What you need to know before you apply for a home loan

Raziel Ungar

Raziel Ungar

January 12th, 2023 - 30 min read

In this video

The four steps of the financing process
Why a conditional underwriting approval is important and necessary
Pros and cons of working with a mortgage broker vs a direct lender (like a bank)
Should I pay cash if I can?
Intro to Mike Treon, PNC Bank, residential lender to discuss the underwriting process
Changes in the lending environment since the 2008-2009 mortgage crisis
Direct lenders can lend off their own balance sheet, and how that can benefit the client
The inversion of the previous rate model for small and jumbo loans
How lenders calculate a client's restricted stock units (RSU's) income in a hot market vs a slowing market
How the right direct lender can make the approval process faster
A walk through the process once you decide to talk to a lender
How lenders look at foreign assets
Avoid getting hooked in, and locking in your interest rate
Should you ask for the maximum amount you can afford?
The difference between pre-approval vs fully underwritten credit approval
Why a pre-approval is not sufficient, and how to avoid surprises
Steering clear of multiple lenders pulling your credit and how a good lender can help buyers get rates from other lenders
Once approved, what if any surprises could pop up in a shifting market?
Pros and cons of offering all cash and then taking out a loan
Buying and selling at the same time: misuse of the term "bridge financing" and how lenders perceive this strategy
How to navigate bridge financing with an equity line of credit and how it can save you money
How lenders factor in your rental property income as part of your purchase approval
What if I don't have enough equity for a line of credit or I don't want to go that route? What about a hard money loan?
When to engage a lender even if you're not ready to buy for a few months or even a year
What is an adjustable-rate mortgage?
The difference between an ARM and a 30-year fixed
The benefits of having a recast feature on your loan
A home is not to be traded like your Apple stock

This is the video I've been wanting to make for a while -- everything I feel savvy homebuyers should know before starting the home loan process in the Bay Area. Having represented hundreds of families, couples and individuals buying home and condos in San Mateo County over the years, I've seen clients who had have stellar experiences and others who had less than positive experiences. An amazing experience would include you feeling like you got a fair rate, had solid communication, no surprises, and an on time closings. It sounds much easier than it actually is. You don't want to be the person who was asked for the same document two times, or be the person who is told two days before closing that your home will close a week late because the lender was so backlogged causing you to reschedule your moving trucks and extend the 30 day notice you already gave your landlord. These things are all completely avoidable. I've seen it all, and there's no reason why with minimal effort you can have the positive experience you deserve.

For a deeper dive into everything insurance related, please visit our comprehensive post with a summary of what you need to know to get started. If you're thinking about buying or selling real estate in San Mateo County, or need a referral, I'd love to connect.

Raziel Ungar: Hi everyone and welcome to Raziel TV. Today I'm going to talk to you a little about the financing process. This is something that can be super smooth and really straightforward, although it inspires a lot of anxiety and stress in the buying process. It probably can be the most stressful if not gone about the right way. In this video, I'm going to share with you things that I've learned representing hundreds of nice people buying homes in San Mateo County over the last 17-plus years.

There's several ways that you can get a loan. The two most common are working with a mortgage broker and the second one is with a direct lender. So I'm going to talk to you a little bit about the benefits of each and then I'll share my recommendation. But before I do, let me tell you about the four steps of the financing process.

The first is what's called a pre-qualification. You might have heard that phrase. It really doesn't mean anything in my opinion. It's basically useless. The second would be a pre-approval. A pre-approval is what most buyers will get in the process when you submit your paperwork to your lender. They're going to ask you for your tax returns, and your most recent pay stubs if you're a W-2 employee. If you have your own business, they're going to want to see your PnL. They're going to want to see your assets, whether that's in the stock market, or money market. RSUs if you're at a company that provides those benefits.

They're going to want to see all of that to build a financial picture to determine if they want to give you a loan. So if you submit your paperwork to your lender at the bank or mortgage broker, they're going to look at all that and they're going to say, "Okay, yeah, it looks like we want to give Raziel a loan. We're not 100% sure, but we most likely would be based on what he's sharing with us now at this moment in time." That's called a preapproval.

