Rate Shopping...Is That Your Lowest Rate??
Article
I've often said that if I had a dollar for each time I am asked during the year...
'So...what's your lowest rate?' A mortgage professional can tell that a client is shopping rate only. Since we work with clients all over the country and can't see you on the phone, we can tell by the questions you ask and the answers you provide.
Is it a purchase or refinance?
How much did you invest?
How long have you owned the property?
How long do you plan to keep it?...and so on provide invaluable pieces of the puzzle to help us help the client to obtain the best financing possible. Albeit the rate is important, if you get into the wrong program the rate can become secondary.
Let's start with a refinance... Just today I received a call where the client would like to refinance a property he purchased just 4 months ago. Suddenly, the property is worth twice as much as he bought it for and he is looking to get $800,000.00 cash out when he just invested $160,000.00 initially. Sound fishy?? Well, it is and that is the way an underwriter looks at it too. Most lenders require a minimum of a year's seasoning on a loan or purchase, even if you paid cash, before they will allow a refinance on a given property. It makes sense when you think about it...they want to see how well the property will perform with the new owner to insure they are a capable (translated 'profitable') operator that they can entrust to make the payments. So even with the lowest rate, this scenario could not effectively service the debt or meet lending guidelines.
Debt service is another issue with all loans. I know we're in for a challenge when I ask...
"What is the NOI (net operating income) on the property" and the borrower launches into an illustrious speech about how great the property's gross income is and how wonderful the property performs. About the third time I try to interject only to hear the sound of crickets or more of his wonderful, overinflated, accolades...I know we are headed down a bumpy road. The property must debt service the loan and if it can't debt service, then even the lowest rate in the world can't help.
Another one is the client who is looking to 'flip' (buy and sell in less than a year) property. I may have a program with the lowest available rate of anyone in the country but if it carries a 'step down' prepayment penalty, he may end up owing much more than the 'low rate' could ever save him when he goes to sell that property during the prepay period.
Oftentimes we get the client who has been paying for several years on an 'owner financed' property and is looking to get permanent financing through a conventional product. I had one last year that the lowest rate definitely applied to. The client was in his 70's and had owned the property for many years.
The 'owner financing' was designed to keep the former owner 'fat and happy' with a 10 year prepayment penalty and 10% interest rate with a 15 year amortization. Needless to say, he saw this elderly gentleman coming and really took advantage of the situation. This client needed and more than deserved the very best terms possible, particularly because of the less than favorable 'owner terms'. I wish I could have been at the closing (it was out of state) when the client signed the papers for the new loan we provided with a 25 year amortization and 5% rate. It nearly doubled his cash flow and got him the cash out necessary for the property improvements he had wanted to do for many years.
Cash flow is the most important thing to the majority of our clients. I often tell new investors that it is much easier to have a 25-30 year amortized payment than a 15 year amortized payment. If there is no prepayment penalty, you can always apply some additional revenue to the principal without spending the 'rainy day' fund when the market changes, as it did in 2008. Our goal is to put the client into the best product for their needs, which doesn't always carry the lowest rate.
If you are an experienced investor, with excellent reserves and strong resume, lenders will compete all day long to get you the lowest rates. Take that same investor who is just coming out of the recession with a property that was built in 2008, failed to ramp up for a couple of years due to the economy and you'll find yourself waiting in line for an underwriter's attention and a premier rate. That's where a mortgage professional can save you time and money in the marketplace. Armed with product knowledge and the programs that will help you survive a tough economy, we can place your loan into the right product to insure you success and keep you cash flowing.
Now there are exceptions to every rule...When you have a high quality property, a low LTV (loan-to-value) and a stellar resume with the PFS (personal financial statement) with a net worth well beyond the value of the subject property, then yes, let's find the lowest rate possible! This client is looking to 'buy and hold', is not concerned with a prepayment penalty since he is keeping the property to will to his grandchildren in 30 years and is genuinely worthy of the lender's lowest possible rate and best terms available.
As always...ask yourself, "Would you lend money to you?"
Anita Huedepohl
Liberty Funding
615.417.4710