Real Estate Today: Episode 2
Since the start of the Covid pandemic in March 2020, the way people work has changed and the types of homes people need have changed. Those changes have necessitated alternative financing options to meet the needs of the new buyer.
While many people transitioned to working at home, many lost their jobs or left their jobs for opportunities with more flexibility.
The problem is that traditional financing methods, like Conventional and FHA financing, are pretty inflexible when it comes to their lending criteria.
So how do you buy a home when you’re self-employed and don’t show a lot of actual income because you take write-offs on your taxes?
What about if you’re a full-time Uber or Lyft driver making good money but not collecting a W-2?
In today’s episode of Real Estate Today, Ryan and Greg interview Jim Dring with Quontic Bank to discuss alternate financing options for self-employed and Gig workers.
Ryan Cook: Hey, this is Ryan Cook. Welcome to another episode of Real Estate Today. I am the Broker/Owner of HomeSmart First Class Realty and I’m here with one of my preferred lending partners who does this weekly podcast with me, Greg Page. Greg, why don’t you introduce yourself and tell them what we’re going to talk about today.
Greg Page: Hey folks. Again, it’s Greg Page with First Class Mortgage Company. We’re going to talk about a couple of programs that I think may be of interest. We did mention the MI Buster last week. We’ve got some updates on that. And also with us, we have Jim Dring from Quontic Bank, who’s going to be talking about some of the QM products that we hinted at last week.
Review and Update of MI Buster Program
Ryan Cook: All right. There’re two quick things on that I want to… Before we really break into anything. One, you mentioned some changes to the MI Buster, which is the Mortgage Insurance Buster program… the “10% is the new 20% down” program. What are the changes that have happened… Even since we had this conversation last week?
Greg Page: Well. As we all know, we’re in a very fluid environment, things change on a rapid basis. So one of our preferred lenders rolled out a MI Buster program last week. And basically it allows only 10.1% down to avoid the MI. So you’ve got a client that’s buying a half a million dollar house, that’s $50,000 less cash they need to bring to the table.
Ryan Cook: Yeah. Adds up. Good.
Greg Page: It really does. And it also provides a better buying opportunity. They might be able to use those funds to buy a more expensive home or utilize it for renovations, whatever they may need, but an extra 50 grand in their pocket goes a long way.
Ryan Cook: Yep.
Greg Page: Yesterday afternoon, the lender rolled out a new program piggybacking on that, it’s now available for refinancing. So anybody-
Ryan Cook: That’s amazing because when you and I are doing a refi on my own property right now because my wife has dealt with my home not being fixed for long enough because we’ve put into growing the business and trying to help as many people as possible. And now my wife’s like, “It’s my time. It’s time to fix our house.” And so you’re helping me with that which has been fantastic. How would this program change things? How would it differ?
Greg Page: Well, again, as a real estate agent, you’d be able to reach out to your past clients and make them aware of this program. Because in some cases, they could be paying a couple hundred dollars a month on their MI insurance. And if they refi, they could save literally thousands of dollars a year. As a real estate agent reaching out, you’re letting them know that you’re not just kind of a one and done, “Hey, I sold you your house, thank you very much.” But you’re looking out for their well-being, their long term benefits and saying, “We have new programs through lender partners that we have with various lending organizations. This is a program surely you might want to take a look at.”
Ryan Cook: So every real estate agent out there… And this is the US across the whole country, right?
Greg Page: The US.
Ryan Cook: Yeah. That’s what I mean.
Greg Page: Yeah, yeah, yeah.
Ryan Cook: I just want to make sure, I didn’t want anybody say, “Hey, it doesn’t work in my area.” No it’s available everywhere and every real estate agent-
Greg Page: This is a nationwide program. Yes.
Non-QM Lending Options
Ryan Cook: Should be taken advantage of this opportunity to have those types of conversations and provide value to the agents. So the second thing you mentioned was Non-QM. Now we understand what that means, but remember a lot of our audience may very well not be real estate professionals and they don’t know what Non-QM means. So can you or Jim explain what Non-QM means and the value of it.
Greg Page: Sure. Well, we’ve brought Jim in from Quontic Bank to address that and why not let the professional talk about what they are and what they do. So, Jim?