What you really want is to go for step three, which is a conditional underwriting approval. That is when your lender will submit all of your paperwork directly to an underwriter at the bank. The benefit of that is the person who's the underwriter, is an employee of the bank. Their job is to make a decision on behalf of the bank. Is this person a good credit risk? Do we want to give Raziel a loan? If the answer is yes, then you get what's called conditionally underwritten approved. That is super important.

That's what I recommend to all of my clients. We typically do not submit offers unless you've gone through the conditional underwriting process. It's really easy to do that. Most banks don't necessarily do that upfront. The reason why is the person who's doing the loan, they're most likely getting paid on commission. So it doesn't cost the bank anything free to go through a pre-approval. However, if they're going to put your file in front of an underwriter, they're going to pay someone several hours of their time to actually scrutinize all of your paperwork very closely and then come back and say, "We will give you a loan."

The reason why we don't see this as a standard practice though in the industry is because you're not signing anything with the bank saying, "I'm going to get a loan from X, Y, Z bank." The bank's like, "Well, if we have to invest several hours to go through that process to approve you and then you go to a different lender, then that's not good for us. We didn't get paid anything." So that's a negative. However, if you have a strong referral from your agent or your financial advisor, from someone who they work with regularly, then it's most likely they're going to offer to put you through underwriting upfront.

Then the fourth step of the process is your full approval. That doesn't happen until you're in contract and usually about halfway into the deal because at that point the bank needs a purchase contract. They need an appraisal and then they'll go ahead and approve the loan at that point. So to recap, pre-approval. That's what most people have, but still not what I recommend. Conditional underlying approval is really what you want.

Now, if you're working with a mortgage broker, and I worked with a mortgage broker for many, many years at the beginning of my career, he was really honest, he was ethical. He was just a good guy and all my clients had a positive experience working with him. The benefit of the mortgage broker is you can go to the mortgage broker and say, "Okay, here's my situation. I'd like a loan." Then the mortgage broker will say, "I can shop your loan to these 15 or 20 different banks who I have relationships with, and then whichever bank gives me the lowest rate after the offer's accepted, then I'm going to place your file there and that's who you're going to get your loan with."

So the perceived benefit for you as a home buyer is you're going to get the lowest rate. The challenging part is even though that mortgage broker I worked with for those many years, even though he is an honest, and really good person, the hard part is he's not the underwriter. The file would be brokered out, and so he was acting as a middleman, and so what would happen is in the middle of my transactions, the bank who he'd be brokering the loan to would come back and say, "Hey, we're missing this piece of paperwork. We need more information."

This was stuff that didn't need to happen. People are trying to make their moving plans, and figure out closing. I view it, in my opinion, it was a lot of stress. So really the best thing to do is if you work with a direct lender, like one of those bigger banks, or it could be a smaller bank, that's fine, that they go put you through underwriting in advance. The key distinction is when you work with the mortgage broker, the lender is not decided in advance. They don't figure out who the lender's going to be until after you're in contract when they shop the rate.

So if you are going to go with a direct lender, you might say, "Well hey, if I'm only working with one bank, how do I know I'm going to get the best interest rates?" So that's a good question. So what you can do is work with a couple of banks, if you want. That way you go through underwriting with two banks and that way you make sure you're going to get the best rate. However, if you ever receive a strong referral from your realtor or financial advisor, whoever it is, or a friend who worked with that lender in the past, there's no incentive for them to quote you a higher rate because the last thing they want is the word to get back that they're not quoting a fair rate to the client and then their business will dry up.

So there's a huge incentive as a realtor when I make a referral for my clients that the person is going to be honest, a good communicator, and provide a fair rate. Just as you would imagine, if I'm your agent and I refer you to someone, I don't receive any kind of commission or kickbacks or anything like that. That's illegal. So maybe something like that could have happened a long time ago, but it's certainly not allowed now and I've never seen that in my career. So for your agent, we're in a position of trust. We want to just refer people who we believe will help you have a good experience. We'll close the transaction on time at a fair rate.

Unfortunately, I've done many transactions over the years where the lender hasn't done a good job and the client has ended up having multiple delays in close of escrow. I had one situation a few years ago where the lender was a poor communicator and the lender and two people on the processing team were out of the office and all had away messages up. So we couldn't get any information for a week. My client ended up having to postpone the moving trucks twice. You can imagine how that client felt in that experience. So working with someone who's really competent is super important.

