## Real Estate Strategies So You Can Combat Rising Interest Rates

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It feels impossible to buy AND sell. Here are some real estate strategies to help combat rising interest rates.

Interest rates are averaging 7%.

Yet buyers can only afford the same payments they could when interest rates were 4%.

This reality of affordability puts buyers and sellers both in a tough spot – buyers can’t qualify for the price point they’d like to, and sellers can’t get rid of the flips they bought earlier this year.

What can you do to combat rising interest rates like this?

You end up with two main strategies to combat rising interest rates in this market:

1. You can lower your price to make the monthly payment the same for the buyer, based on interest rates.

A buydown is a strategy where the seller pays in advance to bring down the interest rate for the buyer.

In our previous example of the \$800,000 property, our target payment would be \$3,800/month. What would the purchase price be if we took the 7% interest rate down by a percentage point? Could that get us closer to \$3,800 without sacrificing as much purchase price?

Let’s say it would cost 2 points to bring the interest rate down to 6%. That interest rate would allow you to sell at \$640,000, while still keeping the buyers’ monthly payment at \$3,800/month.

Buying down the interest at a cost of 2 points would only cost you \$12,800. Yet even with that buydown cost, you’d still make an additional \$52,200 selling at \$640,000 (compared to the \$575,000 pre-buydown).

It becomes a win-win: the buyer can qualify for the \$3,800/month payment, and the seller can ask for a higher price.

## How to Price a Flip to Combat Rising Interest Rates

This example covered a higher-end, \$800,000 house. Does all this math work the same at a lower price point?

Let’s look at a \$250,000 instead.

At the beginning of 2022, a \$250,000 house would have cost a homeowner \$1,193/month. Now, that same house would cost the same person \$1,663. That’s \$470 more per month, or a 39% increase. From early 2022 to early 2023, the monthly payments will have gone up by 54%, to \$1,834/month.

These numbers are still probably cheaper than rent for a comparable property. However, that doesn’t necessarily mean buyers will be able to qualify with lenders.

If someone could buy a \$250,000 house at the beginning of 2022, now the same exact person could only afford \$180,000. By next year, they can only afford \$162,000.

This is why properties are sitting on the market. When prospective homeowners buy by payment, they can only afford 30-40% less in purchase price.

What if you try the buydown technique here?

If you paid 2 points, you could bring the interest rate down to 6%. This would cost you \$4,000, but allow you to sell for \$200,000. You’d net \$16,000 more than if you were to sell at \$180,000.

Watch the video here:

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## What is the “BRRRR Buy Box”? And Why Do You Need It?

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Want to guarantee a successful rental property? Learn the framework: The BRRRR Buy Box.

Every BRRRR has a “buy box.”

If you don’t know yours, then you jump into the refinance stage blind. You can end up with negative cash flow, more required out-of-pocket, or not even qualifying for a refinance at all.

We’ve had clients live this nightmare. One came to us at the end of a BRRRR just to find out three of their properties wouldn’t cash flow, so they had to sell them. All because they didn’t learn their perfect BRRRR Buy Box before they started.

Let’s go over the BRRRR Buy Box to save your next rental from the same fate.

## What Is the BRRRR Buy Box?

So, what is the BRRRR Buy Box? It’s a set of parameters to keep your BRRRR on track to a successful, profitable refinance. What’s in it? There are four important numbers:

1. What is your minimum cash flow requirement? Not only yours, but what is your lender’s minimum net cash flow for you to qualify?
2. What amount, if any, do you want to put into the property? This is money that you’re willing to keep in the property. You don’t get it back out at the refinance.
3. What’s the maximum loan you feel comfortable with? What do you qualify for? What fits your cash flow requirements for this particular market?
4. What’s your maximum amount for purchase and rehab? These numbers are vital to keep you in-budget with cash flowing.

Let’s go through an example of what a BRRRR Buy Box would be.

### Cash Flow Requirements

Let’s start with the first question. Say your minimum needed cash flow for a property is net \$500 per month.

