Why can’t I qualify for a loan?  I get this question from borrowers a lot these days, with the tighter lending standards and the demise of no doc loans.  In addition to credit factors and loan to value issues, one of the major issues today is the DTI ratio.  I believe it is important for borrowers to have as much information as possible about their transaction, and to understand some of the issues they may face in obtaining a loan.  Here is a quick rundown on DTI ratios, how to calculate them, and some ideas to reduce yours.

DTI stands for debt to income.  The debt to income ratio is the ratio of your income to your debt.  Typically, this ratio needs to be at 45% or less, although there are a number of circumstances that will allow for a higher ratio, sometimes as high as 60%.  The calculation is not hard to figure. 

Take your annual income, this is pre-tax, not take home, and divide it by 12.  This is your monthly income.  Next, take all of your monthly debts, car payment, property taxes, insurance and the minimum payment due on your credit cards (you do not need  to include utilities, etc.) and add them up.  Divide your total monthly debts by your total monthly income and you have your debt to income ratio.  So if you make $72,000 a year on a salary ($6,000/month), and have $3,000 in monthly debt, your debt to income ratio is 50%.

When calculating your DTI, you can use your existing mortgage payment to get a rough estimate.  When we calculate it for home loan purposes, we are going to use the new, proposed loan payment.  If you want to estimate what it would be, you can use our online mortgage calculators to get a good idea. 

If your DTI is high, chances are you will have a tougher time qualifying for a loan these days.  To reduce your debt to income ratio, you typically either need to reduce your debt, or increase your income.  If you have a car loan, or multiple car loans, refinancing those loans can reduce your monthly debt.  If you are a member of a credit union, often times you can get pretty good terms.  If you have liquid assets, paying down your credit card balances will also reduce your debt. 

These days, another option for reducing your DTI is getting your property taxes reduced.  This can be a big one, with property values falling, you may be able to save yourself a decent amount of money each month by doing this.  You typically need to contact your county assessor’s office, and they will let you know what paperwork you need to submit.  Talk with a local realtor, see if they will pull comps or put together a market analysis for you to substantiate your homes current value.  If you are in the area, you can contact my wife to put together a market analysis for Contra Costa real estate.

Hopefully this has been informative, please feel free to contact me with any questions on this subject, or any other related to real estate finance.

How do you know if a refinance is a good option for your situation?  The best way is to talk with a mortgage professional.  By doing so, you can look at many different options that fit your particular situation.  Your financial position and your credit rating will have a direct impact on the type of refinance terms you can qualify for.  By talking with a professional directly, you will have accurate numbers and will be able to compare the cost of refinancing to the benefits. 

You can also use our mortgage calculators online to see if a refinance has the potential to better your situation.  You can play with the numbers, rates, terms, etc. and have a good idea of what would be a benefit for your situation.  If you are in an adjustable rate mortgage currently, now is an excellent time to explore a fixed rate solution.  Rates are once again near historic lows, and even though lending standards have tightened, the climate has created a great opportunity for credit worthy borrowers to take advantage of.

In general, you are going to have costs associated with any refinance. This is known in the business as points and/or closing costs, where every point is equal to one percent of the total amount of the loan.  There are options available for no point, no cost refinance transactions, but you should compare the terms of these loans to the terms on loans that do carry fees.  Typically, you are going to end up with a higher rate if you choose a no closing cost type of loan. 

Additionally, it may be beneficial to look into paying additional points to lower the rate.  Many borrowers do not see the benefit of paying points, but it is a very good option for many situations.  For example, if you are refinancing into a 30 year fixed mortgage, and you plan on staying in your home for a period of time, it may be beneficial in the long run to pay additional up front fees in exchange for a lower interest rate and monthly payment for the life of the loan.  Your mortgage professional can lay these numbers out for you so you are able to make the proper, informed decision that meets your needs.

As always, feel free to contact me directly with any questions.  If you are a California home owner looking into refinancing options, I can help find the best solution for your needs.

Do you have collections showing on your credit report?  Are they dragging your credit score down?  Even if the collections are legitimate, there are steps you can take that will minimize their impact on your credit score, or even get them removed altogether.