It's also a little hard as the client to evaluate the quality of the lender because the lender typically has four to six people working with them behind the scenes. So it's like if we put this into a medical analogy, if you go meet your surgeon for a pre-op and you build that trust and you feel comfortable, it's hard for you to evaluate though what's the team in the operating room? There's an anesthesiologist, there's probably a couple of nurses, and there might be several other people in the room at the same time, but you're not interviewing them in the beginning, you're only interviewing your surgeon.

So the same thing is in lending. You're working with your person upfront and so you need to trust that they can do a good job. So for someone like myself where I've participated in hundreds of transactions, I can just observe and you see certain people, they typically have really strong teams behind them. What are the people on the team? What are their roles? Well, you have a processor. So someone who will manage all the paperwork and there's a lot of it. They ask for almost everything nowadays aside from your blood type.

There will also be the funder. That's the person who will fund your loan right before the deal closes. There's going to be the underwriter who works in the middle of the transaction who reviews the appraisal, and everything that the processor has submitted and they approve your loan. So my point is these are people that even for me as the buyer's agent, I'm not typically interacting with, but I am interacting usually with just the main lender who's our point of contact.

So hopefully that gives you a little context about the difference between a broker and a direct lender. Again, to recap that, I think if you have one direct lender who's going to do a great job for you, then in my view that's sufficient. However, if you do want to get a quote from a second lender and go through underwriting with them, then that's okay too. Regardless though, you need to make a decision if you are going to have two lenders within 24 hours of getting into contract. That's in very minor cases why I even recommend that. I usually recommend just having one lender in the very beginning.

Another question is about cash. So I'm often asked, "If I have the ability to pay cash, should I pay cash?" Obviously, it's not my position to say whether one shouldn't or shouldn't. However, if you do have the ability to pay cash, that's going to put you in a much stronger negotiating position on getting the house. So depending on the market conditions, if it's a really hot market and there's multiple offers, by paying cash, you're absolutely going to stand out because even in more expensive markets like Burlingame and Hillsborough, you typically have 15 to 20% of the transactions in a 12 month period are going to be cash.

So you're more likely than not if you are cash to get your offer accepted. I've represented many cash buyers throughout my career and the listing agents have sometimes alluded that maybe my clients got a lower price because their client wanted some certainty. The seller was going to go buy another house and we were able to offer a seven or 10-day close. So the seller got their money a lot quicker. They didn't have to worry about an appraisal and it just was a lot cleaner. Cash deals are typically seven to 14 days. I once did a three-day close on a cash deal and it was super stressful for everyone involved. I would not recommend anyone do that. So a 7 to 14-day close is super common.

The other reason why cash can be attractive is the close of escrow time period, as I just mentioned. So if it's a finance deal, most of those are getting closed with the bank in 21 to 30 days. 30 days is very common, and 21 to 25 days is usually not an issue. I remember in the beginning of my career we would see some deals closed in 15 to 17 days, which is still pretty ambitious. It can be done, but it places a lot of stress on the lending team and the appraisal has to get done super quick too. So generally speaking, cash, could be seven to 10 days. The seller gets their money immediately versus several weeks where the seller needs to wait.

Now you might say, "Well, hey, that's not a big deal. It's two, three, $4 million. The seller can wait a few weeks to get this money." Which I agree it's not a huge deal. However, if it's competitive and the seller can get their money sooner, there's no downside for them to get the money sooner than waiting a few more weeks. So we've just wrapped up talking a little bit about the approval process and the different types of lenders you can work with.

Raziel Ungar: One lender I've worked with for many years, Mike Treon, he's going to join us in a second. We're going to chat a little bit more depth about the underwriting process, things you should think about, things you should stay away from, benefit from his experience as a commercial underwriter in the past. So I'm really excited for that part of the conversation. I hope you enjoy that too. So to continue our financing conversation. I'm here with Mike Treon. Mike's been in lending and finance for over 25 years and is a fantastic trusted resource of mine. Mike, thanks for joining us. Tell us maybe a little bit about your background.

