Creative Ways to Purchase Real Estate (Including Rentals)
Mortgage Lending Options for Rentals
If you’re worried you won't be able to purchase real estate in the current environment, this episode may give you hope!
Jeff Ohm, Managing Partner of Forward Loans, shares creative ways people are purchasing real estate.
We start by looking at VA loans for veterans, move on to buying down mortgage rates, and conclude with loans based solely on rental income—options that may require minimal down payments.
Some of these options are very creative! I hope you learn something new.
Contact Jeff Ohm
Follow Jeff Ohm on Instagram, or @forwardloans
Time Stamps
00:26 Introducing Jeff Ohm: A Deep Dive into Mortgage Lending
01:08 Navigating Today's Housing Market: Interest Rates and Home Values
02:24 Exploring Loan Assumptions: A Strategy for Home Buyers
11:43 Understanding Seller Concessions and Rate Buy Downs
22:09 The Evolution of Mortgage Options: ARMs, Hard Money, and More
28:04 Innovative Financing: Investment Properties and New Loan Limits
30:57 Wrapping Up: Key Takeaways and Closing Thoughts
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[00:00:00] Hello everyone and welcome to the me financial podcast. I am Michelle Moses, your host. I am a certified financial planner, realtor and former e commerce store owner. And today we are going to be talking about how to get the most home for your money and today's interest rate environment. And to talk about this, I have Jeff Ohm with me and he is the managing partner and producing branch manager of Friedberg.
forward loans. Congratulations. Cause this is a new, uh, role for you, correct? Yeah. And he has an MBA from Arizona state university and more than 18 years of lending experience in the consumer finance industry. He has access to a full range of mortgage sources and can shop any loan so that basically that's what it means to him.
to, uh, be a broker, correct? A mortgage broker. Uh, and he also helps the run the [00:01:00] historic home tour here in Phoenix, Arizona, which is how I originally met, met him. So thank you. And thanks for being on the show. Thank you for having me. Yeah. So today we're going to talk about how you can get, so interest rates are all the, you know, we all had a super hot.
You know, home, what am I trying to say? Market. And you know, everybody's home. They're so happy with that. Their, uh, value is going up, but it has made it very hard to move. Right. Cause now rates have gone up and things are cooling off. We all know this story. Uh, and in my opinion, things needed to cool off.
Otherwise no one was going to ever be able to move. Like your house always needs to be able to be affordable to what the wages are. Right. nationally. I mean, do you kind of agree with that? Yeah, we, uh, obviously during the pandemic, 2020, 2021, it was quite the frenzy. Yeah. Because of that, we have a lot of people that are locked into their homes with, with those lower interest rates.
Right, right. And it's not a bad thing. It's just that, you know, things go up and down and that's, What it [00:02:00] is with the stock markets. What is with the housing market. Um, and for me, I just personally think that the ups and downs create buying opportunities and that's how you make money. It's the same in the stock market.
Uh, I think you just need to understand it. I just think that the home market, obviously we all need homes. and or a place to live. And, uh, it's, yeah, it's just a lot more closer to home. So, um, so let's start out. So we are going to talk, cause I originally asked you on here because, uh, Jeff did a video about assuming a loan.
So tell me a little bit about that because I had not heard a ton about it except for a VA loan. Yeah, that is, has been a very hot topic for this year, 2023. So as you know, as everyone knows, we did hit. 8 percent in interest rates. Uh, they have come down thankfully. So, but we're still in the sevens. Um, and what that is, is there's, there are some loans FHA, USDA, VA.
And the [00:03:00] USDA one is only, I don't think people have heard of that. Which one is that? So USDA, typically it's a rural loan. Uh, there's only a few areas in Arizona that, that even qualify anymore. Right. And typically they're outside of the city. They have a small census, um, mostly in the Midwest and other areas, but like Florence, for example, would qualify for USDA.
So, and then VA is for veterans and then FHA is what people are more. Correct. Yeah. So those, um, are kind of sponsored by the government and you can put 3 percent down, uh, and then you have the mortgage insurance. It's guaranteed by the government. Correct. Yep. It's, uh, guaranteed by the Ginnie Mae, which is FHA.
