Specialty Loans: Finding the Right Option

A realtor friend of mine has a card on his desk from years ago. It’s an ad for a mortgage lender, long since out of business. On it there is a reflective sticker next to the words, “If you can fog this mirror, I can get you a loan.” Banks have failed, guidelines fluctuate frequently, and Senators Dodd & Frank certainly imposed new rules to housing’s old games. For those whose lives reside outside the standardized boxes checked by underwriters everywhere, getting a mortgage these days may seem at the best invasive, and even quite possibly offensive.

Thankfully there are more options these days than those immediately following The Great Meltdown, when the pendulum got stuck on stupid. Mortgages are based on four building blocks: income, assets, credit, and property. Like a game of Jenga, lenders balance these together in order to create your home loan. While all four of these must be in some way measured in order to be compliant with federal and state regulations, alternative lending options allow for more flexibility than the standard Fannie Mae or Freddie Mac qualifying basis. Of course, the more creative the financing, the more expensive it can be.

Bridge loans have been around for quite a while – the idea of borrowing to buy before you sell is not a new concept. (I always picture them with my arms up, one elbow on the current house, the other on the new house, hands touching to make the bridge.) Today’s options range from those where one simply excludes the payments on the house to be sold, gets a small loan from one to give the down payment on the other, and there are even some where only the equity of the two properties concerned is the primary qualifier. Usually folks still have to make payments on both properties until one is sold, though a few options exist where the interest can be deferred until such a sale occurs (for a period of time, at least).

For those of us who live mainly off our asset portfolio, renewed programs are in the marketplace which look to those accounts to qualify. “Asset Depletion” is a lending term for just such a program. In this case, one’s qualifying income is calculated based on what liquid, accessible funds are left over once the down payment, closing costs and necessary reserves of a transaction have been taken into consideration. Each type of asset held – from checking, to savings, to stocks, bonds and retirement accounts – can be valued at different levels and for various historical lookbacks. The intent here is to create reasonable continuance of one’s ability to pay one’s obligations based on the funds accessible. Windfalls or recent liquidity events may not work for this type of program. 

If you are looking for quick cash without selling openly traded accounts, you may want to check out margin loans. These are typically done with your financial advisor directly, and each trading house calls these by a different name while qualifying them by different standards. The idea is that you are lent money secured against managed funds that could be sold if necessary to repay the debt. Thus, you are not creating a capital gains event by selling the fund (or stock), nor do you have to qualify within the standardized mortgage blocks. Even though these funds are not secured by property, you may be able to still have tax advantages with this structure. Be careful though, as volatile markets could create forced sale requirements.

Investor types may also want to consider a “Debt Service Coverage Ratio (DSCR)” loan. Newer to the marketplace, these are loans that qualify to the property itself only. The other, primary obligations of the debtor are not taken into account as these are for investment properties only. Title can be held by individuals, foreign nationals, or LLCs. The loan to value, amount down, and terms will vary not only according to property type, but also by credit score and the actual amount of debt ratio that is covered by the property. Think: Does it easily cash flow or not?

The majority of options I’ve covered thus far are for folks whom may not document a lot of income on their tax returns. However, there are plenty of alternative sources of income that do show on taxes which still need particular consideration. Income from trusts, royalties, pass-through entities (LLCs, K1s, etc.), or notes receivable all have their own subsets to qualification use – even if it is taxable in a standard sense. The best thing to do in any situation is to know your own situation, since most any loan will require some established assurance of repayment. 

Lending will continue to change and adjust as the market gives us demands, dips, and delineation. Options exist at a broader level than the TV ads suggest, and usually at terms different from those in that enticing pop-up you’re tempted to click. The most effective way to find your best option is to interview based on your needs and your parameters. Remember, the most creative option is typically not the least expensive – and the right professional will always ask you for more input instead of simply laying out one option. Real estate is one of the best ways to create wealth in this country, and home is one of the most important things we build together.