Mike Treon: Sure, absolutely. So I actually started in finance, like you said about 25 years ago, but just slightly over that. I have a different background than a lot of lenders because I spent some time in the hedge fund world, in convertible bond and currency trader. I cut my teeth also prior to that as a commercial analyst. I did a lot of construction financing and SBA up to $20 million and then also construction loans in Silicon Valley. Then I became very interested by the markets. So I was a couple of years in London, went to the dotcom period of time, and then went back into the mortgage world in early 2003 or 2004.

So I've seen a lot of markets, but I also bring kind of a different flavor just simply because being both from the commercial side, the trading side, currency, bonds, et cetera, I tend to watch these things as you know very closely. Most times I'm in the office at 5:30 in the morning with the bond market, just because that's the type of clientele we deal with. We deal with clients that are very active, very astute in the market, et cetera. We're dealing with larger loans. So we're always trying to get that client the best possible deal, if you will.

In terms of the market, kind of what we've seen and how this pertains to your particular market here is we've seen a big change over in the past 10 years in regard to what happened in the dotcom crisis. Pardon me, the mortgage crisis in 2008, 2009. What happened was the jumbo lenders became much more specific to portfolio lenders. So I've run top teams at Wells Fargo, JP Morgan, and now I'm at PNC. I've been at PNC for five and a half years. We portfolio all those deals so we control the paper, okay?

That's important as your clients are looking for a lender, especially in your world, the size of the loan, simply because these loans are capped on the balance sheet of specific lenders versus a broker who's going to then be beholden upon that third party to either agree to that underwriting and to agree that pricing plus as a middle person who's getting paid. So prior to the mortgage crisis, you would have, the smaller loans have better rates and the jumbo loans have worse rates. That inverting after that time period because there's a lot of unintended consequences of the Dodd-Frank legislation.

So literally, lenders who are lending off their own balance sheet, they're taking money in terms of that and they're lending it out. So they're really saving, I tell people, the best cooking for their clients. The advantage for us is simply we control the deal. So I'm kind of known in the marketplace too where people call me where they're having problems elsewhere and a lot of those problems come around RSU, right? So RSUs are registered stock units, okay? So in that situation, you may have someone who works for Google or Microsoft and they're getting paid in a combination of those RSU which are very important to how the lender quantifies that income.

So in the mortgage crisis in 2008, 2009, we had an inversion of the previous model, which basically meant that smaller loans used to be better rates and larger jumbo, super jumbo were much higher rates. Now, when I say inverted, basically you're seeing smaller loans that can be sold to Fannie Mae go up in rate and the larger jumbo loans were better in rates by a quarter point to maybe a half point, okay? That was a very big distinction in the marketplace.

Now, one of the things that we experience in this market, particularly San Francisco, Silicon Valley, but mostly all the way through the coast is RSUs, and that is people that work for a tech company that is a publicly traded company. So they have restricted stock units. Now, these RSU are very much a big important part of their income because they receive a base salary and they also have bonus and they have a stock component. Okay, why it's so important in this particular marketplace is that lenders use different adjustments on how they calculate that income.

Mike Treon: In a downturn, in a slowing market, which we're seeing a bit now, we're starting to see lenders not actually let people know how they're adjusting that income, but it's not in the borrower's favor. So a lot of times, I'm kind of known in the marketplace of people when they have a problem elsewhere at a different lender where they come to me to kind of figure out if there's a way to work out. I'm seeing a lot of those lenders really knock people's income down quite a bit. So we're often able to do a different interpretation on that to get them to the finish line.

However, a lot of times my thought with the client is like, "Well, who told you you were approved in the first place? Because when the lender tells you you're approved, they should be able to stand behind it." The main piece that we're all looking for as in this market is if you're going non-contingent on a property, you better make sure that the lender has no surprises for you. You want that just done and knocked out of the part.

Raziel Ungar: So tell me a little bit more about that Mike, because obviously there's a lot of heavy lifting that happens in advance around the approval process. What can a direct lender do for people watching the video if they're wondering what does that look like? Why is that of value to me? Why should I do it? Can you walk us through that?

Mike Treon: Sure. So there's a couple different things. One is the control of the file and the speed at which the lender can move. So you're not actually beholden sending this file off to some other third party and hoping that you're aligning that approval with how they're going to interpret the file. You essentially are the full stop at that point. So I always tell people, if you come to me with a deal where, hey, we need to move fast on this, we can do a full approval, underwritten approval in two business days if I'm going to put that person in the right position for that underwriting.