This is your first criteria, so you want to make sure every property you look at would cash flow \$500/month. To predict cash flow, you can approximate rent in the area of the property, as well as estimate the monthly mortgage payment and other costs.

If you know you can charge \$2,000 for rent, but your loan, taxes, and insurance will equal \$1,450, then you can predict a \$550 monthly cash flow.

### Cash Put into the BRRRR

How much money do you want to put in? Some people do BRRRR for the appeal of zero down properties. Other people want to put as much in as possible at the beginning to keep loan payments down and cash flow up.

Having a target number helps you better set up your refinance.

### Maximum Loan

The maximum loan doesn’t always mean the highest possible loan you qualify for. Rather, it’s the loan that works best for the property and the situation.

What is the maximum leverage you could use and still meet your cash flow requirements and the bank’s refinance guidelines?

Most banks will refinance you on rate-and-term from 75 – 80% of the appraised value, as the house sits after you’ve bought and rehabbed it. Cash out refinances cover somewhere between 65 – 75%. That may be too much for your particular area, or not enough. It’s important to understand the maximum loan for your particular deal.

### Purchase and Rehab Budget

Finally, what is the maximum amount of money you can put into the purchase price and rehab? What budget fits in your buy box?

Remember that on top of the purchase and rehab, you’ll still have carry costs and closing costs. All of these numbers will have to fit within your budget.

We believe in this quote:

“Prepare and prevent. Don’t repair and repent.”

This line applies to all real estate investing, but especially BRRRR. The BRRRR Buy Box is a framework designed to help you bring a “prepare and prevent” mindset to your rental investments.

The BRRRR Buy Box involves keeping the refinance at the forefront of the process. You need these 4 key pieces of information before ever closing on a property:

• Cash flow requirement.
• Money you can put in the property.
• Required loan amount.
• Purchase and rehab budget.

## Knowing the BRRRR Numbers

If the maximum loan you want to do is \$250,000 and you’re willing to put in \$30,000, that makes \$280,000 total for everything. This “everything” includes the purchase, both closings (for the initial loan and the refinance), all construction costs, and carry costs.

There are a lot of reasons to prepare for BRRRR. Poor prep results in holding the house longer, missing out on vital rent income, and paying high interest rates on a hard money loan.

Before diving into BRRRR, remember:

• The house can involve major repairs.
• Your lender could delay the appraisal process.
• You need to factor closing and carry costs into your total budget.

## Don’t give up on BRRRR

Make sure you’re prepared to win at BRRRR. Know your BRRRR Buy Box, and you’ll be successful.

Nine out of the 10 people we meet who stop doing BRRRR give up because they got to the refinance and it just did not work.

They didn’t prep their buy box ahead of time. They had to bring in too much money. The house did not cash flow. They didn’t qualify for a refinance. They got stuck with a hard money loan sitting on the house, eating away at their funds.

In this situation, people usually sell at a loss, then they’re turned off from BRRRR forever.

BRRRR is an excellent process. It’s a smart way to get into rentals, if you prevent and prepare before you start buying.

If you’re left with any questions or have a potential BRRRR deal you want us to look at, we’d be glad to help. We can go through the numbers for you and help you find your BRRRR Buy Box.

Send us an email at Info@TheCashFlowCompany.com.

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## How Interest Rates Impact Sellers and Buyers

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Rising interest rates impact both buying power and selling price. Here’s how.

When interest rates change, the monthly payment people can afford doesn’t. This results in buyers’ available price points dipping lower and lower.

People might be willing to pay a little more per month for a higher purchase price in this market. But that doesn’t matter if they can still only qualify for a loan with the original lower payment.

Let’s look at a real example from one of our recent clients about how they need to price their current flip.

## Interest Rates’ Impact

Back in January, our client’s property would have sold for \$800,000. That number was still on their mind as they brought the house to market a couple months ago.

However, back then, the interest rate would have been around 4%. This would have made the property’s monthly payment around \$3,800.

Fast forward to now. If people are buying properties based on payment… Could this client still sell for \$800,000?

