Non-QM and DSCR Loans Explained | Real Estate Notes Show

Welcome back to another Real Estate Notes show. I'm your host, Dave Putz from JKP Holdings. Alongside me as always, Mr. Nathan Turner. What's up, man? Hey, hey, how are you doing, man? Good. July weather is killing us up here in Jersey, not about you, but it's just. Now we're, this is the beauty of living just outside of the Rocky Mountains. It's nice and cool all the time. Like I remember talking to the people from Southern California and like, oh, it's beautiful. 75 degrees all the time. We get the same thing. Actually, the bonus is it cools off at night. We don't even have air conditioning in our home because it just, it just self-regulates.

Beautiful. We love it. Oh, that's awesome. So it's funny. We, it is summer. We're putting a little bit less episodes out than normal, which is understandable. Um, but I don't know about you. I've seen influx in my area of houses for sale and I, it's, it seemed like every block I'm seeing more and more properties. I'm curious. Those who are watching this, put a comment down here. Like, are you seeing the inventory change? You're locally. It's just, I'm seeing houses for sale more. I'm seeing things stand on the market longer. I'm just seeing different things. I know you're up in Canada, but are you seeing anything different in your market? Uh, not so much where I'm at, but, uh, but yeah, we've got some properties for sale that have been for sale for a lot longer than we anticipated.

And, uh, that's been kind of an interesting shift. And I'm talking to some other people, same thing. They're getting the same kind of thing where houses are staying on the market longer, we're starting to do some price adjustments and that kind of thing, which is just kind of an interesting shift and, you know, good or bad, I don't know yet. We'll see how it all plays out, but, uh, but it's been an interesting thing just to watch and see. Yep. So I'm concerned with it a little bit, you know, um, concern, meaning good for us, not for me and bad for us, right. But certain for the population whole, um, we wanted to jump right into this topic because I think it's really interesting and I, I, I've been talking to his guests for a long time on and off and we want to come on.

Um, and we, in this space, we always want to buy notes and create notes. And that's our world, right? For those no careers out there, we'd love to hear what are you guys creating right now and what are you doing with this stuff you're doing, right? Are you creating? It's a whole degree notes, sub two raps. What are you doing? So please let us know. But one thing we've won across a lot and we get. You know, 10 tapes a day in this field is this non QMs. And for those who don't know, that just means that Fannie and Freddie can't buy it, those got created and there's nothing you could do with it. Um, so it makes it different.

That stands for non qualified mortgage. So like, why doesn't it qualify? What's the deal? Is that super risky? Is that scary? And so, yeah, we haven't really talked about it very much. Um, we've both been around it for a while, but let's dive in. This could be interesting. And the other facet is big thing is this DSCR loans, which for those who don't know that just basically means you have equity and you have rental property and you're using the credit of the rental property and the value of the property to make a loan against it that you don't typically live in, you're renting out and you're getting an equity loan on it.

Um, and you're leveraging that credit that's inside that rental property as a way to prove what it is. And before we jump in the call, Andrea was sharing that he has some products for those people who may not have the parameter that I look for, but the available to people out there. So if you are a landlord and you're looking for the pull some of the equity out and you're getting good returns, but your local bank may not be able to give you debt, can't you maybe be able to solve some problems here? What's going to be really interesting to get into this stuff. Have you ever bought a DSCR loan? I haven't, but I haven't.

And I'll tell you the reason why I actually went to an IMN conference, uh, last year, beginning of last year, uh, all about DSCR mostly cause I just wanted to see, is this something that is viable for note buyers? And what I found is interestingly enough, DSCR rates are very comparable to what banks were offering. And so for me as a note buyer, Oh, that's a dead deal. Cause they, you know, if you're, if you've got a loan out there at six or 7%, um, my discount is going to be atrocious. You're not going to like it. You're not going to want to sell me that loan. So I, it was a great conference. I learned a lot.

I met a lot of good people, but at the end of the day, DSCR for me, didn't look like it was going to be something that could work just because those rates are so competitive. If you're somebody who needs that loan there, you know, take note because it's not, you know, you're not going to be paying 15% on that loan. You're going to be paying very comparable rates to what the banks offer. Yeah. Well, let's just dive into this. Andrew, welcome to the show, man. Appreciate you joining in with us and share some of your great vast knowledge. But before we get into all that, how did you get started in this field? And what do you do? Mortgage banking.

I've been in since the early 2000s and started as kind of like a light processor. I had left the country to go be young and irresponsible. And I came back into the country and I landed on my feet outside of the Chicago area. I was originally from Crystal Lake, Illinois, but I took a job just south of there. By about 20 minutes, 15 minutes. And it was a processing center. It was a third party processing center, primarily for credit unions, credit unions across the country would outsource their internal loan processing to companies like this. And so I was one of the people that would pick up phone calls and also process paperwork for those credit unions, and it was based on home loans and other types of consumer loans.

And that's where I dipped my toes into some very, very light mortgage processing for credit unions. And that was the start of it. And so I started to get acclimated to the paperwork, what they're looking at, how those deals were put together after they were being sold to their consumers. The application, all supporting documentation would come into a facility like ours, and we would have to shuffle all that and kind of move it down the conveyor belt. That wasn't a very long-lived position for me. And then I ended up moving west and then kind of figuring out what I wanted to do. I bounced from the Chicago area up to Tahoe and then realized I was going to flake out, not do anything up in the paradise of the Sierras.