Jim Dring: Thanks, Greg. Well, basically Non-QM; they’re loans that fit outside the box of conventional Fannie Mae, Freddie Mac, FHA. As far as Quontic Bank, I’m a wholesale account executive with Quontic. I cover basically New England. I do have some companies in other areas but primarily New England. And I can guarantee you that I am the only account executive that can tell you that we can do owner occupied, no ratio loans. We can also do stated income loans. And the reason… The first thing I’ll tell you is the reason we can do is because we have an exemption from the Department of Treasury because Quontic Bank is a CDFI lender. And what that means is-
Ryan Cook: What does CDFI mean?
Jim Dring: We’re a Community Development Financial Institution.
Ryan Cook: Okay.
Jim Dring: So the Department of Treasury has given us an exemption from the “Ability To Repay” rule and Dodd-Frank, in an effort to bring people that are sort of on the periphery. Let’s say, they’re self-employed, they have money, they have great credit but they don’t have the income, because they write everything off, to buy a house. So they allow us the exemption in order to bring those people into the marketplace. And we do it primarily through two products.
Product 1: No Ratio Loan
The first product is our no ratio. And it’s truly like a no ratio. I mean, when you’re filling out the application, you leave the income section blank and you leave the employment section blank. So we don’t ask, we don’t know what they do. We don’t want to know what they do. We’re making a lending decision based on the appraisal, the down payment and the credit.
And a lot of people say, “Wow, Isn’t that dangerous?” Well, I mean, the max LTV on that product is 75. So if you have someone that is putting down 25%, they have a 720 FICO score. How much risk is there? What’s the likelihood they’re going to walk away from that house? It’s pretty slim. If you look at a lot of brokers do loans with a 580 FICO score or 3% down FHA loan. Those are the loans that people going to walk away from. They’re not going to walk away from mine.
Ryan Cook: Yeah. So it’s a misnomer of people that this is sort of like what got us in trouble during 2006, ‘7 and ‘8 with the subprime loans. These aren’t really subprime and these are good borrowers, a lot down, but maybe they’re a business owner and they’re not showing a lot of positive net income because everything’s flowing back into their business, for example.
Jim Dring: Exactly. Exactly. And-
Ryan Cook: What other type of person is this a good program for?
Jim Dring: Well, on that particular program, we don’t ask. So I mean, it could be somebody that’s on a fixed income.
Ryan Cook: Yep.
Jim Dring: It could be somebody that just switched jobs and they’re not in the same industry or they had a job gap and they fall outside of Conventional. So a lot of times someone will stay in this product for a couple years and then maybe move into a Conventional loan somewhere down the road.
Product 2: Limited Documentation, aka “Stated Income”
The other product that we have, actually can go to 80 LTV, where No Ratio only goes to 75. To go to 80 LTV, we call it a Limited Doc. But what it really is, is a stated income. So a borrower… It typically works with self-employed person. The borrower does their own P&L. They literally can sit down at the kitchen counter with a cup of coffee, they do their own P&L. And that is the income that you use on the application. So obviously, you want to make sure that the income has to work because we do have to keep the Debt To Income Ratio (DTI) technically less than 50. I always tell workers, make sure it’s less than 40, but it has to make sense too.
Ryan Cook: We’re making sure here, just so folks, because we understand the lingo. So I’ll say P&L is a profit and loss statement. So any business really should be doing a monthly profit and loss statement. How many months back on a P&L do you need to see?
Jim Dring: 12 months.
Greg Page: So it’s the last 12 months?
Ryan Cook: So you just want the last year.
Jim Dring: Yep. Now you only have to be self-employed for one year, but you have to be in the same line of work.
Ryan Cook: That’s interesting because a lot of banks require at least two years of showing a profit.
Jim Dring: Yeah. For us. Nope. It’s one year, but you have to be in the same line of work for two years. So how do we validate that they’ve been in the same line of work for two years? We actually asked for a CPA letter on all of our light doc loans and the CPA letter just says, how long they’ve been self-employed, how long they’ve been in the same line of work. How do they file their taxes. It’s pretty straightforward.