The problem is: interest rates are now closer to 7%.

Let’s look at how this impacts payment. If someone could qualify for the \$3,800 payment back in January… then they qualified for that payment, not necessarily that purchase price.

If the target buyer can only budget/qualify for \$3,800, then in order to keep that monthly payment with a 7% rate, the new price will need to be \$575,000.

### Why Is It Important to Know How to Price a Flip?

This client’s main motivation is that they want to clear off properties like this because they know better deals are coming. They need to be free to buy soon without past flips hanging over them.

Another motivation is: they don’t want to keep making payments on a property that will sell for even less in a year.

Next year, experts anticipate interest rates will be up to 8%. Affordability for this property would go down to \$520,000. This client certainly doesn’t want to be caught with this property for sale in that market.

Watch the video here:

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## You Are Doing BRRRR Wrong

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Most people do BRRRR wrong. Here’s the step they usually miss.

Buying properties at undermarket prices. Fixing them up. Keeping them as rentals. Refinancing.

We’ve helped clients with this process for over 20 years. What’s the biggest error we see people make?

Many beginning investors take the order of the BRRRR acronym literally. They buy, rehab, rent, THEN try to figure out what the refinance will look like. That’s actually doing BRRRR wrong.

Going into the refinance blindly is how to do BRRRR wrong. At best, you won’t know how the property cash flows. At worst, you can’t get a refinance loan at all.

Let’s look at what you need to do instead.

## How to Keep From Doing BRRRR Wrong

The refinance is where you make your money in a BRRRR. Refinancing determines the cash flow, your money out-of-pocket, and the financial success of the project.

If everything hinges on the refinance, why would you wait until the fourth step of the process to start figuring it out?

You need to mentally move the third R, “Refinance,” up to the beginning of the process, before you even buy.

There are certain questions you should know the answers to before you put money down on an undermarket property.

You can get the cheapest house out there, with the highest ARV… But if you aren’t able to get a decent refinance for it, you’ll still lose money.

Here are some questions you should be able to answer at the beginning to ensure you don’t do BRRRR wrong:

• What loan-to-value (LTV) does the bank require?
• When you go to refinance, will you have to bring in money? How much?
• Will it cost more money than you have? Or more than you want to spend on this project?
• Will you do a rate-and-term or cash-out refinance?
• What will be your cash flow on the property?
• What’s the minimum cash flow you need? What about the minimum the bank needs?
• Does the bank require investment experience to lend you a refinance loan?
• Does the bank have reserves requirements? (This is usually around six months’ worth of payments the bank requires you to have in savings or a mutual fund).

If you don’t know the answer to these questions up front, you end up like a lot of buyers who get BRRRR wrong and lose money.

You get to the refinance part of the process and learn you don’t have enough money to bring in. Or you find the cash flow is bad.

## Prepping for a BRRRR Buy

Does it make sense to buy a property (with a higher interest loan), put all the money into repairs, rent it, and THEN figure out whether it’s a good or bad investment?

It takes just a little time and effort up-front to figure out if a property is worth pursuing.

We like to call this time up-front “building your BRRRR buyer’s box.” It’s a process that helps you prepare for the refinance ahead of time so you don’t do BRRRR wrong.

Going into a property, you should know:

• How much cash you’ll need to bring in
• What rehab budget you can afford.

## Do BRRRR Right

Leverage determines whether you’ve done BRRRR wrong or right. All real estate investing hinges on leverage, and our goal is to help you create the best leverage possible.

Using the right debt will accelerate your business, while the wrong stuff will slow your investing career to a halt.

If you have questions about a BRRRR product, email us at Info@TheCashFlowCompany.com.

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## Refinancing: DSCR Loans vs Bridge Loans

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Refinancing can save you from a bad fix-and-flip. But which is better: DSCR loans vs bridge loans?

This market could force you to sell your fix-and-flip for much less than anticipated. Or – it could not sell at all.

When your lender asks for the money from your flip loan, a refinance could be the solution. Refinancing buys you time. With the right refinancing loan, you can safely wait for a better market to sell the property.