And then I bounced down to Vegas, where my sister was, and Vegas was going through the early 2000s. It was starting to really heat up and turning to the Vegas that everybody knows now. And I walked into a mortgage brokerage at the time and dropped an application. They interviewed me and they said, what do you want to do? And I said, I guess I'll just process or something. And then they looked at my resume and they say, no, you should not be processing. You're way overqualified for that. You should be selling instruments. And I said, OK. And they said, have you ever sold anything? I'm like, not really.

I guess I'm selling myself right now. He joked and he says, you're not doing a very good job at it. You need to kind of beef up on the sales stuff. I'm like, hey, noted, noted. You know, I'm a gregarious guy, but I've never been in sales per se. And so he says, you've got languages, you know, business degree, philosophy, Spanish degree, that kind of stuff. He's like, you should be selling instruments. And, you know, it's apparent how you treated the lady at the front desk and walk through and talk to different people in the office like you never met a stranger. I'm like, yeah, that's accurate.

Like it does anywhere I go. I've never met a stranger. He's like, yep, you should be talking to people and not be caged like a processor. And so I'm like, OK, great. So I got into originating home loans, which simply means stroking an application. After you listen to some clients and figure out what their needs are, finding a loan product that matches what the heck they want to do. And then you submit it. And then inside of 30 days later, you're going to close and fund and record it. That's it. And so I started at a brokerage and it broke down to a million dollars. And brokerage just means that you're not lending your own money.

Means that you are taking that application and you're usually going to have it underwritten by that end broker and the end broker, or you could underwrite it in house. And then the end broker is going to fund it and record it. So that's what I was doing and cutting my teeth and mortgage lending. And then I realized that the grass was greener across town at another company. And I had buddies that had departed my mortgage brokerage for a lot of good and wild and dramatic reasons. And they ended up over there. And it turns out this was like this was the premier mortgage bank, meaning they have their own warehouse line from which they stroke a check and fund the deals.

And that was like the Chicago Bulls or the Golden State Warriors of mortgage lending at the time. So real quick before, what is a warehouse line for those who are not familiar with that term? Yeah, it just means that you have your own money that you're going to lend or you are borrowing money from somebody and they've put it on a, for lack of a better term, a giant checkbook for you. And then you are going to temporarily stroke a check at the end of that mortgage in order to fund that deal and wire that money as a mortgage bank to the title company. That money simultaneously pays off the seller for their sales price.

And then as you guys know, because you create notes that you're going to create security instruments and promissory notes and things like that. And then you're going to saddle that borrower with the new debt that you've just created in the form of a home loan. They're going to give you a mortgage, right? People always say, hey, I'm going to go get a mortgage. And you're like, no, buyers are actually giving us a mortgage. It's a weird thing that I say too, because I don't want to correct everybody. They're giving us the mortgage, right? And so that's what it is. A warehouse line is a fancy checkbook from which we go ahead and rip money off to fund our deals.

And that is how the cycle of money goes. We pay a cost to grab that money temporarily. Then we close that loan. We sell that loan off at a profit. And over a basket of many home loans throughout the year, we're capturing a small margin of profit every time we sell a loan. We immediately pay that checkbook balance down so that we can pull off of it again. And we just do that. Our mortgage bank does that over and over and over again. It's not my name on the mortgage company. So that'd be Chris Biagi at All Western Mortgage where I'm currently at. But yep, that's how that cycle of money works. And so I ended up going to a mortgage bank for control and for deeper pricing with my clients.

So you're able to get better rates. Yeah. At the time, yeah, at the time. And there's a big argument out there, whether you should go to a broker. Do the brokers have better rates? Do the direct lenders have the money? Do they have the better rates? It's a loaded argument. It can cut both ways. It depends on how much money the broker wants to make or the originator wants to make or the bank wants to make. It really just depends. There's no clear-cut answer on that, despite what you may hear. I might have my lunch taken from me and then be beat up on the playground by a broker one day. I tell my client, hey, that's a great deal.

You need to go take it. It could be because that person that's at the brokerage is just going to make a happy meal on the deal. So they've just cut everybody and are trying to get that deal. Or it could be that I bludgeon a broker to death for any number of reasons on a deal, including pricing. It just depends. There's no real cut way. So what we're talking about today really is just non-QM. Yeah. Let's explain this, like the chat GPT question, right? Let's explain this to a high school student. What is a non-QM for those who have no clue we're talking about? And why does it matter? What is it? Why is it created or what happens to it? Give us that high school answer of what it means.

The overwhelming majority of home loans for residential properties in the United States, when a borrower does not have cash to buy a home, they need a home loan. So they come to a lender and they apply for a home loan. The overwhelming majority of those home loans that are provided to the American home buyer are going to be a conventional home loan, which has been around forever. That is backed by Fannie Mae and Freddie Mac. The guidance, the rules that we have come from those agencies for conventional home loans. FHA and VA and USDA, government backed, those have their own specific guidelines to which we have to underwrite those deals.

So we have to look at a client through that filter of a conventional FHA, VA, USDA guidelines. You can sometimes get by with some exceptions to those, but they're really, for all intents and purposes, are written in blood. You need to adhere to those guidelines. By adhering to those guidelines in mortgage banks like mine, when it wants to sell that loan off after it closes it for the home borrower, with an amazingly high degree of confidence, as long as my bank during the underwriting process has conformed to those guidelines, we are almost assured to sell that loan off at light speed, days a week.

