah. So if you're putting 15% on your investment property — anything less than 20% you'll have mortgage insurance on. And you can do it in one of two ways. You can pay it on a monthly basis, which is probably what 99% of people do, or you can pay it in a lump sum. So just like when you go for auto insurance, they give you a discount if you pay it in a lump sum.

Oh.

I don't normally recommend doing this for most people, because especially if it's a first-time home buyer, right, they're putting 3% down.

Well, they don't have the lump sum, that's why they're paying…

Right. They might not have the lump sum, or they might not be in the home long enough to really get their money's worth out of the mortgage insurance before they sell it. Or if you refinance it — so let's say hypothetically you buy today with 3% down and you pay your mortgage insurance premium up front in a lump sum, and two years from now you refinance the home, if you don't have enough equity, you have to pay your mortgage insurance again. It's a new mortgage. So it doesn't transfer over, because it's a new mortgage. So most of the time it doesn't make sense, but sometimes it does. I think I've only done it like two times in my whole career.

Okay. And then when I get to the 20% value it drops off? Or do I have to initiate that drop-off?

So when you get to 20% equity, or an 80% loan-to-value, you can call your servicer to request it to be removed. Otherwise, at 78% — or when you have 22% equity — it automatically falls off. So the schedule, when we put it in the computer, the computer auto-defaults to 11 years. Like, that's what they assume it takes most properties to get to that 20% equity mark.

Okay. 'Cause I have heard some loans you have to refinance to get it off. Like, it's on there for the life.

Correct. So for conventional loans, that's the only loan that you can get it removed.

Okay.

So there's four main types of loans when it comes to traditional financing. Conventional, which is a non-government loan, and then the government loans are FHA, VA, and USDA. So conventional, it's called PMI, stands for private mortgage insurance. So we shop it. We have a bunch of carriers. All the mortgage lenders have the same — Essent and ARC, and there's a handful of other ones. And so we put your information in and they feed us back the premium. They're the mortgage insurance company. So that's private mortgage insurance. That's the one that can fall off automatically, or you can request an appraisal. You can call your servicer. They generally will let you do an appraisal for a fee if you feel like you have enough equity.

And then when it comes to an FHA loan, that is on there for the life of the loan, unless you put 10% or more down, then it will remove at 11 years. So you would have to refinance into a conventional loan. A VA loan doesn't have mortgage insurance. And then a USDA loan, which is more of that rural area, agricultural areas, it's a 0% down, but their mortgage insurance is for the life of the loan.

And FHA and USDA have a flat — so everyone has the same premium. It doesn't matter your credit score, you get the same insurance premium. But when it comes to conventional, it's private mortgage insurance. So your credit score plays a factor, your down payment will play a factor, and then your debt-to-income ratios. Those all play factors into how high or low your premium will be.

Okay. And then if I have an investment property and I'm only putting 10% down, and if I sell that investment property in, say, two years, do I have a payback? Because I didn't put the 20 down, so they kinda lent me the 20 'cause I have the insurance. So is there some kind of recapture of anything, or can I just sell it and I'm good to go with the loan?

So for investment, you have to put the 15%. There's only a second home that you can put 10.

For 15, sorry. Okay.

So the 15%. So yes, if you put your 15% down and you sell the home in a couple years, it would just be like a primary residence. It's the same type of thing where you take your sales price minus any…

So we don't have to worry about paying anything back?

No. Because there's not any sort of assistance that you get for investment properties. If you're looking at like a primary residence, you get down payment assistance. Sometimes you have to pay those back. They're not forgivable.

So is there any advice or question I maybe didn't ask about the investment side of the loans that people need to be aware of?

I would say if you are looking at getting into investing and you don't have a lot of money, but you know you really, really want to start building it, my recommendation, depending on your credit, would be to look at getting a multi-unit. And obviously, this isn't gonna work for everybody. If you're single, or you're a couple, no kids, this is probably a little bit easier.

But I would look at getting a two, three, or four-unit home. Four is the max for residential lending. And that way you can put a bare minimum. You could put 3.5% down or 5% down, depending on the loan. I mean, VA you can go — there's a bunch of programs you can do with very little. And you have to live in one of the units as your primary residence for one year minimum. And somebody's gonna say, "Well, how do they know?" Just please live in the one unit. Put your utilities there. Put your driver's license there.

Mm-hmm.

