borrower lives in the property
yay! we love owner occ loans
Here are the rules for submitting owner occupied consumer purpose home loans to Capella Mortgage. We follow all RESPA, TILA, Dodd-Frank, ECOA, Fair Housing and every other law when we make our higher priced mortgage loans. Some in the industry call these AltQM loans, but you are usually dealing with a very large institution that treats these loans more like GSE loans, rather than private money loans.
With Capella Mortgage, you get the best of both worlds. We are a true private money lender so we can move quickly to save your customer's deal - whether it is purchase or refinance or cash-out - or even construction. The last thing we want is for your customer to lose his large amount of earnest money because the traditional lender cannot underwrite and close in the alloted time period.
So, let's go over the rules:
down payment
MINIMUM DOWN PAYMENT IS 20%
Down Payment is probably the single most important factor in determining if we can make a consumer purpose loan or any other type of hard money loan. Private money transactions for owner occupants require a larger down payment than traditional loans, and the minimum is usually 20%. The reason is that Dodd-Frank limits the interest rate that can be charged for a consumer purpose hard money loan to 6.5% over APOR. For all of 2018, 2019, 2020, and so far, 2021, the cap has been 9.5%. Therefore, an owner occupant will receive a rate of approximately 9.5% with a 20% down payment. There are very few situations where we have given a waiver for the 20% down payment, so unless the borrower owns another property free and clear, you should expect that your customer MUST have the 20% down, plus the closing costs, plus at least 3-6 months of reserves.
WHAT ABOUT MORE THAN 20%
Conversely, for customers who are putting down more than 20%, their interest rate will be lower than 9.5%. Based on our rate sheet, the loan size, the LTV, the credit profile, and the property condition, the rate could go all the way down to 7%. So based on the LTV (the amount of down payment), and the remaining factors, the interest rate for an owner occupant will be between 7% and 9.5% as of June 2021.
WHERE IS THE RATE SHEET?
To calculate the approximate interest rate for your customer, without taking into account any of the special circumstances for your customer, click here.
ability to repay
YES - all borrowers (for all loan types) must meet Ability to Repay as defined in Dodd-Frank. THERE IS NO SUCH THING AS "STATED INCOME" FOR OWNER OCCUPANTS.
However, we are more flexible on our interpretation of HOW to prove ability to repay. Whether we use bank statements, lots of bank accounts, cash on hand, W2's, paystubs, tax returns or a combination of all of the above, if there is a commonsense way to prove what your customer's average net income is, then we will do the loan based on our different ratio criteria.
Of course, we are going to review the transfers from other bank accounts, and the way the borrower pays his bills. Dodd-Frank has specific steps that we must go through to independently analyze income.
For example, if your borrower has been doing the same thing for 20 years, let's say "landscaping", and he started his own company 18 months ago (so he does not qualify for a traditional loan), and his bank statements show that he has 65 customers that each pay $100 per month for landscaping services, and he has had those customers for the past 12 months, then it is logical to state that his gross income is about $6500 per month.
BUT:
- does he pay others?
- does he buy tools every month?
- what did his tax return show his business made on the last tax return?
We analyze all of those things together and determine his gross income and his disposable income and then we decide if the loan will work for this borrower.
If the borrower is buying a condo for $138k and putting down 20% then does his mortgage payment (PITI and HOA) equal approximately what he has been paying for rent for the past two years?
Putting all of the data together, applying common sense and flexibility in how we look at the situation, gives us the first YES or NO in the process. By using his client list, his bank statements, and his most recent tax return, cou.d we meet the Ability to Repay 43% maximum ratio for a qualified mortgage? Yes, in this case I think we could.
credit profile
score
The third important factor to analyze on a consumer purpose owner occupied home loan is the credit. Not necessarily the credit score BUT how the borrower uses credit - the whole picture. We have made many loans to owner occupant borrowers with 400 credit scores that have performed magnificently. The question is….why is their credit 400? Is it because they pay cash for every single thing and don’t use credit? To us, that would be a better borrower than one with a 600-credit score who pays late all of the time. So, we look at the whole picture: how they use credit, what is on their credit report, what type and how many late payments and collection accounts do they have, how much money do they make, how much is left over after making their housing payment, how often they travel, what is the likelihood that they can refinance out of the hard money loan, what type of work do they do, does their spouse bring in income, are there other members of the family that contribute to the household? All of these details create the big picture and that is how we will make our decision.