So we've got these giant, we're a pitcher, we're going to throw this ball in the form of a home loan, we're going to sell this off to the secondary market, which is investors that want to buy our loans. Those investors want to buy loans that adhere to the guidelines of those agencies I just mentioned. And if we underwrite to those guidelines, they will buy that loan off from us with a high degree of confidence that they know what they're getting in that file when they buy that tape, buy that loan from us. Very safe. It's very boring. It's very vanilla. And those clients have matched all those guidelines, dot in the I's, processing the T's.

That creates a huge pipeline of loans being originated by people like me for borrowers like you guys, or anybody else that wants to buy a home or refinance a home, we sell those off. And then the secondary market, a servicing company ends up holding onto those, collecting the payments for an investor bank or mortgage bank or investor that wants to buy those loans. Okay. So that's where most of the deals are being done. There's a special niche of loans, which is growing month by month, day by day, year by year called non QM. Non QM simply means this, there's something about your profile, be it your income or your credit profile, or there's something about the property, or there's something about the cashflow of the property, for example, like a DSCR, there's something about it that is deviating from those very black and white guidelines that I just explained to you guys.

Those people, even though they might not adhere to the guidelines of those boring vanilla loans that I just mentioned, conventional FHA, VA, USDA, they might still be a fantastic risk for us to lend to them. So non QM means non-qualified mortgage, non-qualified means it's just not going to adhere to those big dogs guidelines, the big agency guidelines. Does that mean you shouldn't lend to them? Hell no, it absolutely does not. You guys are probably sitting on notes for very unorthodox profiles of people. Maybe not. Maybe you guys want plain Jane Bill and maybe you guys charge 10 to 14% and end up lending to or financing something very unorthodox.

You're going to look at that on a deal by deal for nine QM world. We, you know, when you, they always say, when you first buy your home, don't buy something right before you closing your loan and they go out and buy a car. That loan technically probably won't qualify for qualified mortgage anymore because of ETI, debt to income. Something could trigger it by buying that car, right? That it no longer can be sold with confidence because of some kind of issue or at the closing table. They couldn't verify some W2 or the W2 is old or maybe there was a property problem that was really kind of small in our world, but in the Fannie world, it's a no deal and all those little to a note buyer.

It'd be a non issue, right? Do I care? He bought a car and his DTI went from 41 to 43 and I still think of DTI is good. Yes, but Fannie says they want this, whatever that ETI to be 41, 43, 38, whatever it is. Is it is a note buyer? Did they be worried about that? If are these somehow less safe? It's a very valid question. If you were to take a look at guidelines and anytime people deviate from these well-established guidelines, it's probably very evident inside of default statistics that when you deviate from the conservative vanilla Plain Jane agency guidelines about which I spoke referenced, when you deviate from those, you probably have a naturally higher default rate because you're acquiring less skin in the game, less down payment or you're allowing lower credit scores, which is a huge indicative tool to look at performance.

You're looking in the rear view mirror to decide how they're going to behave in the future. A good credit score can default tomorrow because they lost their job, it could, it could, it could. Yeah, absolutely. Or they could make, you know, get divorced and go on a cocaine bender and destroy their life, but they had an 840 credit score. Like you just don't know, but the chances are lower than if you were to initiate a home loan for somebody with a 580 credit score. Right. And the stats bear that out. Okay. And so you're right. There are many people that come to us and they present their facts in the form of a credit report that I pull.

They give me all their income documentation, all their asset documentation before we even target a property for them to purchase. And something about them sticks out of the proverbial box. There's some hair sticking out. Sometimes we can get what's called an exception. Ah, it's a strong file. We're okay. We're going to close this. We know our investors will buy that deal because it's just a little hair sticking out. If it's like, you know, enough hair, it's like a chia pet sticking out everywhere. Like I say, Hey, listen, you're not going to be pre-approved for this conventional home loan. It's not the end of the world.

I found an alternative product for you and this is how it works. And this is what we need to do to get it done. I call the realtor, call the clients, let them all know this. Hey, this is, we're going to have to go in a different direction for this. Do not go out and find homes yet. I need to get some paperwork in to make sure that you're really safe. Well, we might realize that the self-employed income that they gave to me on their taxes, they are just sticking it to uncles, to the IRS and Uncle Sam every year. They're doing what their CPA said to do. They're writing everything off. So they are killing it, but they're distilled income that I'm able to use when it comes through the baker and it distills into a drop.

That income that I'm using is not sufficient in order to keep a debt to income ratio low enough in order to satisfy the boring guidelines. And I say, that's fine. We have some alternatives that we can use for you as a self-employed borrower. They're no longer QMs now because the fact that whatever the wonky situation is. Yeah, that's right. That's right. Yeah. So you've now lurched into a different category of home loans, which are going to be purchased by a group of people and targets that want to buy these loans and sit on them and collect interest payments just like you know animals do. You guys collecting that safe payment every month.

Well, these guys just want to buy the deal off of us, get a loan off of us, and they want to sit down and they want to collect a little margin of interest every single month through their servicing company. And that's how they do it over a large basket of loans. At far worse terms than what you guys are getting, by the way. These guys are trying to make slivers over 400 million deals that they're sitting on. And you guys are doing it properly. But they're putting grandma's money to work. And so you guys are out there. You don't want to do that. But at any rate, so those people come to us and if they stick out and they can't get the boring loans, then we find them an alternative product.