Please don't commit mortgage fraud, okay? So if you live in it for the first year: one, you put less money down. Two, because technically it's your primary residence, you're able to get higher closing cost assistance, potentially, if the market allows for it, from the seller. 'Cause when you buy an investment property, it's a very small cap as to how much you can get from closing cost assistance, from seller contribution.

So you get a lower down payment, you get a better interest rate, you can potentially get higher seller closing costs. And then on top of that, you get hands-on experience with that property. Yes, you have to share walls with your tenant, but if the water heater goes out, you're right there. You can get to it. So you can potentially avoid a much higher cost of whatever the repair bill is, especially if one of you or both of you are handy.

So that would be my recommendation, which a lot of people don't take advantage of, and maybe it's 'cause they don't know. But that way you can get into it, you can move out after that first year, put a new tenant in there and cash flow that at a higher rate, and go ahead and buy another primary residence. That's what I would do. Like, that's how we did it — well, not with a multi-unit, but we bought our house, lived in it, turned it into a rental, bought a new house as our primary, lived in it, turned it into a rental. And so then we got to put the lower down payment if we wanted to.

So you moved every year, essentially?

Well, no, we lived in it for two years. Well, the first one was a few years, and then the second one was like a year and a half.

Yeah, but you're upgrading your houses every time. Can you do the same thing for short-term? Like, could I buy a multifamily with my 3% down and do short-term on the other three units, or the other two units? Or is that just long-term?

It bases it off of the long-term rental. But again, things can change.

Well, long-term rental income is the worst. I mean, that's gonna be your lowest — unless you run your short-term horribly. That's where you're gonna have your lowest income. So if it works there, it should work with the short-term. 'Cause that would give people then — 3% down would give people the ability to have extra money to furnish the place.

Correct. And so we would base it off of long-term, but if you're gonna actually do it short-term after that, you change your mind, whatever, or one of the units you're like, "I'm gonna go ahead and make it short-term" — you buy a four-unit and you live in one, and one is a long-term, and then maybe the last two are short-term. I mean…

Yeah. So it doesn't really matter what's in there, it's just based off of the long-term potential.

Yeah.

Okay. Quickly before we end — gosh, this was a fast hour, Jordan. Before we close everything, what about assuming loans?

Assuming loans, the short version — I also just did a video on this as well — it is not for the faint of heart. It is not an easy process. You have to really be dedicated to it. And one of my agents just went through this. She was on the buy side, so she had no experience, the listing agent had no experience, but both them and their clients were willing to come together and figure it out to make it work, which, if it folded out, it ended up being a really great transaction.

But I don't want you to expect this as like a 30-day process. One, our company doesn't service a substantial amount of loans, so this is not something that I have a ton of experience in, but I have a knowledge about it.

So essentially government loans — VA, FHA, USDA — are the ones that are assumable. Conventional loans are not assumable. I've never seen one. When we mark off the paperwork, it always says it's not an assumable loan. So I'd be very surprised if you find a conventional one out there.

But let's say you find a house, it has an FHA loan on it. And really the listing agent would be the one asking their client what type of loan they have, so they can know if it's assumable or not. But for the sake of easy numbers, let's say the house is listed at 250 and the current owner has a loan on there for $150,000. So there's a difference, right, of $100,000. 250 sales price, 150 loan amount. There's $100,000 we have to pull out of thin air.

There's really only two places that you can do that. You either come out of pocket cash, which most people don't have, or you have to find a way to do a second mortgage on it. Now, the servicer of the first loan, which is who you're going to have to get qualified through — like, you're gonna have to call them up, "This is the home," they're gonna put you through that process of, "This is how we need you to qualify." It should be pretty standard. But then from there, they would be able to tell you if they can offer you a second mortgage to come up with the difference, or you would have to find another banking institution to give you the money for the second mortgage and be willing to sit in second position.

So again, it's not a 30-day process. There are a lot of hoops you have to jump through, and both parties really have to be willing to take that on. It has to be your primary residence, 'cause again, this is a government loan, so you're not gonna be able to do this as an investment property.

And another just quick thing to touch on is on a VA loan. 'Cause when you get a VA loan, you're using your entitlement. So if I bought a house and it was my VA loan, and somebody wants to come assume my mortgage but they're not a veteran — if my mortgage company allows for them to assume it, I am giving up my entitlement, because they're not a veteran. They don't have any entitlement. So I'm giving that up, which means I either no longer have the ability to buy another home with a VA loan, or I am capped as to how much I can buy my next home with a VA loan, because part of my entitlement is still being utilized.