That's the underwriting that we're going to stand behind, okay? That's what the client wants before. If they're going to write an offer on a $2.5 million property, they don't want any surprises. They need to know from us that they can actually depend upon that lender. So [00:17:30] what is the difference there is the time and the control factor, and also as you know, I have experienced that, I will immediately tell someone upfront, "Here is the potential problems that we have and here's where we can get you and where we can't get you."

Raziel Ungar: Right.

Mike Treon: I think one of the most important things about properties in this particular market is that lenders are honest and they're truthful. Where you're getting the most problems with mortgage people who want to do the right thing and want that big deal but don't do what they need to do to not put the client in precarious position. That's most of the time the calls I get from people because a lot of times I'm very direct to people. I'm like, "Who told you this was done?" Because if I can't get them there, I'm like, "You're just dealing with someone who wanted the outcome but wasn't doing the work upfront." That's the real issue in this market. You just want to make sure all the I are dotted and the Ts crossed.

Raziel Ungar: So let's rewind. Someone reaches out to you, they say, "Mike, I'm thinking about buying a house. I think I could afford something at one and a half or $3 million or whatever. What are the next steps? This is all new to me." Walk me through that process.

Mike Treon: So we really want to streamline that process. So I do these calls in five to 10 minutes with the clients. I go, "Here's what we're going to do. My assistant's going to send you out an application. It's going to be with a secure email on a financial needs list." We're only as good as the client. If you get us what we need in terms of that financial needs list and you tell me I need to move quickly, I'll put you in the fast lane. I'll get you turned around. In these days, it's going to be two years of documentation. So I call two of everything, two years W-2s, two recent pay stubs, two months' asset statements, everything, brokerage, retirement accounts, et cetera.

We will count all those towards our reserves. We are not going to count any foreign assets. So we deal a lot of Canadian clients and lot of clients in the UK, et cetera. If they have a half million dollars parked abroad in terms of that, that will not go towards the reserves. But we do allow that money to be wired into a gift which as you know, a lot of lenders started having a lot of problems with that, especially around money coming in from China, et cetera. We have no problem with it. If you have a gift letter and we can show the wire, not an issue. But that's where a lot of lenders run into problems in this market is around gifts from outside of the U.S.

Raziel Ungar: Got it. So in the beginning in that five or 10-minute phone call,] then they'll send you their two years of everything. Walk me through where they're like, "Hey, what would my interest rate be? What would my monthly payment be?" Talk about that.

Mike Treon: Sure. Upfront, I always get down to that very quickly because I find that a lot of lenders to hook people in, which I don't like to do. In other words, I want to tell them, "Based on your credit range, here's the rate today." As if you were in contract. That's all we can do because a lot of times people really need to understand that a lender cannot lock that rate until you have a contract. So there's no forward floating lock. People come to me and are like, "Well, I'm going to buy in 90 days. I'd like the lock today." I'd really love it if you could do that too, but it doesn't exist. A lender will only lock that when you actually get a contract.

So I always tell people, "Let's take a snapshot in time and say you're in contract today. Now, historically tell me Mr. Barr, have you had a good credit?" "Oh yeah, I usually come around 760, 780, et cetera." "Great, let's look at which product, an ARM loan, a 30 year." "I like a 30-year, et cetera." "I'll give you a rate range and say this is where it would be today." Then I'm going to give them a payment at that point and then they're going to take that as homework and let me know if that's the product they want to go with, et cetera. But it's walking them through what that particular monthly rate exposure is or what that monthly payment is so where that price range.

A lot of times too, I always tell clients, "Look..." A lot of times clients can afford more than they want to spend. I always tell clients, "Look, spend what you're comfortable with. Go by your discipline. Don't go by the max I can approve you for." Right? sometimes people are like, "Well, just do the max." I'm always very sensitive about that. I don't love that question because I never want to seem like we're pushing in terms of that. I want them to get to a comfort level of where we are and then figure out if that's in their mental budget of what makes sense.

Raziel Ungar: Okay. So Mike, tell me a little bit about the difference between a pre-approval and a conditional underwriting approval. Because I talked about that earlier in the video, but it'd be great for you to expand on that.