And then obviously VA, uh, has a, um, it's called a funding fee, but that's an insurance as well. Okay. So, um, and the way that that works, uh, actually have a situation today. So they have, uh, a veteran. [00:04:00] Um, the loan is at 2. 75, uh, the loan balance is 500, 000. They're selling it for 725,000 and they're soliciting or selling the fact that they have an assumable loan at 2.75.
Now, do you have to be a veteran in order to get this assumable and assumable you guys means basically that you're gonna take over the loan at that rate, so it, the name on the loan would transfer to the new owner. Correct. And there's a process and we'll, we will get into that. Okay. Um, so as a veteran does not, you do not have to be a veteran to assume a VA loan.
Just to get it in the first place. Correct. Okay. But what happens is, is every veteran is given an entitlement and that entitlement is what allows them to purchase a house. If that veteran sells to a non veteran and they assume, let's say the process is done, [00:05:00] that entitlement still stays with that house.
Because the loan. It's kind of staying with the loan. It is. Right? Okay. The entitlement is staying with the loan and that is not a benefit to the vacating veteran. Okay. So if he, if that veteran, he or she are good with walking away from that entitlement, and don't plan on purchasing another home of, of that same value, um, then they're in a good position.
What if it was a husband and wife and they're both veterans? Could, do they each have an entitlement, but they'd be co, how does that work? Cause if they're co borrowers. Yeah. So, um, okay. So that's kind of going to, That's down another road. Typically, most often the husband and wife are not both veterans.
Okay. It's just the one. Correct. Um, now if you had a husband and wife that were veterans, you could use both entitlements. [00:06:00] And that's a really good question. Cause I would assume Maybe one entitlement is attached to the house and then that they could take another one and go buy another one. But if that never happens, then we don't really need to talk about it.
It's very rare that that happens. Um, but going back to that situation, the buyers, the new buyers would have to come up with the difference between the loan balance and the sales price. So that's 225, 000 cash that they would have to put down in order to qualify. To assume that loan because no mortgage company wants to be the second on it of 225 basically.
So, well, the, the issue with, with the VA is you can get a second, but the VA requires that is it is an assumable second. Okay? And there's no one out there that are offering consumable seconds. Now the seller can choose to do a seller carry. But then the seller will not realize that cash [00:07:00] benefit until that's refinanced or paid.
Does that make sense? Yeah. Seller carry. But explain what that is to people that don't know. So what a seller carry is, is um, that 225, 000, the seller would basically create a trust, create a lien, create some sort of payment. Towards that, um, and then do a type of balloon payment, say maybe five years, 10 years.
So they basically become the mortgager. They become a lien holder on that side. Right. So then you would have two. Correct. Liens on the property. Okay. But going back to the process, so all FHA, all, everyone has an initial servicer and it may be Mr. Cooper, it may be. cross country, Freedom Mortgage, uh, Rocket.
There's tons of servicers out there and they all have different processes as far as that [00:08:00] qualification goes and that transfer goes. Um, as a listing agent or a seller, the first thing that I would do before even putting in the comments that this is an assumable loan, is Is I would call that servicer and see what those, what their requirements are.
I would see what their requirements are and then I would ask him how long that process will take. Because there are some servicers that are taking up to 180 days. Oh my gosh. So you could have a contract on a house and then have to wait to close. Yes. And the issue with that is, as we've seen, we had contracts go under, In the summer, April, May, the market was hotter than, uh, and 120 days into the transaction, say in October, it still wasn't completed.
And the house had gone down in value. House had gone down in value. Buyers got frustrated. Buyers canceled. Sellers went back to [00:09:00] the backup offer, but they had already found another house. And now they're sitting in a position where they've been off the market for 90 to 120 days. They've lost value.
They've had to relist. So there, there are some risks on both sides. Okay, yeah, avoiding the 180 days. Correct. Yeah, okay. So that is one way of getting a loan is assuming it, but you've got to be able, I mean, there, it sounds like, I mean, is this something that's really viable because it sounds like there's just a lot of, it is viable as long as you have the right servicer, you have a motivated seller, and you have a motivated buyer with the means to complete the transaction, they have the cash to pay either cash or if they can get a HELOC or a second.