A lot of people get mad when I say that, and they're like, "Well, no one's gonna do that." And I'm like, well, if somebody's retired and they can't live by themselves anymore, maybe they have to go into a home or they're living with family, and they're willing to sell the house, they're never gonna buy a house again — that very much could help another person if they're able to qualify for it.

Or if they're married to another veteran. Now they've got two entitlements, and they can give up one 'cause the other person can go use theirs.

Or that.

I have a client that did it with a VA loan, and it was not for the faint of heart. It did take a long time, but he assumed a 2% loan. You're not gonna get that. And I look at it like, if I am the person that is selling, and if I can go through and help them with that process, because now I maybe could ask for a little more on my house because they're assuming a 2% loan. Now you just created more value in your home. Because right now we're kind of seeing in the market — this is what I've seen — when loans were 2%, we were overpaying for them like crazy. Now that they're 6 and 7%, or 5, wherever they're at, now we're not overpaying for houses. There are some that are still going over asking where I'm at, but for the most part, that's not happening.

I do know that Farm Credit Services also is allowing people to assume loans. 'Cause I have people buying farm ground, and Farm Credit is actually telling them, "Hey, you could assume this loan," 'cause it's at Farm Credit already. And so instead of them losing it, they're letting the new buyer assume it, which is probably about a 4% loan.

That's really nice, because I mean, most lenders won't say that, right? Because they don't make as much money. That mortgage is already, what, five, six years old. The origination is not as high as if they did a new loan. The interest isn't, right?

Yeah.

So the fact that they're willing to say that, I really commend them for that.

Yeah, that's — I was surprised at that too. But so, okay, let's say that we do have somebody that will assume a loan. Will you guys do a second mortgage for us? Will you guys take second position?

We do second mortgages. We have a partner that we do HELOC and HE loans for, but it has to be where we're already doing the first, which in this case we wouldn't.

Okay. So more FYI information than…

Yeah. You may have to go to — I would talk to whoever is servicing the first loan, so you can see if they'll offer a second mortgage option, 'cause some of them will. And if not, they may have a list of options to recommend to you. Otherwise, I would reach out to your local credit union or bank and see if they have any options available.

Well, thank you again, Jordan, for coming. This is such good information. I didn't know any of this, because, you know, I'm over here touting without the bank, right? So but there are obviously people that need to — we wanna go to the bank, we wanna leverage what we can when we can. That doesn't mean that I'm not gonna use the bank. I may be calling Jordan and saying, "Hey, I'm on a rental property. I don't wanna give up all my money. What am I looking at for a loan option?"

Jordan did say before we got on, she answers her phone on the weekends. So be polite, for God's sake, and don't just call her for stupid reasons. But she is there if for some reason you can't call her during the day, or in the evening or whatever. Jordan's not a bank, so she's not working bankers' hours, which is, I think, phenomenal. And it's also phenomenal, Jordan, to find somebody that cares as much about their clients as we do over here. I do have bankers' hours, but you know, the insurance company is closed at 4:00. So there's not much I can do about that.

Right, right, right.

However — that you truly care about people, and that is fantastic. That is not easy to find in today's world. It's not about the money, it's about the people, so that's awesome.

I appreciate that. Yeah. And you guys can go on my website and you can always schedule a call, like if you need credit help. I'm a no-pressure, there's no strings attached. There's no cost to it. It's simply — you could be two months out, you could be six years out, and you just don't know where to start, whether it's credit, buying a home, whatever the case is. And I will be very transparent: I don't have that information, or I do, and this is as much as I do have, and run with it if you can.

Yeah, and I would highly suggest you guys do that. It's no different than you saying, "I can't start a life insurance policy because I don't have the money," and yet I'm finding the money, I'm getting you to think differently. Jordan's doing the same thing. You are saying, "I can't afford a house, I need to rent," and you don't even know if you can afford a house or not. Because — what are the options? What are the strategies? I'm sure you do the same thing I do, and you're giving people strategies of, "Hey, maybe buy a duplex and rent the bottom out, and you can afford it this way." Because people just don't kinda get out of their own way sometimes, and we block ourselves.

Yeah.

So yeah, schedule with her. It's anutterhomeloan.com. You guys can go there. Just give her a call if you have questions. Don't be scared. Obviously, she's very nice, and she's not gonna high-pressure you into anything. So thank you very much again for coming back. I appreciate it.

Of course. Thank you so much for having me.

You're welcome. All right, you guys, you know the routine. If you need anything, maryjo@withoutthebank.com. Otherwise, grab your book, schedule your appointment. We're happy to help, and have a fantastic rest of your day.