Mike Treon: Yeah, it's kind of funny. In the lending world and also real estate world, there's this lexicon that people don't understand, these slight nuances that aren't nuances at all. They're huge differences and this is one of them. So a pre-approval versus a pre-qual. The pre-qual is not worth a paper it's printed on. The pre-qual is literally the mortgage person is like, "Here take this and..."

Raziel Ungar: Just a quick phone call, no document, yeah.

Mike Treon: Let me do the least amount of work possible, right? Just maybe keep you on the hook. But let me do the least amount of work also. Now, in this market that's really dumb as far as I'm concerned, primarily because if someone's going out and going potentially to go after a million dollar plus house, then you as the lender better do your job to make sure that they have the proper ammunition, if you will, with regards to what they can afford and what they can't afford.

So I always tell people you want a fully underwritten approval, and a fully underwritten approval is literally going through underwriting. That's the part that we can control because we have a localized approach with regard to that. If we need to rush it and you call me up and say, "We need to write by Tuesday." The client's solid, we can get that fully underwritten by Tuesday in a two-day period of time. That way, that client can go in and write the most aggressive offer. I always tell clients, "It's my job to give you the ammunition with regard to your full approval. It's your job with your realtor to decide how you want to deploy it."

Raziel Ungar: So Mike, I've chat with prospective clients and clients that say, "Look, I was pre-approved by a different lender or I'm already pre-approved. Isn't that sufficient?" Then I'll kind of chime in, "Well, actually I think it's in your best interest if you go through underwriting because then an actual underwriter will invest several hours. They'll actually review everything. Whereas the other person, whether they're well-intentioned, they're just sharing their opinion whereas you need the underwriter to actually make a decision and say, 'You will get your loan'." Is that kind of what your experience is or how do you kind of counsel people around that?

Mike Treon: Yeah, very similar to what you just said because it's just back to the idea is that you don't want surprises. You want to know that you can count on that analysis with regard to how they've approved you. Because what also happens too is as you know in certain marketplaces, people start out with, "Hey, I really want to go for a 1.4," but they have tasted at 1.8. So when we've already done the heavy lifting with regard to that, adjusting to that client is very easy. We've experienced this many times where a client comes and goes, "I'd really like to go to this." Because they started out at a certain mental level and that level changed based on what they saw in the marketplace.

That's a quick answer for me because we've already done that and I've got all the calculations to say, "Yeah, we have the room to potentially go here if you so choose." Which also leads me to the idea of how long are these approvals good for, right? So an approval, once it's done, is good for 60 days. However, all we're doing on that 60 days, one of my assistants is calling you and saying, "How's it going? Are you still shopping?" You say, "Yeah, we're still looking." Great, we reset from our 60 days. So that credit report is good for four months or 120 days and all we're doing at that point is checking in with you.

This is another thing too that's really important is that I really counsel people not to go have multiple lenders pull your credit. Someone called me the other day and they're like, "Well, I've gotten approved by four lenders and I'd like to get approved with you." I'm like, "Did you go have four lenders pull your credit?" I said, "How many of those lenders were aware?" He said, "Well, three of them." I said, "Well, they're not doing you any service whatsoever because here would've been my counsel, give me your credit range and call all these people and say what is your rate? They should be able to quickly tell you that in a five to a 10-minute phone call."

The reason they're not is that they think that the more data you're going to send, the more we're going to go to the dance together in the future. Which I find to be just not a direct and honest way to do business. So really, figure out who you want to work with and make them give you a quote, and then I'm not saying don't get multiple quotes because we're, and as you know this part, we're in a gun battle every day when it comes to rates.

That's why I get people rates very, very quickly and say, "Shop till you drop. I want to do business with you. This is what we bring at the table and I want you to have the information but don't have any more people pull your credit. It's not necessary." Right? Have them give you that information right off their rate sheet for the day, but they don't need it based on you giving them your W-2.

Raziel Ungar: Right. Then going back to the approval, once someone receives the conditional underwriting approval, should they have any concerns or surprises later, or is that pretty much, "Hey, we will give you a loan as long as you have a good appraisal"?