And it's an amazing space. And for those listening, it's not reckless. People are like, oh, these are the new state of income Nina ninja loans from 2006 that destroyed the country. No, hold on. Hold on. Prior to recording, hitting go, recording this, I was telling him the deals that we were originating back in the day were exponentially more risky. Some of those deals that we did back in the day would be a hundred percent financing for an investor to buy a rental property with no income and no assets documented as long as they had the credit score we're looking for. And by the end of that degradation of mortgage guidelines, it started a little conservative and then money is always chasing a better return, a better yield guys, re drives everything in this whole planet.

And so people were chasing more and more and more. And so the guidelines were deteriorating sometimes weekly and they're chasing that return as fast as they could because the people that were investing in mortgage companies in order for those mortgage companies to lend it out in the form of a mortgage and then sit on the mortgage. Well, they were dropping the qualifications tremendously so they could charge a higher interest rate so that they could give the people that gave them money to lend it a better return on their money. This is all very basic. And so those guidelines deteriorated so we could do a hundred percent financing, no doc on a rental property with a decent credit score.

And by the end of that- I wonder what happened? Why did it fail? And adding into that debacle was the fact that basically appraisers were colluding with everybody to hit the value that everybody needs. We had a collateral issue. And if anybody ever wants to go out and watch it, was it the big short? I'm telling you, that's like, if I had not healed that movie would present some intense PTSD because I went through it. When the whole- when the music stopped, so to speak, then you can hit- maybe they even use that line in there. It was like the oxygen got sucked out of the room. It was eerie. And then you're watching CNBC on our TV in my office.

Of course you got to have your TV with the stupid news on and the financial tickers. It's so dumb, right? And then you're listening to all this stuff and then you're getting an emergency call from the president of your mortgage bank, the best bank probably in the nation that I'm at called Meridius Capital. A fantastic outfit. Just was a victim of these circumstances. And then you're realizing that it got so bad, so quick overnight, literally overnight, that they weren't buying loans from banks like ours, which means we're now sitting on these loans after we originated them. And we owe that money back to the warehouse line.

It's like a shark. A shark has to constantly move. I don't know if that's a myth or not, or it'll drown, it'll die or something. A mortgage bank has to cycle through its money, originate, sell, originate, sell, replenish your warehouse line over and over and over again. It has to do that or else the mortgage bank dies. So we ended up with- we ended up with, you know, sitting on a bunch of loans. And then that means that the mortgage registry is dying because everything at the engine is seized up. And, you know, that's what happened overnight. And it was a scary thing. But those loans, to circle back to my original point, those loans, even if you had done the work and I talked to my clients and I made sure that they're okay on paper, despite what the loan was not collecting in the form of income and assets, I was underwriting those deals with my personal clients.

A lot of people weren't. I'm saying we're not collecting any of this. You're choosing as a doctor with incredibly complicated tax returns and investments. You're choosing a half point higher interest rate from me to look the other way and all that paperwork. So you don't have to send it over to me in boxes. Yeah. I said, that's fine. You're smart. Take the half percent interest rate higher. But I know, I know this guy can make the payments. Yeah. So I was personally underwriting my deals like that as if they were proving all that stuff. You know, my loan, but the loan didn't prove that. So for those who are curious, the big short is the name of the movie.

So the big short, get out there. If you are anywhere in real estate world, watch it, learn it, understand it. If you've heard, look for patterns. Yes. Another one's margin call, which is a great movie. Cinematically. It's a good movie. Margin calls. Very good. Those kind of eat nibble at it from different directions. They're both entertaining. They're both page turners in terms of movies. It's very, you know, you're not going to get bogged down and jargon and stuff like that. And so they sure does a good job of explaining things. Right. You have the girl in the bathtub kind of explaining in layman's term because it does get complicated and they back off.

Right. Did you dive in? The both sides are there. Do you remember when you got first in the space, like how scary it was for us to even look at this stuff? It was nerve wracking looking and not performing them, buying it 30 cents, buying it 35 cents. I remember saying I will never buy a loan more than 40 cents. And that obviously is true anymore. But I looking at it from that perspective, we're buying so much stuff that it was ridiculous. It was, it was nuts. It was those first ones. That's exactly what I bought. My very first package of loans was rental properties, you know, that nobody was going to live there.

They just thought everything's going to be fine. This is going to pay. And then of course it didn't. And that's, that's exactly what I bought. I bought a whole bunch of those, especially at the end. So when the value property dropped 20%, 25%, we bought it 30 cents and foreclosed. We're selling it 65 cents and we're making money. That's we did for nine, 10 years. Right. Those loans are no longer around. I don't care how crazy things will get. They're not the dot Frank thing ruled all that out. Things have changed. You're not going to get back to that kind of situation. They are coming back a little bit.

I'll give it that, but they're not going to get back to where it was. Turn your head the other way and forget everything going on. Yeah. The quality of loans today is much, much different than it was 15 years ago. And so that I, I, we won't see that same kind of debacle. Even if you guys thought you were buying a quality loan, it was hard to tell because the, the dog duty was mixed in with the a paper. And so you guys didn't know potentially if you had to buy a tape, you know, somebody was telling you that the, all these things were a paper, B paper. And as those movies will articulate in elementary fashion, it was just a giant mangled salad.