First things first, you need to identify who is handling the collection account.  This is normally not the same organization you originally owed the debt to, but a third party.  These third party groups purchase blocks of collection accounts for pennies on the dollar, and then attempt to collect on them.  This can work to your advantage.

On your credit report, you should be able to gather some important information.  You will find the contact information for the collection agency.  This is either under their name on the actual collection line item inside your report, or it is at the end of the report.  Depends on the report.  You will also find the dollar amount originally owed.

Once you have the dollar amount owed and contact information for the collection agency, give them a call.  Your game plan is to get this item removed.  It’s going to cost you some money, but if you do it properly, your collection will be removed.  When you call the collection agency, you want to offer them a portion of the actual debt.  They bought this debt for less than face value, many times you can settle for about half of what is owed.  That is only half of the battle, though.

In addition to agreeing on a dollar amount to settle the debt, you also want an agreement from them to remove the item from your credit report.  You want them to agree to this before you send your payment in.  You also want this agreed to in writing.  Before you send your payment in.  If you don’t make this specific agreement, they will normally just report to the credit bureaus that your collection account is paid.  You don’t want it marked paid or settled when trying to repair your credit, you want it removed.

These collection agencies will not always be willing to remove the item from your credit report.  When you run into this situation, you have a couple of choices.  If you are interested in credit repair for the long haul, it is still best to get the account settled and paid.  If they refuse to remove the item in question, negotiate on the payoff a little harder.  Remember, they bought this collection in a large block of other collections for a fraction of what you owe on it. 

If you are looking to repair your credit for the short term, and I see this a lot in home loan applications, you should not pay your collection off if they will not remove it from your credit report.  This is especially true for older collections.  In the long run, paying these collections off will help your credit, but in the short term, it will not.  If you have a collection that is 4 years old, it is impacting your credit score less than if you were to pay it off.  Huh?  Let me explain.

Credit scoring weights the most recent 12 months of credit history heaviest.  The older the item on your credit report, the less weight it carries.  If you have a collection that reported 4 years ago and you pay it off, your credit will suffer short term.  The reason is that the collection agency will report to the credit bureaus that this collection has been paid.  It sounds like a good thing, but it is not.  It is a new item, very recent and weighted heavily.  Even though you are taking care of a debt, it is still a collection being paid.  The credit bureaus will ding your score because this is a new item being reported associated with a collection account.  Your credit will actually be worse than if you just left it alone!

With that being said, you should still pay it at some point, and often times this can be done through escrow at the closing on home loans.  This way, you improve your credit report for the long haul, while not shooting yourself in the foot short term (since you have already obtained the loan you are after when you pay this item).

Hopefully this has been helpful, check back in often for more great articles!

With the tightening money in the residential sector, a number of brokers are entering the commercial loan market for the first time.  While it is a great market to be in, there is a learning curve, and packaging requirements are different than for a residential transaction.  Below I will outline a general commercial loan package and what you should be including.

The description “commercial loans” is blanket terminology for a wide variety of properties and transactions.  Each individual deal is going to need to be structured a little differently, but if you put together the following, you should have a good base to work from.  First off, is this a purchase or a refinance?  If a purchase, you will need the purchase contract and proof of deposit money.  If a refinance, you should have a copy of the existing loan statements and notes.

For the property, you should put together a section of your package to include a description of the property, including zoning, how many units/tenants, floor plan etc.  With the floor plan, you should also have a breakdown of the building into gross rentable area, net rentable area, parking, vacant space and size of the building and parcel it sits on.  Finally, include the most recent appraisal you have for the property and an overall description of any deferred maintenance or environmental issues.

Next you want to address the income aspect of the building.  You need a current rent roll, copies of all leases/rental agreements and at least 2 years of profit and loss statements, plus a year to date profit and loss statement.  You should also obtain a balance sheet for the operating entity, and if there is a property manager, a copy of the management agreement.  Finally, you should also get a projected cash flow for 3-5 years on the subject property.

Financials on the guarantor as an individual (even if held in a corporation or LLC) are also important.  A personal financial statement, balance sheet and last 2 years of tax returns should be collected.  In addition, you should take a basic 1003 and have a recent credit report.