That loan is about three quarters of a percent lower in the interest rate and you get a higher LTV. So we’re actually starting to do more of those because we made some adjustments in our pricing and we also made an adjustment in our LTV going a little bit higher. So with that, I can go to 80 LTV on a single family loan, our max-LTV and all of our products, if you’re a multifamily; three or four units is 70. I can go to 75 on a 2 unit.
Ryan Cook: All right. So LTV for the folks who don’t know loan-to-value. So if it’s a $100,000 property and you have 80% LTV, means that they had to put down $20,000 and you’re financing the other 80%.
Jim Dring: Yes.
Ryan Cook: Okay.
Jim Dring: And we do allow gifts for down payment and closing costs. And we do need reserves with this product. So if a loan is less than half a million, you have to have three months reserves. And when I say reserves, it’s principal, interest, taxes and insurance as reserves. If it’s over half a million, less than a million at six months, anything over a million dollar loan, you have to have 12 months of reserves with our products.
Ryan Cook: Is Quontic Bank the servicer or do you sell these?
Jim Dring: We do service them. But the loan itself usually gets… They do get sold usually within 12 months.
Ryan Cook: Okay.
Jim Dring: Yep.
Ryan Cook: Right. [crosstalk 00:09:12]. Greg is sort of quiet.
It’s An Opportunity For More Potential Home Buyers
Greg Page: No, no, I’m just thrilled to hear that the opportunity for people has been expanded again because as we all know, after Dodd-Frank in 2015, when these rules and regulations were put in place, it really limited the ability of a lot of people to be able to purchase homes and standard programs mean, in today’s economy, there are a lot of what we call gig workers out there.
And these are people that are driving Ubers, DoorDash, whatever it may be, starting businesses. I mean, there’s a lot of people who simply left their 9-5 to go out and find alternative ways to make an income. And the past regulations would have inhibited their ability to purchase a home. But again, having these types of programs, especially in today’s economy, we’re experiencing more and more people looking for alternative ways to derive income, be it like you said, the DoorDash, Uber drivers, business owners.
It’s a changing game. And again, as I mentioned at the beginning, it’s a very fluid situation. So organizations like Jim’s with Quontic Bank that are providing these alternative revenue lending platforms is a great asset obviously to our industry, but to your real estate agents. Also to-
Ryan Cook: But beyond that, we can make the introduction as to, these are programs that are out there, that everyone always has stuck in their mind they need 20% down to be able to purchase a home. And they don’t realize all the different programs out there to be able to do it. And with our changing economy and the type of jobs that people are moving to. A lot of the traditional platforms, people won’t be able to get financing.
So what Quontic has put together here; it’s offering people who are starting to go to those alternative type employment jobs, who they’re self-employed. But they’re working for, say Amazon, where Amazon’s always looking for delivery people and people starting to create their own business based on doing deliveries, whether it be of a Amazon product or food products, of driving people, as personal taxi services… Excuse me, on and on.
So this creates a whole other opportunity for people who did not think that they could purchase. Now it’s opened the opportunity for them to be able to do so. How would an agent explain a program like this to an end consumer? Like if they’re having a conversation with someone, what would be some maybe key things about that individual that the agent would go, “Hey, wait a second. I think I know someone who has the right program to be able to help you out.” Who would that person be?
Jim Dring: I can answer from our perspective, if a Realtor’s trying to pre-qualify somebody right off the bat. I mean, if you find out that their income is inconsistent, if they’re self-employed and… People are self-employed, they get it. They know that, hey, my income’s not that great because I do write everything off.
The first thing that pops into a lot of brokers mind is to do maybe a bank statement product where they add up the deposits over the last 12 to 24 months. And then they come up with the income and I can tell you, and Greg can tell you as well, being a broker, there’s no nightmare for a broker because of the fact that over 24 months, you know there’s going to be bounced checks, you know there’s going to be large deposits; with us instead of doing all that and going through two years of bank statements, the borrower does their own P&L; that’s it. So I mean, the difference in the streamline-
Ryan Cook: And by the way, that P&L is certified by their accountant?
Jim Dring: It is not. The only person that’s-
Ryan Cook: The accountant has the letter that says you’ve been doing this work for at least two years but the P&L; it’s really on your honor sort of thing.
Greg Page: Unaudited. Yes.