So it was a little different for us, right? Andrew. So what we didn't look at the D paper. Yeah. We didn't care what letter it was. We didn't know what letter it was. We got the property values X. We confirmed the value of the property, the sellers, we bought a lot of money. And the fact that people thought the property worth 50 and was really what's 100 or 90. Right. We bought a discount off the 50 at 30. Knowing the fact that it's worth 90. And we sell it at auction for 75. We're made a crap load of money. So the paper quality, we didn't, as long as we can foreclose file, that's all that mattered to us.

Yeah. As long as it was enforceable. That's it. As long as it was enforceable, we knew the value is there in the property. So that was the, I had one performing loan in four first four years, five years of buying notes. Yeah. It was a re performer going, this is weird. Everything was default. Yeah. Everything was closing. So yeah, the paper quality didn't really matter because we're foreclosing on them. Yeah, that's right. And so to circle back, because I'd go on and on and talk too much. So when you, when you circle back to the difference between pre financial crash pre GFC to now, and you're going from sub prime loans to scare everybody with all the Nina's and the no docs and this and all that, when you compare that vintage of loans, category of loans to today's non QM, today's non QM is pretty solid.

You're collecting larger equity positions upfront on your purchase money deals, meaning a higher down payment. There's more skin in the game. Okay. You're verifying things, right? And you're, you're oftentimes you're forcing a property to cashflow on a DSCR deal. So that, you know, an often an off quoted DSCR ratio would be, you know, one and a quarter, you're collecting 1250 and rent versus a servicing PITI of a thousand. There's your 1.25. So there are, there's a remarkably higher degree of transparency and proof on documentation these days compared to the financial crisis. I am not scared of non QM at all.

Is it abused? Gosh guys, it's like anything. People are lying on conventional home loans and using and creating fake W2s and you know, this stuff's always going on, but as a category non QM is just fine. So what's the difference then for the borrower? If you're saying like they get in there and they're like, well, Fannie Mae is not going to work for you. We've got to look at something else. What's that difference to that borrower? Yeah, that difference might look like a higher down payment. Okay. It might look like instead of 5% down, we need you guys to come in with 10 or 15% down and we'd like you to show us some reserves, meaning that we're going to need you to prove conclusively that you have some money sourced and season in a bank account for a couple of months that if the shit hits the fan that you guys can make anywhere from, you know, two to six months of this PITI mortgage payment, you know, they could blow that the next day.

Could that be an IRA? Could that be an IRA? Does it have to be cash in a bank? Oh yeah. No, no. Yeah. Yeah, that's right. And so if it's something that's not, if it's not a stock brokerage that you can pull money out, you know, literally after this call, then, you know, how can you get that money? What are the terms of withdrawal? What's the penalty going to be? If you've got to raid your IRA to save, you know, to keep your shift upright, we're going to, we're going to shock your IRA balance or something with, you know, your, your investment account by a penalty, either it's stated in the agreement or, or an industry standard, we're going to discount how much you have in there.

And then, then we're going to go ahead and say, okay, you know, we know you've got the assets. Yep. If you need a hundred grand, your IRA has 300,000. You know, the fact that even with the shock, you have a hundred grand, you can pull out of that thing. Yeah, that's right. Yeah. So generally it's more on the, on the down payment side or the rates ever. Yeah, the rates, the rates can rise. The rates can rise. There are certain non-QM instruments like a DSCR, depending on how they structured, they can be not always, they can be better than conventional rental home loans. Right. So those two will kind of like snake around each other.

And then depending on what's going on in the treasury market or the risk appetite by N banks that want to buy and sit on DSCR deals, they, and I'll get to how they price those out, but you'll find times when they're better than conventional. How would you get better than conventional? Maybe you have to stick a three year hard pre-payment penalty on there. Who knows? Right. Maybe instead of a 1.0 DSCR, you need a 1.25. Right. So you can get term soon. What's 1.25 mean for those who are like, don't know what that means. What's a one super simple. Let's say you buy a rental property, you come to me and you just want to put 25, you want to put 25% down payment on a rental property.

You don't want to prove your income because it's too complicated. Or maybe you just can't. Maybe you have no business in the conventional world ever buying a rental property. And the whole industry says you shouldn't be a landlord. And you're like, to hell with that. There's got to be a way. There is a way. There's a good DSCR loan. So, you know, Nate comes to me and, and he just doesn't have the income on paper, but he's got a great credit score and he's got the money for a 25% down payment or something. It could be less. Right. And, and that he fits that those guidelines. And then the only thing that happens here that he's got a couple of months reserves, right? You know, two to six months reserves if we need it, he's good.

He looks strong on paper and that, but his income is impossible to prove. It's a mess. So we say, Nate, relax. We know those other three lenders told you, you couldn't do this. This is exactly how you're going to do this. We're going to omit on the application. We're not going to put any employer or income information on for you. What we're going to do instead is we're going to make this property carry the burden of the entire file. We're going to send an appraiser out there. You're going to buy this property for 250. The appraiser has to value that property at 250 or better. That's, that's the first piece.

And then the second piece is this. So now we know the collateral is worth 250, but instead of using your income to establish a debt to income ratio, to make sure that you personally with your income can service your monthly obligations on your credit report, including the future mortgage payment and your house payment that you have now. We're going to brush all that to the side. The appraiser, when he goes out there, he or she, it's 2026. So the appraiser is going to go out there, value the collateral. We're good. 250, we hit the mark. That appraiser is also obligated to attach to it a report called a 10-07.