Um, but you really have to look at what that blended rate is because those seconds are now are in the nine to ten, eleven percent range. Yeah, so if you got two and a half on the first and then, yeah, nine percent on the second. Yeah, you have to look at that blended rate. Yeah, you might be at [00:10:00] five anyway.
But I, I'm in numerous Facebook forums and they are completing them and there are some services that have the capacity to do that. And they're getting done in 30 to 45 days. Okay. All right. I mean, and I always think that this is the way of the world. I mean, you see it with laws and it's same in the financial world.
It's kind of like when, when there's a situation, people are going to find a way around it. Like they're gonna find a way to get in that house, you know? Um, and so I think if this is an option for these low rates, Then people are gonna do it. 'cause I could see how the va, if someone had cash, they'd say, okay, well I'll just downsize for a little bit, or, you know, and take this cash.
Yeah, yeah. And leave my loan and my entitlement with this loan. Yep. In the, in the situation, that first scenario that I was telling you about, they've been on the market for quite a long time, so this could be. That, um, final attraction to get them to go under contract. Right. Okay. Yeah. Because if they couldn't afford the house payment, they're going to do anything they can [00:11:00] to get out from under it, basically, and get some cash.
Okay. And with that being said, I just read where, um, the VA put a halt on foreclosures. There's quite a bit of, VA homes that are, that have gone delinquent. And this could be a good opportunity for those servicers to avoid foreclosures, get them on the market, have people assume those loans. This could be a good opportunity for that as well.
Okay. And then before we started, Jeff was talking about how we could do a whole podcast just on, uh, VA loans because they are that common. Complicated. Um, so we'll probably have him back to talk about that too, if you guys are interested in that. Okay. So the next thing that we were talking about, and I think this kind of goes in together was, um, so what's popular right now is a lot of seller concessions.
So people are trying to keep the value of their house high and sell it at that higher rate or higher amount. And, um, and then when you need [00:12:00] something fixed or anything, or they're offering to buy down the rate. And when you'll see this in the news or you hear this lingo around, it's called a 2 1 buy down.
So can you explain a little bit of that too? Yeah. So when we, when we first consult with somebody that's interested in purchasing or getting pre qualified, We always ask them what's, what's the most important thing? Obviously rate is important to everyone, but rates are, it is what it is, right? But there are ways to mitigate that and, and lessen the payment.
And the way that we do that, um, let's just take another 500, 000 house, for example. If you were to lower that purchase price by 25, 000, that would maybe save the borrower a couple hundred dollars. Right. It's not, you got to lower it by a lot. And that's why these, that's why the rate buy downs are so much better is because you're spreading that out over the 30 years versus, yeah, 25, 000 you're saving is just not going to [00:13:00] add up monthly.
Right. So I'll give you an exact number. example of a purchase that I just closed. So it was a 735, 000 purchase, uh, 200, 000 down because they had just sold their previous home. So they had the cash to put down. Um, and they, uh, received 3 percent in seller concessions. So it equated to about 27, 000. We were able to, um, buy the rate down to 6.
99. So that was a permanent rate down, uh, less, less than a point at the time. Um, this was in October and we did a 2 1 temporary buy down. So their initial rate for the first 12 months was at 4. 99. That scenario alone saved them over 800 in monthly payment. Wow. So in that, uh, we also had a little bit left over to pay for closing costs.
So typically a 2 1 temporary buydown, a good rule of thumb is [00:14:00] it's going to be about 2 percent of the loan amount. So in this case it was close to 12, 000. So can you explain what a 2 1 buydown does for people though? Yep, a 2 1, what it's doing is, is it's a prepaid interest account and basically the seller, You are using those seller concessions to prepay that interest for 24 months.
So for the first 12 months, you're taking 2%, so, excuse me, between 4.99 and 6.99, right? So that 2% is in an escrow account, so every time they make a monthly payment, the borrower is paying what would be 4.99, and then they're pulling that additional 2% in the escrow account. In the escrow account. Now what's nice about that is those funds are never lost.
So if that account is refinanced within that 24 months, [00:15:00] whatever's left over will be applied back towards the principal. Oh, so if their, if rates went down and they wanted to refinance, then they could. Oh, okay. And that's the, that's a nice benefit versus, you know, A permanent buy down is, it is what it is.