Jim Dring: It’s unaudited. The borrow does it themselves. The actual accountant that writes the letter, doesn’t even have to know about the P&L, they never see it. They don’t know anything about it. All they’re doing is saying, yes, this person’s been self employed for however long, year, two years. They file as an S Corp report, they file a Schedule C. That’s all we’re looking for from the accountant. We just need some verification that yeah, this person really is self employed.
Is This A Scam?
Ryan Cook: All right. So for the end user out there, the consumer who’s listening to this and they’re saying this sounds too good to be true. This sounds kind of scammy. What would you say to someone who says that?
Jim Dring: I can assure you, we’re closing loans every month. We’re busy, we’re doing millions and millions and millions of dollars worth of loans every month. I’ve been doing it with Quontic for 14 months. Every month, we’re signing up new brokers and closing more loans. People are skeptical in the beginning because they hear about Dodd-Frank and how can you do that now.
What I do is when I sign up a broker, I send them all the information. We’re a CDFI lender. This is how we’re doing it. It’s spelled out in a three page article that goes through everything step by step. We’re absolutely… I mean, we’re FDIC insured bank. So why would we ever do anything that would jeopardize that?
I’ve been doing this since 1992. I started doing when we were doing handwritten 1003’s. And I can tell you, we close loans.
Is The Process Any Different?
It takes 30 to 45 days like a normal loan process. But we do close loans. And I will say most of our customers, most of our borrowers; they’re really happy because before they sit down with Greg, the day before they were told by somebody else you can’t buy a house and they sit down with Greg and Greg goes, “Wait a minute, I’ve got this product. You can buy a house.” They’re like, “What?”
What About The Interest Rate?
The rate’s a little higher. I mean, our floor rate is 4.75%. So it’s a little bit higher than you’re going to get but people are just happy to get a home. They know they’re going to pay a little bit more. And to be honest, when I started the mortgage business and Greg probably said the same thing, rates were 10%. So for somebody to come in-
Ryan Cook: Yeah, my first home I bought in 1999 was 10%.
Jim Dring: Yeah. A stated income loan at 4.75%. I’ll take that all day long.
Jim Dring: It’s either that or I rent for the rest of my life. So most borrowers are happy. I mean, they get the fact that the rate’s going to be a little higher… Like I said, it’s-
Is There Anything Else That’s Different?
Ryan Cook: Outside of the documentation, it’s a little bit different. Is there anything at all that’s different about the process?
Jim Dring: Well, we do verify the down payment. So if there’s a hangup, I would say the hangup is in the source of the downpayment. Because a lot of people who are self-employed, their bank statements are a little funky because they’re not reporting a lot of income, so we have to document it. So that sometimes takes a little bit of extra effort. But the rest, it’s pretty simple.
We do have some funky forms that we have people sign because we’re a CDFI lender but that’s just a really a matter of having somebody sign it. It’s nothing crazy, but like anything, appraisals take a long time to get in. So that’s always factored in. Right now, everybody’s busy with appraisals. They’re taking, sometimes three weeks to come in.
So that is a little bit of a hold up. But other than that, it’s pretty straightforward. I mean, we’re taking out of the equation, the most difficult part, which is the income. I mean, we’re just completely removing it with a no-ratio product. So almost saying that process is simple, it can be a little bit onerous because of the nature of the business. Back in 1992, I started writing handwritten 1003’s, the business was a lot easier back then than it is now. Now, there’s so many moving parts that you never could have imagined back then but the process moves along. We close loans. I’ve had one loan rejected in the last 14 months.
How Successfully Do These Loans Close?
Ryan Cook: Well, that was my next question is how many have fallen apart?
Jim Dring: I mean, we have appraisals. Like everything else, appraisals have come short sometimes.
Ryan Cook: Sure.
Jim Dring: I’ve had borrowers changing their mind. I’ve had borrowers change their mind at the closing table. That’s just the nature of the business. I’ve had one loan that was actually turned down. It was a person that, about five years ago fell behind in their mortgage. So they went into some sort of forbearance agreement and then they came out of it. And then last year, they went in another forbearance agreement. We can do it if someone’s coming out of a forbearance agreement, but we don’t like somebody to come out two forbearance agreements. So that’s the only one that I have that was actually turned down.