It's really just report 1-0-0-7. It's just a form. And then that is going to be your gross rent report. The appraiser is going to go out there without my influence and input. They're going to independently verify what that property can command in the form of gross rents. They've got different ways to do that. Okay. They can reach out to property management companies. They can go to the MLS. They can, they've got different ways, but whatever it is, they're going to back into that report for us. They're going to show what your subject property that you want to buy can command for a monthly rent.

And they're going to, just like an appraisal report, they're going to have comps, rental comps of properties that are similar in attributes to yours for footage, bedrooms, accoutrements, where is it located? This side of the tracks or that side of the tracks. And they're going to give us a figure, just like a bottom of an appraisal gives you a value. They're going to give us a gross rent. And it's going to say, that's what the rent is on this property. We then take that rent and we are going to weigh it against the principal interest taxes and insurance of the property that you want to buy. Most DSCR lenders out there have a rule of thumb.

Most of them do. And they're a little boring and they're not a very aggressive and they're, you know, so you'd probably want to deviate from them. They're too conservative, but they're going to say that you need a one and a quarter ratio. In a simple example, they would want to make sure that you could collect 1250 in rent to service a thousand dollar monthly all in mortgage payment, which gives you an express ratio. Rents divided by the payment equals 1.25. It's unbelievably simple. There's no complication in that. That'd be principal interest taxes and insurance HOA, right? Pity Mihoa, right? Is like, you know, acronym.

That's it. Now you could go lower. Some DSCR deals will say you need at least a one to one. So they'll say, you don't even have to cash flow. You just need that. You need to collect a thousand in rent and then, you know, a thousand versus a thousand payment. We have products that allow you to go down as a DSCR down to three quarters. So meaning you could collect 750 in rent, but your payment's a thousand. You can go lower than that. And it becomes what's called a no ratio loan. And our clients love that. So now you don't even need to express to us what that relationship is between the rental payment and the underlying mortgage payment.

And so why would you do that? Right, Nate? Well, you might acquire at a fantastic off-market deal like us, pounds do, we're pigs out there sniffing truffles and we find them. You buy a property for 40 cents in the dollar from a distressed seller. And, you know, you might want to then get it into long-term fixed financing in the form of a DSCR deal. What do you care if it's not cash flowing? If you're sitting on that much equity, right? That's not for everybody, but you might be like, I don't care. I'll take a bath on my cashflow every month because I'm sitting on this insane equity. Right? And, you know, if you make some improvements, then you can augment the rent over time, whatever it is, you run it through your own personal investor filter.

So you can do that. So we've gotten way away from the reservation of Fannie and Freddie's guidelines for rental properties. They're very black and white. Everybody knows what they are. Okay. Fannie and Freddie might limit an investor to 10 properties financed. There's another reason. Well, we don't care in the non-QM world. You could do this, you know, depending on the DSCR guidelines I'm using, there might be an unlimited number of rental properties that you can use to forget this 10 property limitation. Right? Now you can go out and you could finance 200 of them that way if the guidelines supported that.

Right? Does Fannie and Freddie do DSCR? Do they accept it? Do they have terms? No. I think so. Fannie and Freddie is just black and white. Your income and your assets all have to be verified. Your credit has to look a certain way. And then Fannie does, well, let me split that here a little bit. Fannie may not care if that property you're buying is going to cashflow, but on your application, if you're underwater on rents on your property, that means you are now subsidizing that property, which means your debt to income ratio is going to rise. So if you make a bunch of money and your rent is only going to be covering half your mortgage payment, I personally don't care.

Neither do the guidelines. As long as when your income is now servicing the deficiency in the rental, that your debt to income ratio is going to rise because now you're subsidizing a $500 on our fake example payment. Can your income support that without blowing out your debt to income ratio? If so, we don't care. But if you try to do that, and let's say you find a great deal out there, then that could be a problem. Right. Yeah. So you have so much insight on this side. It's not like you spent a few months doing this, right? 25 plus years in that space. How is it for you to transition from that W2 brain into the investor side? You're switching over.

What would be your angle? What do you look at now as an investor, which is a new world for you? Right. What are you looking for in an investment that you would advise other investors look for knowing what you know about all the lending is available? Are you asking how did Andrew brainwashed Andrew that only lived and died by guidelines? How do I put on my investor? Yeah. You have to. Yeah. Yes. I think I was handicapped by that because I was a lender in a very dogmatic black and white world. And so I had to understand that the best deals almost without exception are in the off market. Almost without exception.

You can find some amazing deals in the MLS guys, but that's not where you're going to go fishing. You're not going to go fishing in a pond with literally shoulder to shoulder with all the other fishermen chasing after the five bass that are swimming around. You're not going to do that. What you want is a pristine high mountain lake that you've hiked to. You've chosen your fly. You're going to get out there. You're going to cast and there's no competition, almost no competition. Maybe one guy on the other side of this lake and you guys share the same. You're going to fish on the other side. There's no competition.

So you're going to find these better deals. You've got to fish. Yeah. Is there a lending trick out there that you're like, man, I can exploit this opportunity that I know from my daytime that is available that I'm going to go grab a hold of two or three is where a big thing years ago is a lending trick out there now where it's like, man, I got to exploit this opportunity. This is good. Is there anything else in the bank is missing? That's so you're at this. So if you're an investor, how would you use non QM to go out and find these or is there a non QM product? Do you know right now in the back of your mind, you said, man, I could exploit that because of this, this, this, and it works for investing as the lender.