Yeah, you're buying down the rate for the life of the loan. And it's a sunk cost. So if you come and you refinance that in 18 to 24 months and you haven't hit your break even, those funds will never be recovered. Okay. All right. And these are really popular right now, right? They're very popular. Um, homes are sitting longer, You know, buyers, there's, there's a lot of buyers sitting on the sidelines because of rates, um, but right now you can get some really good deals and you can get the seller to help mitigate those rates and lower your payments.
Okay. And so essentially the 2 1 buy down buys it down for 2 percent for one year, and then it would go on the second year, go to 5. 99. 1 percent for the next 12 months. And then, so why is it [00:16:00] called 2 1? Because it's, I get the two, but what's the one? The one is the one one interest rate 1% every year kind of thing.
One. So 2% uhhuh for the first year. Oh, 1% for the next year. Okay. And then it's back to the original six, nine to nine. Okay. Now, if they don't have enough seller concessions, they can do a one one, which is 5.99 for 24 months. Okay. And they can also do a one oh. which is just 599 for 12 months. It's still lowers their payments, just not as much and not as long.
Okay. So the numbers basically mean the first year and the second year. There's actually a three to one. Okay. So that'd be three years. Yes. Okay. So the third, first year would be 3 percent 9, 9, 4, 9, 9, 5. So you can negotiate all of this when you're negotiating your contract for your house. It really depends though on, what you're eligible for seller concessions.
So if you're 5 percent down or [00:17:00] less, you can only get 3 percent in concessions. If you're putting down 10%, you can get up to 6 percent of the sales price. Now 6% It's not often that we get the 6%, but there's a lot that you can do on a 500, 000 loan with 30, 000. And if you're putting 25 percent or more, you can get up to 9 percent seller concessions.
Okay. And that includes, so if you're, so first you're negotiating, right, for the sales. Of the of the house. And that is just something that's included because they want to sell it for hire. Then they give you the concessions of the two. One buy down, let's, let's say, yeah. Um, but then you go through the inspection period.
There are some things wrong and they don't wanna fix 'em. They just say, here, here's some money, here's some money. That also adds to the seller concessions. And so if you're only putting down 5 percent and you already have a 2 1, then you need to really make sure of how many seller concessions that you're taking, [00:18:00] correct?
There is a point to where you can't. Yes. Right. So if you, okay, so let's pretend that you negotiated the 2 1 buy down. So two years of, uh, some interest payment on your mortgage when you were negotiating the house. Then there's some things wrong and you had another 2%. And when I, we say 2%, this is the 2 percent of whatever.
It's always of sales price. Yeah. Of what the sales price is. Correct. So then let's say you had 4%, then you could use that extra 1% 'cause you're only putting 5% down in the house. Could, you could use that to prepay, like HOA, what can you use that for? In, in the 5% scenario, you would not be able to go over at all 3%.
You wouldn't even be able to pay like a HOA or prepay your insurance. You're, you're, yeah, you're capped at 3%. for anything. Okay. So that's it. Okay. So that's why it's, you have to make sure that, you know, as an agent, as [00:19:00] a client that you're working with the lender that understands these things, because I have heard horror stories where they've gone through the Benzer.
They've negotiated the fire inspection. Okay. What, you know, I do, but I just want you to explain it. It's when they're, when they're submitting their repair order. Yes. Yes. And, and you're at that negotiating and they don't want to do the repairs and like, well, we'll just give you an additional 15, 000. Well, it doesn't work like that because if you're already capped at 3 percent and you're using all of it.
Fannie Mae, Freddie Mac. We're not talking FHA or VA right now. We're talking conventional conforming loans. They will not allow any more concessions. They won't allow a lender credit. They won't allow an agent credit. Wow, okay. You are capped at the 3%. Now, if you're putting 10 percent down, then you can go up to 6 percent concessions.
But you have to make [00:20:00] sure that what we do is we reverse engineer it and make sure that we can use all of those concessions because there are times, you know, they want to replace a roof or they want to replace a sewer. Yeah. There's some big priced items. Yes, there are. And. That is, you know, those are the things that we may say, Hey, have that come out of seller proceeds at closing.