Let’s take a look at DSCR loans vs bridge loans for this type of refinancing.

## DSCR Loans

Are you open to keeping your flip for a little longer term? Would you convert it to a rental in the meantime? If so, a DSCR loan is a great way to refinance out of a fix-and-flip.

A DSCR loan is a type of rental loan, based only on:

• Rental income from the property (not your personal income)
• LTV (appraisals, listing price, etc that show the value of the home)

If you’re considering a DSCR loan, let’s look at the pros and cons of shifting gears from a flip to a rental.

### DSCR Loan Pros

A DSCR lender will loan you up to 80% of the value of the home.

#### Cash Flow Opportunity for Your Flip

Your options for a DSCR loan product are broad. You can get anything from an interest-only to a 40-year loan.

With these options, you can spread the payments out. With lower payments and a potential tenant, you can match the cash flow to break even on the property (or maybe even bring in positive cash flow!).

This cash flow frees up your money to buy more flips and keep your business going. With that free money, you can jump on the good deals that will pop up in the next few months.

#### “Easy” Loan

Some of the biggest advantages of a DSCR loan is how easy it can be to apply and qualify.

For this type of loan, there are no income requirements. You just need good credit and rent that covers the monthly loan payment.

### DSCR Loan Cons

There’s one important trick to refinancing a house that’s been on the market:

The appraiser is going to use the last price the house was listed for in their appraisal.

It’s tempting to drop the price when you have a flip on the market to try and attract a buyer. But once you decide to refinance, your house won’t appraise for higher than that lowest listed price.

So, it’s important to decide what you want to do with a flip ASAP. If you know you may want to refinance, you don’t want to keep lowering the list price, or it will negatively impact you.

#### Pre-payment Penalty

All DSCR loans have some kind of pre-payment penalty. Many are for around 3 years.

This means you have to keep the loan for that period of time, otherwise you’ll be charged a percentage fee for paying off the loan early.

If you want to keep this loan on your property for less than 3 years, you’ll be stuck paying that pre-payment penalty with a DSCR loan.

#### Not Available for Rural Areas

Also, DSCR loans are not designed for smaller towns. They can be great if you’re in a larger community, but they’re just not available in small ones.

And as money tightens up overall in the real estate lending space, DSCR programs are tightening up too. Rates will go up, LTVs will go down, and they will concentrate more on city centers.

Most DSCR loan programs go as far as 25 miles from a city. But anything that shows up rural on an appraisal will likely not qualify for DSCR.

## Bridge Loans

A bridge loan is a short-term loan that’s designed to give you flexibility on flips that are slow to sell.

With a bridge loan, you’re free to keep the house on the market, or convert it to a rental. The main purpose of a bridge loan is to get you out of a tough situation with the lender of your flip. What you choose to do with the house afterward is flexible with a bridge loan.

### Bridge Loan Pros

Bridge loans are designed to help you refinance out of a flip. It gets you out of your original loan quickly –which is crucial when you’re getting calls from your lender. Plus, it helps you from paying high monthly payments with no cash coming in.

• have no pre-payment penalty
• can be interest only
• close very quickly.

### Bridge Loan Cons

#### Too Short-Term?

Bridge loans are short-term – varying between 1 and 3 years.

In our market, we don’t expect interest rates to trend down for at least another year. If your bridge loan only covers you for a year, that might not be enough time to carry you into a better market.

You’ll want your refinance bridge loan for at least 2 years to give you some flexibility with the property.

You may need to shop around – 3-year bridge loans can be difficult to find, and many are limited to 1 year only.

#### Low LTV

Bridge loans are usually only 65% to 70% of the house’s current appraised value.

Again, remember that your listing price will have a direct impact on that appraised value. If you slide the price down on the market to attract buyers, your refinance loan will be lower.

## DSCR Loans vs Bridge Loans to Refinance

When we meet with a client about how to refinance out of a fix-and-flip, we weigh DSCR loans against bridge loans.