Ryan Cook: Sure.
Jim Dring: Like I said, mostly, if loan doesn’t go through, it’s an appraisal issue. It’s just something like that. But most of them come through. The other thing is we do a lot of refinances.
I do a cash-out refi, no-ratio up to 70 LTV. So good. And we have no limit on the amount of money that somebody could walk away from a table with.
I did have a gentleman, he’s a former NFL player. It was a Florida deal. The guy’s house is worth $2.5 million dollars. He did a cash-out loan at 70% LTV, walked away from closing to like $1.4M, $1.5M. We don’t ask really what you’re doing with it? We just give a letter and every letter comes back the same. It says for future investment, but we have no limit on the cash out.
So you can walk away with a million dollars if you have that much equity. It’s a great product. Apparently this gentleman wanted to take that money and buy other properties, buy commercial properties. And that’s what he did.
Greg Page: And Jim, on the forbearance issue, I believe they have to have made three payments.
Jim Dring: Correct.
Greg Page: Yep.
Jim Dring: I have one right now. It’s a $1.2 million loan. The guy came out of forbearance in September. So I had October’s payment, November’s payment, December’s payment. We’re good.
The Value Of Working With Knowledgeable People
Ryan Cook: Wow. I mean, these are all the things that for the average consumer, has no idea about this type of stuff. Most Realtors and most real estate agents don’t know about these types of products as well, because it’s… It really is important for an agent to be well versed in the financing side to understand different programs out there to make those introductions. Because there may be a way to help.
We’ve had plenty of agents come in, who were trying to put something together and the person wasn’t able to qualify; probably a lot of time self-employed and understanding if there are alternate programs out there that could help them is another way to be able to serve your clients and help them reach their goal of either being a homeowner or being able to refi that. Like myself, refi the house so we can actually complete the remodel. Without knowing about these products, sometimes it just limits your ability to be able to help your clients.
Greg Page: Well Ryan, after the 2015 regulations rolled out, it all became kind of cookie cutter. And everybody fell into that mold where they had to fit inside the box. And the box is widened now. I mean, the box has opened up. And as I said earlier, it’s a very fluid situation. Things are changing daily where I’m getting emails just on the rate.
We’ve got all these lenders and I get two emails a day. Rates are good. Rates are bad. It’s moving very, very quickly. And we all can agree, I think, that in 2022 with inflation going the way it is, we are probably going to be seeing some rates going up. That said, they’re still historically low. I mean, I sold 15% interest rates at one point, back in the ’90s. And if you need a home, as Jim said at 4 ¾%, it’s still better than renting.
Ryan Cook: Still. That’s right, 100%. So Jim, in wrapping this up, do you just want to give a quick summary of what these programs are and what are the the big bullet points that people need to know about them?
Jim Dring: Well, the big thing and what we lend on is credit and down payment. That’s pretty much it. We do source and season to down payment. And the thing about us too, is we only ask for 30 days bank statements. So we don’t go back 60 days, 90 days and a lot of confirming letters. We just want 30 days.
I tell brokers if they have enough money in there to close one account, don’t give me five, just give me one, try to keep it as simple as possible. But again, we’re looking at 720 FICO score to get the max LTV but our minimum FICO score is a 680. So any broker or Realtor, just keep that in mind because the first thing we look at is the credit score and you do have to have three trade lines open and active for 12 months.
Ryan Cook: Okay. Fantastic. So that is our show today, Real Estate Today. We appreciate our guest Jim Dring with Quontic Bank talking about some alternative programs for folks who are self-employed or gig workers, either for the purchase or refi on their existing property. Greg, you have any parting words for us today?
Greg Page: No, I’m looking forward to next week. We’ll have another special guest and we’ll keep that under wraps. So, until we hear.
Ryan Cook: Oooh… I don’t even know who it is. It’s really under wraps. Fantastic. I appreciate everyone and thank you so much for paying attention. If you want to, please subscribe to our blog post or our YouTube channel where you can get regular updates on our Real Estate Today podcast. We look forward to seeing you again and thanks so much for participating.
Greg Page: Thank you everyone.
Jim Dring: Thank you.