Pay a contractor at closing, right? Those are the things that typically the underwriter is not going to require to see. Okay, so if a contractor fixes it before it's, the house is sold, then they would put a lien on the house basically, or you, and then you would put it in the closing. And then they get paid when the house closes.
Correct. Okay, so there's other creative ways to do it rather than just doing seller concessions. Yeah, there is. There are. And it, it really, You really want to make sure that that buyer is not in a situation where now they've bought this house, they're cash poor, [00:21:00] and they don't have the funds to fix whatever major repairs are needed.
So we're going to look at all of that. We're going to say, what makes most sense? Buy it down, do the temporary buy down if there's major issues like a roof or a sewer or even an A. C. A. C. may work, it may pass the inspection, but like this thing is done in one year or two years. Yeah, I mean that's like ten, twelve, fifteen thousand dollars.
Easily. Yeah. Easily. So, and you don't want to be without AC in Arizona. No, no. And that's actually a law. It's a safety issue. Yeah. It will not close if it's not functioning. Right. Right. Yep. So, and we have, there's certain lenders that will allow repair escrows, but I try to avoid those at all costs. There are, there's things that we can do outside of an actual repair escrow, uh, either getting it done During the transaction [00:22:00] or coordinating with the contractor and having the seller pay up front.
Okay. All right. So there are other, uh, are ways around it if the sellers, uh, willing to do it, I guess. Correct. So years ago, an arm used to be really popular. And so where did the arm go? And the two one buy down came in? Do you know what I mean? Like, how did we come? Because to me, it kind of seems like the same thing.
We just have like these two different names for it now. Well, they're different loan products. And ironically, you cannot do a 2 1 temporary buy down on an arm, believe it or not. Well, I know you couldn't do that, but the arm would still be just lower in the first couple, five years or three years. But I guess it's, it doesn't go up every year, so that's why the name of it is different.
Um, but it's kind of the same thing with an arm. It's like, okay, a five year arm. Okay. It's low for five years and then it's going to go up to whatever rate, right? Yeah. So the issue with arms right now is we're, you know, things are funky [00:23:00] because the fed has continued to raise rates. Uh, thankfully it seems like that has subsided and they've said, uh, no more.
So cross our fingers, but we're in what's called an inverted yield curve where arms right now because of margins, they just don't offer, they're not as attractive as they used to be. So, um, you know, financing jumbo loans, uh, the luxury market, arms were always very popular. 7 year arm, 10 year arm, because the rates were lower.
And most, you know, luxury homeowners are not in those homes for 7 years to begin with. And if they are, They wait until they can refinance out of that into a 30 year fixed. Um, but right now, ARM rates are similar to 30 year fixed rates. So, now there are some retail banks out there, there are some credit unions that are holding that paper in house, [00:24:00] and it's kind of giving them a competitive advantage, but they're few and far in between right now.
Okay. I've also seen, um, just as an advisor, uh, I get people that call me all the time with investment products and things. Hard money lending is off the charts right now. I mean, cause there's so much cash people are just, uh, people that have money, have a lot of cash sitting in savings accounts waiting for an opportunity, uh, because they haven't felt like the stock market has been, you know, all of this.
And then housing, I mean, it's really expensive. Like if you're going to like, flip a house or something. I mean, you're paying 800, 000 for this house. That's a lot of your cash to be tied up in one house. So I feel like there's a lot of cash and people are looking to do with it, what to do with it. So I've gotten a lot of calls about these hard money lending.
So do you have any thoughts about that, about what's going on? Have you seen any of that? Yeah, actually. Um, I know quite a few wholesalers. And the hard money lenders are the, it's their kind of life source, [00:25:00] believe it or not. So there's some really good hard money lenders out there that really like to work with seasoned wholesalers as well as flippers that will, um, they can get up to a hundred percent financing.
So they can put a down payment, get that house owner contract, and, uh, the hard money lender, as long as you have a relationship, will, offer financing for the renovation, right? Um, most hard money lenders only work with investors and people that they know and they have it. Yeah. And the payment is interest only.
Yeah. So they start and it's normally like a six month loan, but I guess I'm bringing this up too, because I kind of wonder if like, okay, so rates are high and they are coming down and I think they will start to come down, like, The mortgage, the way that I view it is so the Fed kept raising rates and it's kind of like the stock market.