There’s always a tipping point – usually somewhere between the 14th and 17th month of a DSCR loan – where the pre-pay fee becomes cheaper than a bridge loan.

Bridge loans typically have 2% to 4% higher annual rates over a DSCR loan. Always analyze this tipping point, and choose the right loan (DSCR loans vs bridge loans) for you based on the length you’ll need it.

Watch the video here:

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## How to Know When a ReFi Makes Sense

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### To refi, or not to refi: That is the question.

And we get this question a LOT. “Does it make sense to refi if I only plan to hold onto the property for a few more years?”

Earlier this week, we discussed the power of refinancing (and the math behind it.) Do the numbers support taking on extra years of payments?

For some of you, they do. For others, you might be left thinking, “But wait! What if I’m not going to keep the property for 24 or 30 years? At what point does it actually make sense to refinance?”

However, if you are not going to keep the property through the next 30 years, you’ll need to look hard at what the costs will be over the expected period. The key here is determining which path will cost you more money and which one will keep more in your pocket.

GOAL: Keep more money in your life and less in the hands of bankers.

### Let’s look at an example:

You’re planning to keep a property for 3 years and then sell it. The question is, what will put more money in your pocket and cost you the least over those next 3 years?

### Here is how we figure this out:

2: Then, pull your principal and interest from your current mortgage company’s website.

3: Next, ask your mortgage broker to give you the principal and interest from the new loan.

4: On each loan, multiply the payments by 36 (the 3-year window before you sell the property) and add the balance of your loan at the end of 3 years.

5. Lastly, compare notes and find out what would be the lowest amount. This is the one that will keep more money in your pocket.

Ultimately, this is just a pure and simple scenario of determining exactly how much the loan will take out of your pocket over the course of 3 years. We’re not looking at monthly cash flow, because true dollars out are pure and simple. This is your true cost out of your pocket.

If you need help, we’re happy to step in. Give us a call, and we can run all the numbers for you and see if it makes sense.  If it does, we can help you out even further by securing low rates and costs on your refi!

*All non-commercial and construction loans offered by TNS Loans NMLS #1719349

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## Investor Mortgage Report 6.2.2020

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## Thankfully, it’s looking like another great week for standard conventional mortgage rates.

So far this week, all evidence is pointing towards increasing stability and improvements on the conventional mortgage front.

• Depending on whether you pay your mortgage person points or you have them wrapped into your loan, rates fluctuate between low 3’s and low 4’s.
• We’re seeing great rates on the conforming side.
• Every week, the non-traditional loans are reappearing with increased frequency.
• Some lenders have decreased credit score requirements to 680.
• Rates are still on average above 7%, but signs are showing that they will drop soon.
• LTVs are inching higher, but not to the degree we have seen them in the past.

In short: conventional mortgage interest rates are really good. But what does that mean for you?

#### How do you know when it’s smart to refinance your rental (or any) property?

Let’s face it: as rates drop, the question of whether or not to refinance runs through all our minds.

Would you like to find out (without the sales pitch from your mortgage person?)

Anyone can crunch the numbers in just a few minutes with just a few items.

Yes. It involves math. But we swear it’s EASY

For now, all you need is a piece a paper, a pen, a calculator, and your mortgage information. (You can pull this info directly from your mortgage company’s website). Then, follow these three steps:

Step 1: Locate the amount you pay monthly for principal and interest. (Ignore everything but your principal and interest (i.e. taxes and insurance).

Step 2: Locate the number of months remaining on your loan.

Step 3: Multiply your monthly payment by the number of months you have left on your loan.

That’s it!

Let’s look at an example:

A: Your monthly principal and interest payment is \$1,200

B: You have 288 payments left on your loan.

C: \$1,200.00 X 288 = \$345,600

(Scary sometimes to see how much you really owe, isn’t it? Don’t panic.)

Now, let’s say that you have an opportunity to refinance and lower your interest rate with a new payment of \$1,100. Should you do it?