It makes sense. Numbers make sense, but I got to go find a property that fits that bucket because the lending opportunity on that is ridiculously awesome. The opportunity is good. Let me just go find properties for a long time. The two or threes for rehab and properties were golden ticket where people were borrowing money higher than the value of the property. Knowing the fact that you're rehabbed the property, right? Is there a lending opportunity currently today that borrower that investors should be using that, you know, that could be a huge opportunity like to me, this DSCR, no doc loans. That's a golden opportunity.

Yeah. I would never thought you would go below one. In fact, you can go below one is absolutely ain't your below 10%, which is ridiculous in my eyes. Oh yeah. Yeah. You're well below 10%. Yeah. So absolutely. I mean, what a popular thing that investors come to me for, they clamor for is an exit out of hard money, right? So they've gone out and acquired just dog do property and they've, they stole this property and they know it needs some work. They went out and they got their hard money and they know they've got, they've got to get out of there in three to six months, whatever the terms are. And it's ugly, you know, they're paying points and the interest rates high for them.

They're investors. They're all investors are cheap, right? And they want to get out of there as fast as they possibly can. They come to me and they want to exit that hard money. And then they want to get into some kind of long-term fixed financing. Yep. Right. And you can do, you can do so. So DSCR are a fantastic fit for that. So now you've got a property that you know, that you have pumped some money into, you bought it at nothing, right? And so now you want to go ahead and get out of hard money. And then you might want to remove some of the money that you've now created. You have forced appreciated to that property from nothing from your acquisition costs.

You put some money into it. You've polished up the proverbial do, and it's shining now. And so you want to carve off some of that equity while getting out of hard money, creating new fixed finance terms for yourself at a pretty damn competitive interest rate. And so then you could just reload all your deals. So you can, you don't have to leave all your money dead and trapped inside those properties. So DSCR is a fantastic exit out of hard money. I like it. Yeah. That's a huge one. Is there anything that you're doing personally that maybe you see like even with whatever you've got going on with the bank, you're like, yeah, but there's this one thing that they're ignoring.

Is there anything that you're looking at personally that investors should be looking at? Yeah. Investors, other investors should be looking at. Yeah. Let me address that from two different ways. I think all investors, when they're looking at off market properties, they're underwriting those properties as investors first. And then after they've underwritten those properties of how they're going to work, whatever it is, buy and hold, buy, fix and flip, they're going to buy it. And then they're going to offer a contract for deed, whatever it is, they've approached this property. It's the hot gal at the bar.

They want it. They want it, this gal. And then at some point after they've underwritten it, they have to figure out how they want to potentially, if they don't want to keep it by cash and leave it all cash with zero debt on there, they've got to figure out what they want to exit out of their cash position and into that. So there's nothing more important than becoming an off-market investor and figuring out how to find these deals. Yeah. Right. And there's a thousand ways to get to that deal, but you've got to be able to find those deals. And then once you find those deals, sorry, I've got to find this cat.

This cat, it's a stray, but I found the real owner a mile away by sheer luck, but it wants to go on my laptop. Sorry, guys. So investors have to be able to find these deals and they have to be able to underwrite those deals. And then once a smart investor has done both of those things and they want to get out of a cash position or get out of hard money, then they would figure out what kind of loan will work for me as an investor because I'm so screwball on paper that I'm not going to fit a conventional home loan guideline. And then that is going to like a Plinko thing with a ball, the puck's bouncing down to fall into a bucket.

They're going to go through my little Plinko board, depending on their profile, income and assets and property profile and credit. And they're going to fall into a bucket. And that's going to be one of several home loan types, DSCR, debt service coverage ratio, bank statements, meaning you are going to present to me a 12 or 24 months of personal or business bank statements. And we're just going to be qualifying you off of deposits. And you can do that on your primary home, a secondary home, a rental property, DSCR, bank statement loans. You could go and get your CPA to provide to me a PNL, a profit and loss statement, not even audited.

It's like your CPA is just going to vouch just a PNL statement, okay, to show that you are making the money that you say on my application that you typed in that you're making. Great. That's huge. Again, these are for people that can't prove anything, right? In an orthodox way. 1099, you might have a bunch of different 1099s in your life and you're a smart guy, but you're a hustler and you cobble all this stuff together in the form of 1099s. Will you use those instead? You might get paid a pretty traditional income, but it fluctuates too much and we'll get what's called a workplace verification of employment from your employer.

And they just give us a one page document that verifies that you're employed there and they're going to verify your income. We're going to do away with taxes and W-2s and sometimes pay stubs. So that's when the investor will come to me. And that's what investors need to know, that if they're going to go out and acquire properties or if they need to refinance those properties that they sunk their teeth into, those people that think that way are anomalies in society and they're go-getters, hustlers. They're water moving down a stream. They're going to go around barriers. They're going to go around the rock.

They'll figure it out. They'll pass it to a guy like me. They're going to figure it out, guys. And so what they come to me is that we can figure out what product is going to fit them. And then they go out and they just crush these properties. It just becomes an ATM machine for them. And they do it over and over and over again with their very ultra unorthodox profiles. So to answer the question, what should an investor be doing? Just like the limitation that I was faced with when I became an investor, I just figured this can't be done. So investors have to train their brains and say, how the hell can I get this done? That's it.

Just ask the question. And if you've got a bird, yeah, to network, and if you've got a bird dog like me, that's like, you know, kind of a, I try to be a savant about these guidelines for the non-QM products and get real wonky about it. And I'll tear through these things. Like I'm looking for a way to get a deal done. You just need somebody in your corner that's going to do that for you. So an investor has got to be able to find the deal. How the heck can I get this done? I don't know how to get it done. Talk to somebody that knows how to get it done. If you're using institutional money and non-QM is institutional.