background check
Yes, every mortgage lender uses tools to check the background, occupancy, known relatives, and public records of borrowers. So do we. It is always best to tell us the complete set of facts in the Loan Summary, no matter what they are, and let us decide if this is a loan we can do. For example, there are a lot of rules in the "Fannie, Freddie, FHA" world that we do not use. There is no need to say that the property is going to be an investment property just to get a hard money loan. There is no need to hide the fact that the borrower is buying the house from his ex-ex-wife. If it makes sense and the price makes sense, just tell us as we are going to find out anyways. We get phone calls every day from borrowers that are afraid to tell us what is in their background, because they have been told that they will not be able to get a loan, and about 70% of the time, it is not a factor that is relevant to their particular situation.
collections
If you read our guidelines, you will see that we expect that a borrower does not have more than $2000 in collections. However, that does not include medical collections. If a person gets sick, or has a disease, and they end up with medical collections, does that mean that they cannot make a house payment? We don't think so. However, one tried and true sign of a borrower who will not make his mortgage payment, is a borrower who doesn't pay his cell phone bill or his water, electric, or gas bills. Those provide the essentials of life.
do not use credit repair
This cannot be emphasized enough. If your borrower has been through credit repair, we will notice it, we will figure it out, and we will most likely turn down the loan. Trust me, it is easy to spot someone who has been through credit repair and if we do not have the raw factual data in front of us we cannot adequately gauge whether or not the borrower will make his mortgage payment on time. We would rather underwrite a borrower with a 400 credit score, than we would one who has a fixed up score. If your borrower already did credit repair, then get us a copy of the old credit report BEFORE the credit repair.
what's the rate, term and fee
rule #1: let us discuss rate, term and fee with your borrower
You can be on the phone with us when we discuss this with your borrower, but we are real experts at quoting rate, term and fee on hard money loans. There is a LOT that goes into our manual underwriting and quoting and there are a ton of rules to keep in mind when negotiating with the borrower. Additionally, we are very experienced in showing the borrower the true cost difference between the loan they wanted to get and the hard money loan they are going to get. You would be very surprised at the actual price difference between a rate of 5% with PMI and a rate of 9.5% with zero PMI for a 6 month period. It is almost always lower than the amount of earnest money at risk.
Let's face it: borrowers only entertain hard money when there are very important reasons for doing so: and sometimes it is a matter of life and death, or nearly life and death to them. Here are some examples that we see almost every month:
- Losing $50k in earnest money to a seller who wants to sell to the backup buyer with a higher price than what your borrower is paying;
- Needing cash out because the roof is destroyed from the tree that fell on it, and the property was uninsured because it was paid off;
- ITIN borrowers who were told they could get a 4% mortgage, but they don't meet the stringent requirements;
- Borrowers who are going to have surgery and have to pay the deposit in advance;
- Borrowers who are upsizing and the underwriter is averaging their income from two years ago and their house already sold;
- Borrowers who are buying a property and putting down so much money that the loan amount is less than traditional lenders will accept. We see this one a lot;
- Borrowers who are sick and tired of the endless requests for documents and underwriters who cannot make up their minds;
- Lease option buyers where there is something that doesn't meet the GSE requirements;
- Borrowers who do not report enough income on their tax returns, but have a cash business that has tripled in the past 11 months.
Over 50% of our business each month is from owner occupants. We love these types of loans because it helps the borrower accomplish what they want to accomplish RIGHT NOW.
term of the loan
There are so many options here, but you have to figure out "term" in conjunction with "ratios" because you can do a 10 year fully amortizing loan, or a 30 year, due in 5, or a 30 year due in 7, or an interest only bridge loan, or a 12 month construction loan, or a 15 year fully amortizing. Every option is based on what Section 35 of the Dodd-Frank Act allows, so to simplify it, we ask the borrower "what do you need this loan for?", "how long do you need this loan for?",
fee - how much does it cost?
The fee is pretty standardized for owner occupants. Depending on whether or not your borrower is getting a qualified mortgage or not, the fee for the loan can be between 2 points and 5 points, with a minimum of $3595, depending on the loan amount. For example, a loan of $150,000 might have a fee of 3 or 4 points, plus the processing fee, which goes to the submitting broker. The processing fee can be up to a maximum of 1 point to the submitting loan officer's broker. As the broker's volume increases, along with the quality of the files, the total fee can be split in different ways between Capella and the broker. The loan officers have contracts with their brokers that state how much they can be paid, but many loan officers have a minimum fee that must be paid per loan. Since hard money is a different type of loan, brokers can have - per Dodd-Frank and the CFPB - different splits with their MLO's based on loan type.
First of all, we can only pay your broker. The broker is the one who is approved to submit loans to us.
Secondly, manually underwriting a loan, and holding it in portfolio for up to 5 years has a high cost of maintenance as no other fees can ever be charged to the borrower (per Dodd-Frank),
Second, the fee that is paid to the broker is going to depend on volume (number of loans closed previously with Capella Mortgage), execution (how sloppy or accurate are the quality of the submissions), fraud score (how many fraudulent type of loans come from this broker shop), and loan amount.