Mike Treon: Right. So that's a great question because you're leading in two different things. One is market conditions because previously we would've said no, but guess what's going on in the last nine months, we've seen a rate rise that we haven't seen. I just got a call from a client who's buying new construction whose $2.5 million deal and the rate's gone up so much that his lenders saying, "We can't do the deal." Because that's how much the rate rose in that period of time.

Now, we're able to get the deal done because there's some things I'm going to count towards his income that the lender wasn't being smart about and blah, blah, blah. But that's happening everywhere. So that's the other thing too is when someone comes right now and they're approved and they got approved three months ago, that may be a whole different world in terms of a 7 ARM that's now gone up 150 basis points or a point in half. That is a huge swing factor.

Raziel Ungar: Right.

Mike Treon: Then the other issue that can affect the ultimate approval is the appraisal. Again shifting market. Previously in the past five years, the trajectory has been up and up and up and up. So we really had very, very seldom any problems with an appraisal. We're having more issues with the appraisal. So if a borrower is reporting 20% down and they're buying a property for $2 million, okay? Let's just say it comes in at 1,950,000, right? The lender can fight that appraisal. But being an appraisal of a $50,000 delta is very difficult because that's a rounding figure [00:28:00] with regard to this adjustment for school, blah blah blah. Very hard to win, okay?

So what happens then? Well, my approval was based on 20% down on the 2 million. So we will lend on the property but we won't lend on 2 million. We're going to lend on 1,950,000. So that means we're going to take our 80% loan of value based on the 1,950,000. So now the borrower is need to come up with more cash down. So they would need to have that. There's sometimes too where we know just because there's not comps and it's a really hot area that it's not going to come in, right?

Raziel Ungar: Right.

Mike Treon: We prepare the client and say, "If it doesn't come in, this is how we would remedy this." I over disclose that because I always want the client not to be running to a situation of not being prepared.

Raziel Ungar: Right. I think, because that sounds fun. Mike, I wanted to ask you about, let's say the client has the ability to pay cash and maybe they want to take out a loan afterwards to create some debt on the property. What's your experience with that? What kind of advice or words of wisdom would you share?

Mike Treon: So a lot more common obviously in certain markets. I think a lot of times it makes sense because a cash buyer is trying to get that seller to take a lower price and get it. So a lot of times it's a great tool, however, you need to know the ramifications. You can do what's called a technical refi with certain lenders, we're one of them, where we'll come in and say, "Okay, you closed on cash so it's not going to fall into the general cash out category because we know you used your cash to get this done. So it's a different type of approach."

The downside is that you're paying closing costs twice because you have to come back in terms of that. That's the main downside and you'll see a lag of getting your money back out. I'll take it 30 to 45 days after you actually close on the property, so.

Raziel Ungar: If it's your closing costs though, let's say it's 5, 10, $15,000, but if enabled you to get the house, obviously that washes out so it still could make sense.

Absolutely. It won't be that much your closing cost. It will be much more on that first closing.

Raziel Ungar: Got it.

Mike Treon: On the second closing, you're probably like 5,000. Because everyone's like, "Oh, I have to do a new title balls again and renew it. ” Yeah, the problem is that you have to do that and you have to pay for an appraisal cost. So the second bite at the apple would be much smaller, probably around $5,000. It's very effective in certain markets because there's a lot of sellers out there, especially if they're moving somewhere else, cash is very attractive these days.

Raziel Ungar: Is the rate typically the same as a purchase or would it be a little higher?

Mike Treon: It's a little higher.

Raziel Ungar: A little higher.

Mike Treon: Not much. Maybe an eighth of a point.

Raziel Ungar: Do you ever see any pushback on that or that just is what it is for someone who wishes this structure their transaction like that?

Mike Treon: Depends on how much money they're taking. If they're going to give us a nice loan of value and 40% equity in the property, we usually can just make it a parity or par-

Raziel Ungar: Understood.

Mike Treon: With what that rate was of the purchase.

Raziel Ungar: So Mike, let's say in this example, I have a client, they already own their home in Burlingame or San Carlos, whatnot, and they want to buy another home, but they want to keep that house because, or they might still plan sell, but they don't want to have to move twice. So they take their time. They buy first and then they want to sell afterwards, but they have a lot of equity in their house. How can you structure that kind of called bridge financing perhaps?

Mike Treon: That's the classic chicken and the egg problem in the Bay Area, right? Bridge financing, it gets used in so many different formats.