It's not, it's not, it's not creative finance. People always want to say it's creative. It's not creative finance. Creative finance is non-QM, but QM is not creative finance. It's a, it's a one way street. Creative financing is non-QM by the basis, but not all QM is creative financing. So before we let you go, I want to make sure people know that Andrew stuff will be below. There's a link for it. You're going to get his information. If you are looking for DSCR loans, you are looking for creative finance ways to get out of deals, please reach out to Andrew, get ahold of them, talk to them, get on a phone call with them.

It'd be awesome opportunity for you guys who are stuck in hard money loans or just stuck in a rental property where maybe you look for a portfolio loan, reach out to Andrew, work it out, figure that before we let you go, Andrew, Nathan always has his final last question. And I'm interested from your perspective because you're new on the investor side, but you're not newer in real estate. You have a good perspective with it. Nathan, go ahead. Yeah. So tons of experience and you've been through cycles and you've seen all kinds of different things. And, and for a long time, I know you're, you're the W2 guy and like, this is what this is how it goes.

And this is how you do it. So, but given that, and now kind of with a new outlook on life and, and seeing what's, what else is possible, but again, with all the history, what's the opportunity coming up? Like, what do you see coming up in the next 12, 24 months that has got you excited? Has got you nervous? Like what, what can we expect in terms of housing, in terms of investing? Yeah. I think at first it's an disclaimer. I think investors, and this is my own biased opinion, and I'm not even a note guy like you. I think that the smart investors, people will probably beat me for this, but I think smart investors should end up to be note guys.

I think that's where, I think that's where the puck eventually goes in an investor career, and they should go there. And so I think that they should, they should pick up those tools and the language they should be able to run the 10v2 calculator. They should take note, note courses, hop on groups like yours, get around people that are savages and who are collaborating and helping try to do that and eventually kind of create and become the bank, become the real bank. Yeah. Just servicing that money. Yeah, absolutely. But I think, I think the opportunity, I mean, we're in a weird part of the cycle.

It's played out. We've gone through the massive appreciation, the grotesque cash flow, which is now being stepped on by higher interest rates, rising taxes, and insurance. There is a lot of serious risk out there for the casual rental property investor. It's a dangerous environment. Most clients that come to me and apply for a home loan, the only reason it's cash flowing, especially if they come with a realtor, the only reason it's cash flowing is because they're putting down like 50 or 60% because they're carrying a small enough loan. Interesting. I'm not in a position in that relationship when they come to me through that gatekeeper.

I cannot tell them to run from that deal. Yeah. Okay. So go off market, buy deep. I think, I think affordable properties, I think, I think that is going to be a very fertile garden for investors and no creators, whether they're people that don't have papers or whether you just found properties where the servicing cost is still decent, where you can then charge a commensurate amount of rent or owner finance payment, whatever it is. I think that demographic is always going to be good. The higher end properties right now by virtue of all the inputs, taxes and insurance and interest rate, I think they're garbage.

I think they're terrible. So I think the affordability play is going to be big. Go off market and then get with people like you guys who know how to create notes, get with even if you guys are borrowing the money to do this stuff, learn how to start walking mortgages and moving that money around from one property to another. I mean, that's going to be a group. All those guys are doing those things. I don't think there's a silver bullet, especially not on the retail level where you're going to be using MLS as a realtors and very inexperienced investors. It's a terrible, terrible environment for your retail investor.

Yeah. But I think all the tools are out there. You've got all the home loans from a guy like me. You've got all the brains and wisdom and experience with groups like yours. They have to get in there because you don't know what you don't know. If I were to jump on your noon call, I know with zero doubt, I'm the least wise and least experienced guy that's going to be on that call. That's the exact room I'm supposed to be in for those topics. Obviously, I know my craft. I'm an expert at what I do, but you have to get around people that are absolutely like abject killers in the space or the investor space.

Yeah, absolutely. I appreciate you coming on here and we'll pitch you one more time. Make sure you look into it in May. Get down to the D and Nashville, Nathan's conference, no conference. Please feel free to reach out. If you have any questions, really free to reach out to Nathan. Andrew, I appreciate your knowledge, your experience, your your your charismatic personality. Listen, you lay it on the line, you know your stuff, but you're also relaxed about it and you're knowledgeable about it. Those kind of things are really hard to find in people. I appreciate you coming on spending an hour with us, shouting some stuff up and sharing with our audience.

Hopefully, they reach out to you and you get some deals from them. Guys, reach out to Andrew. As you can tell, his wealth and knowledge and he will help you through anything. Yeah, I appreciate it. One last piece of wisdom here is that the same products that we're talking about, these non-QM products, those have guidelines. If you control a property and you're a titled owner and you want to underwrite that deal for a new occupant, I would not stick to the tried and true guidelines. If you can offset the risk and use non-QM guidelines in order to fill your properties, then reach out to me if you want to understand what those guidelines look like so that you can now underwrite your own deals to figure out how do I want to create this new instrument using less orthodox guidelines and still be protected from the risks.

The non-QM, so your investors should be thinking like non-QM underwriters and creating their own deals to create their own notes. Awesome. Andrew, appreciate your time. Be well, be safe. Thanks everyone for watching. We'll see you soon. Thanks, Dave. Thanks, Nate. You bet..