#### Let’s take a look:

On your new loan, you’d pay \$1,100.00 for 30 years (or 360 months). That’s \$1,100.00 x 360 = \$396,000.00

If you refinance, you’d increase your monthly cash flow \$100.00. However, as a result, you’d pay an extra \$50,400.00 over the life of your loan!

So, is the extra \$100/month worth an extra 72 months (6 years) of mortgage payments? Does refinancing make sense for you financially? Well, that’s up to you.

Perhaps cash flow is more important at this time in your business life and paying the extra years is ok with you. That’s a decision only you can make. At least when you know all the numbers, you can make your call an educated one.

Try it on all your loans and find out what makes sense for you!

Your payments __________________ Months remaining _______________

Total remaining to be paid ___________________

Okay, we’re sure a few questions are swimming around in your head, so we’ll see if we can answer some of the most common ones upfront:

Q: “What if I’m not going to keep the property for 24 or 30 years? At what point does it make sense to refinance?”

A: That’s coming up in the next article.

Q: “What if I want to use those savings and pay down my mortgage?”

A: We’ll be addressing that in a future article as well.

Q: “What is my breakeven interest rate?”

A: There are so many paths you can go down and we’ll cover as many as we can. We’ll also provide a tool for you to run all these scenarios.

Want an investor tool that can run these numbers (plus your breakeven rate and many more) in seconds? We have one in the works. Just get on our contact list, and we’ll let you know when it’s ready!

By knowing these numbers, you can save tens of thousands on each refinance.

Don’t feel like doing this or worry the math might overwhelm you? No worries! Shoot us an email with your current statement and we can run them for you.

*All non-commercial and construction loans offered by TNS Loans NMLS #1719349

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## Investor Mortgage Report 5.26.20

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## The Mortgage Market is Showing Signs of Being on the Mend.

#### What We Know:

The mortgage market is finally showing signs that it is starting to recover and heal. As states begin to lift travel and business closure restrictions and reopen for commerce, lenders appear to be relaxing some of their restrictions in-kind.  Last week, we welcomed back a few lenders offering loans outside the standard conventional box.

This week, we see even more positive progress, such as lenders expanding the LTVs up to 70% on their investor cash flow loans (based on credit score and lease.)

We are noticing the lending requirements are a little more restrictive than before Covid-19, but at least additional options are making a comeback. Hopefully, this upward trend will continue over the following weeks.

#### What You Can Expect:

A return to business-as-usual won’t happen overnight, of course. The lower credit scores and higher LTVs will more than likely take some additional time to return to their pre-COVID closure state. Lenders will want more data on the unemployment and rental payment front before expanding.

Rates in the standard-conforming market are coming down.  For investors, 30-year rates are in the mid 3’s for purchases and no cash-out refinances.  Cash-out refinances are still a big challenge for investors, and will more than likely continue to be so for the next few months.

Expect to find the expanded requirements (up to 6 months reserves for each property) to be in place with underwriters through the end of the year.

*All non-commercial and construction loans offered by TNS Loans NMLS #1719349

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## Investor Mortgage Report 5.5.2020

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## Refinancing may have just become more expensive for both rate and lower LTVs.

Wow, what is this? The powers that be are still messing with our beautiful lending world. It’s not a shock that government officials seem more focused on getting votes at the cost of property owners and mortgage companies, encouraging tenants not to pay rents and not lending a hand with evictions.

What We Know:

Mortgage rates are so low right now (in the mid 2’s for owner-occupied, and low 3’s for investors) that still-employed buyers should be running out and buying homes left and right.  After all, the number one reason buyers purchase is that they can fit the payment into their monthly budget. We should be seeing mortgage companies throwing money out to everyone. We should see buyers buying and investors refinancing (increasing that cashflow without adding more properties.)

So why isn’t that happening?

In short- our government is hard at work wreaking havoc in the lending markets, making it harder for all of us to get a loan, especially refinances.

Sure, it sounds good in theory: Allow anyone who wants to defer a payment or 4 during an economic crisis to do so, without proving any reason based on financial hardship.