Um, you're kind of building in expectations. And so the mortgage rates were building in [00:26:00] expectations and that's why they went up to eight, but really they should have been more like a six and a half. And so since they have started, the Fed has, you know, is not, it looks like they're not going to continue to raise rates, then it should come down to, you know, under seven and six and a half or six.
Um, but if you can get a hard money loan, or if people are like, I'm tired of waiting, I will go ahead and give you a loan on this house. I mean, do you think that that could be even a possibility? I just don't think that would be that big. Yeah. So hard money for a primary buyer, I don't think is a viable option.
A lot of hard money lenders will not because of the way that they have to, um, report and because of compliance reasons, they won't do financing for primary lenders. Oh, I didn't realize that. Okay. They primarily do to the investors. Okay. Right now. We do. Can I ask how is their reporting differently and all that?
Uh, do you know? Yeah, [00:27:00] it has. And again, this goes back to my taking my UST days, uh, taking my test, but I love it when people ask me questions that I never talk about. It really has to do with the, if you close a certain amount of primary loans. It changes your status. Okay. So, and that's really what it comes down to.
Okay. And you become more like a bank. You do. And you have to have like reserves and things like that. Okay. Okay. So, and I like that. I think that's good because otherwise it could blow up the economy. Yeah. Yeah. Um, and so, you know, we're not where we were back in 07, 08 doing negative amortized loans, interest only.
There's very few of those options. Everything that we do is qualified, so, but we do have non QM options, so we have bank statement loans, we have What's QM? Uh, qualified mortgages. Okay. So Regardless of what we're going to, um, what vehicle we use, we're [00:28:00] going to prove income one way or another, unless it is a DSCR loan.
And these loans are excellent for investors that don't want to They may own multiple properties, it's called a debt service coverage ratio loan, and really, it's just based on down payment. It's based off of a rental analysis, which is called a 1007 in your appraisal, and that's a market rent analysis.
And as long as your payment is equal to the market rent analysis, Uh, and obviously, you know, FICO score on those things, but that ratio doesn't come into play. Income doesn't come into play. As long as your payment is equal to the market rents, you qualify for the loan. And is that for primary or for an investment property?
Investment property. For only for investment properties? Okay. Um, and so that's if you were renting like a single family home. Not like [00:29:00] apartments or, or, yeah, now there are commercial loans as well, but you can do this up to a fourplex. Okay. Which I think would be really, you know, we have a lot of real estate investors listening.
So. And with that being said, as, as of November 18th, if buying is buying a primary, you can get into a fourplex with as low as 5 percent down now. Oh wow. And that's at the higher, you know, because. Uh, the new conforming limit just came out, 766, 550. It's, in Arizona, it's over a million dollars conforming limit that you can get into a fourplex with 5 percent down.
Wow, that's amazing. Yeah, so you can, and you can use the other three units to offset your incoming new mortgage to qualify. That's wonderful. It's fantastic. Yeah, that is fantastic. Oh, well, thank you for bringing that up. Okay. [00:30:00] Yeah. And that, what we were talking about, so that 766 number of conforming, um, that's where you kind of hit the, um, jumbo.
So once you hit and you need your loan to be over that 766 550, uh, then it would become a jumbo loan. And then those rates are, and all of that, that world is, is different. It's a lot harder to qualify in Jumbo.
You know, a fanny jumbo. Um, but you're still going to have to put, you know, 20 percent down if you, if you're not putting 20 percent down, the rates are, they're just a lot higher. It's not conducive. So, but with that new loan limit, you can basically buy an 807, 000 house with 5 percent down, which is right around 41, 000.
Okay. For a down payment. Right. Okay. Okay, well, this is some good information. Thank you, Jeff. Oh, my pleasure. Yeah. Thank you for being on the show. And I hope you guys, [00:31:00] uh, got a little tidbit of information. I know we're throwing around a whole lot of numbers and, you know, loans and things, but, uh, maybe it gave you some ideas or things that could, uh, spur some thoughts.
And, uh, again, thank you for being on the show. You guys, uh, make sure to subscribe and scroll all the way down to the show and leave me a review and let me know if you have any other topics that you want to hear about. Thank you so much for listening.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.