Finally, you want to tie up any loose ends, if there is a tenant that occupies more than 10% of the net rentable space on a large building, you should ask for a financial statement for that tenant.  Often times you will also need a payment history for each tenant, up to 3 years.  A good breakdown on the maintenance costs is also a good thing to have.  It should be outlined on the profit and loss statement, but I like to also have copies of any contracts they have with the maintenance companies.

Once you have gathered this information, you should put together a clear and concise cover letter.  This cover letter should outline the current situation, the need for new financing, and the use of those funds.  You should also lay out very clearly the loan to value, net operating income, debt coverage ratio, debt service and pre tax cash flow.  Put together a table of contents so that your lender can find the supporting documentation in your package.

In putting together a commercial loan package, these are the pertinent items to have.  Having all of this information upfront will speed up the process, and help your transaction go smoothly.  If you are looking for a hard money commercial loan, this is still a good overview of what you should gather, although not all hard money lenders are going to want or need all of the information.  Additionally, you can often times obtain a hard money commercial loan without the debt coverage required by an institutional lender.

Hopefully this has been informative, if you are in the market for a commercial loan, please don’t hesitate to contact me directly.  Good luck!

100% financing is still alive today.  If you have good credit, good income and are purchasing a home you are going to live in, there is a good chance of a loan being available to fit your needs.  You generally need to stay under the conforming loan amount, $417,000 today, potentially in the process of being raised to just under $730,000, at least temporarily.  Good news for aspiring homeowners, feel free to contact me if you would like to explore these options.

Investment property financing to 100% is a bit more tricky.  Most conventional lenders are not lending 100% on investment properties today.  In order to obtain this type of financing, you need to look outside the box.  Hard money is a very good option, even if you have excellent credit.  It is possibly the only option today.  There are a few ways to structure your deal that will enable you to obtain a purchase money loan with no down payment.

The first option is to look at a cross collateralization.  Cross collateralization is the process of encumbering multiple properties to secure the loan.  For this to work, you must own other property, and you must have equity in that property.  Instead of putting money down, you pledge that other property and a blanket lien is recorded.  You do not have to refinance your other property, if you have loans against it, they are not impacted, the lien is recorded subordinate to that existing financing.  But what if you don’t have other property, or the other property you own does not have enough equity in it?

Option number two is to look at a seller carry back.  A seller carry back is where the seller, instead of taking the full purchase price, agrees to hold a loan for a portion of the balance.  For example, if you are buying a property for $100,000, and the seller is willing to carry back $40,000, you would take a first loan out of $60,000 in first position, the seller holds a loan for you at $40,000 in second position and you own the property.  One of the benefits of a seller carry back is that you can often negotiate pretty good terms.  I’ve seen seller carry backs that call for interest to accrue, but not be due, until the term of the loan is up.  Many different options to explore if you have a seller willing to work with you.

A third option is a hard money rehab loan.  If you are buying properties under market value and rehabbing them to sell, this is a decent option.  If you are buying bank owned properties, you are not going to get a seller carry back.  There are rehab loans available that will finance up to 100% of the purchase, plus up to 75% of the after rehab value.  They typically have a 6 month term, roll all the fees and interest into the loan and have no prepayment penalty.  You also will typically get those first 6 months payment free, as the payments are written into the loan amount.  These loans are more expensive than conventional financing, but allow you to buy, rehab and sell a home using other people’s money.  The requirements on these loans are more stringent than most other hard money loans, you need a credit score in the high 600’s, and need to have liquid assets available, typically $20k for every $100k you want to borrow.  You can go to this link to find out more about these rehab loans.

Those are the best ways to finance an investment property with no money down.  I hear rumors of some private investors willing to lend based on the appraised value, but I don’t know anyone actually funding those types of transactions at this point in time with the down real estate market.  If you know of someone actually lending in this manner, please drop me a line, I would be curious to know who they are.

I will end this with another option for acquiring property with no money down.  These days, with the foreclosure problems, some investors are able to take a property subject to the existing financing.  This could be a good option, you would need to bring that financing current and service it, but if you find a situation where you can acquire a property subject to the existing financing, that is a pretty good way to get in.

Hopefully this has been informative, please come back often.  Good luck in your endeavors!