If a lender helps someone out and refinances them and they decided to go directly into forbearance, (yes, people WERE doing cash-out refinances with the plan of deferring payments to take advantage of the government’s kindness,) that lender cannot sell or move that loan off of their books to those that service FHA, VA, Conventional loans, etc, unless they want to take pay a huge fee. So, they decide to hold the loans, thus filling up their lending bucket.

So what happens next?  The lenders don’t want to take a chance that a percentage of people are going to take advantage of this opportunity, so they raise the cost of refinancing for everyone.  On top of that, they will start lowering the LTVs (loan-to-value ratios,) making the box for traditional financing harder for all.

Yes, obviously those that need mortgage forbearance should be able to use it, but it’s the ones who are not in financial need that are making these numbers grow, creating more costly financing for us all.

Let’s look at the numbers from an article from MBA.com from the end of April:

Key findings of MBA’s Forbearance and Call Volume Survey – April 13-19, 2020

• Total loans in forbearance grew relative to the previous week (from 5.95% to 6.99%.) In comparison, only 0.25% of all loans were in forbearance for the week of March 2.
• By investor type, Ginnie Mae loans grew the most relative to the prior week: from 8.26% to 9.73%.
• The share of Fannie Mae and Freddie Mac loans in forbearance increased relative to the prior week: from 4.64% to 5.46%.
• The share of other loans (e.g. private-label securities and portfolio loans) in forbearance increased relative to the prior week: from 6.43% to 7.52%.
• Forbearance requests as a percent of servicing portfolio volume (#) dropped relative to the prior week: from 1.79% to 1.14%.

What You Can Do:

Keep up with your payments if you’re able. The more of us that are paying on time and in full, the quicker the lenders will start to relax and start loaning again. Everyone wins.

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## Investor Mortgage Report 4.14.2020

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## For lenders, times are more uncertain than ever.

With conventional/standard loans as the only lending option available for rental investors, lenders went and changed the rules…and not in the investor’s favor.

As of this week, the new underwriting criteria has hit 90% + of the market for investor loans on rental properties. Plus, most lenders now require a minimum of 6 months reserves (and, a lot of times, up to 12 months) for every rental property that has a loan on it. That’s right. If you have four rental properties, you now need at least 6 months of payment reserves on each property. That adds up quickly.

That may not even be the worst of it.

In addition, most lenders are not allowing borrowers to use the rental income from their properties to qualify. If they do, they might only allow a very low percentage of the rent (like 50% of gross rent). That means if you have rent coming into a property at \$2K, they may only count 50%, or \$1K, of that towards your expenses (if they allow you to use it at all). In this example, if the rental property has expenses at or above \$1K (and most will) the underwriters will expect you to cover the shortage with other non-rental cash flow.

So, if you don’t have great credit (lenders have raised the threshold here, too) and other income to qualify for a new loan, you will be out of luck…for now.

We don’t know how long this will last. It might be weeks, but more likely months. Nobody will know until banks and lenders figure out how current stay at home orders will affect the markets.

So, why exactly is this happening?

Once the lenders get the data, they will adjust. Let’s cross our fingers that rents are being paid and, likewise, mortgages are kept up.  This flow of money will help bring lenders and loan choices back to our market.

#### What can you do?

• Keep informed on what is happening in the lending markets. If you are selling properties, then stay updated for your potential buyers, too.
• Keep paying your mortgages. This will help the overall market, but especially you when you are looking to borrow in the future for better rates (the rates are expected to be great after we return to some normal) or new opportunities.
• Keep your credit score high and keep working with your renters to pay what they can when they can.

Remember the loans and rates will come back. When they do, be prepared to take advantage.

If you have a credit score at or above 760, and have ability to income qualify, then your rate estimates this week for conventional loans look like the following:

• Paying closing costs rates for rental properties (1-4 units) in the high 3’s for a rate and term. Typical break-even point is between 2 and 2.5 years.
• Paying little to no closing costs rates are high 4’s (best for strategies for keeping a property under 2.5 years).

If you want to know where you stand and what you can do, schedule a time to discuss your lending needs with us today by emailing mike@thecashflowcompany.com.

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