Raziel Ungar: Right. By different lenders.

Mike Treon: By different lenders and brokers and et cetera. It's probably the most misused term out there because you know what bridge financing is, that's code for, "I'm going to take you to the cleaners." In the traditional sense because guess what? Brokers don't want to lend you for 60 or 90 days. If they do, they're going to take their pound of flesh. So the way we've worked around that, and we've done this with a couple of your clients, we have a unique product and I'm going to talk our own home book here because PNC is the only one who does that is that we will literally come in and give you an equity line on our property that we know that you're going to rent and give you an owner-occupied rate on that and we don't hit you for an investment property.

So I'll have clients who come in basically say, "Well, based on the school, when school ends..."Maybe we talk to them in November or December and they're like, "Look, in May we want to move based on the school day." If we can set that conversation up correctly, then we're getting them queued up to be ready to pull the trigger down the road. That's why that equity line is such a good product because you can do it without points, you get an owner-occupied rate and we get it done and you don't pay interest on it until you draw from it.

Mike Treon: So if you do buy, great. But if you don't, it's just an insurance policy, and it's an insurance policy that immediately gives you cash. One of the things that I found is as soon as we put that equity line in place and the client's like, "Oh, it's there." You'll find that they quickly find properties much faster than they were expecting because it's something mentally that's been taken care of and they can count on, so.

Raziel Ungar: Could still have a first mortgage on that property and then your equity line comes in after that?

Mike Treon: Absolutely.

Raziel Ungar: Talk about that.

Mike Treon: Absolutely. So a lot of times, a lot of people who-

Raziel Ungar: Or give some examples of numbers perhaps.

Mike Treon: Sure. I'll give you someone in San Francisco, they have a property, a $2.2 million property, they owe $500,000. They bought it about 14 years ago, right? So we're giving them a $750,000 equity line on that property because they want to come and get out of San Francisco, right? A lot of people are wanting to possibly exit the city and come to Burlingame, right? So that's what we're doing to set them up so they're ready and they're looking in the springtime. But these are the type of people that, I bet you, find a property even sooner than that because like I said, once the money's there available it makes them look.

Raziel Ungar: How long does it take to put the equity line in place, the approval process on that?

Mike Treon: I can rush it, but 30 to 45 days.

Raziel Ungar: Okay. So then in a month or two, they'd have the equity line in place, and then after that then when they write the offer they can pull the down payment funds from the equity in their house?

Mike Treon: Correct.

Raziel Ungar: Then obviously you need to be able to still support the debt though on both properties?

Mike Treon: Correct.

Raziel Ungar: Based on your income.

Mike Treon: Right. But I want to throw something else crazy in there. We will allow that person to rent that property. So once we qualify them for the equity line, it's just on that, right? Because they haven't found another property. So let's say they go and find another property and they are stretching themselves and we will allow them to say, "Okay, we're going to rent this property for $4,000 a month." We will take a 25% haircut against that 4,000, a vacancy factor, and give them 75% credit against that 4,000 towards their cash flow.

So it helps them to actually mitigate the effect of the debt on the exited property. We're the only lender that allows it. Most lenders want to see one to two years of that property being rented on your schedule E, which is never going to happen. So this is what I mean is that it allows you to get that "bridge financing" without the expense.

Raziel Ungar: Let's say Mike, someone does not have that equity in their house, or maybe they do and they're looking at an alternative lender, somebody who does hard money loans. I've had some clients do that. You probably have some experience-

Mike Treon: Sure.

Raziel Ungar: Where it's not a fit for what you do. What would be the profile of the client where it might not be a fit for what you do but why they might go in that direction?

Mike Treon: Sure. Great question. Because a lot of times it happens in the Bay Area because you have startups.

Raziel Ungar: Right.

Mike Treon: you have someone who killed it before and then maybe is putting all their efforts in this new thing and not taking a salary. The problem is even if this person has a track record of be successful, the lenders aren't paying the neck because all the unintended consequences of Dodd-Frank is that we're not allowed to be bankers. We have to be like, "Oh, it's either this right here fits to this box or it doesn't." Brokers are great. You're going to see more and more of that activity, which is capital finding a home, and those people looking for that home because they need to solve a problem short term.

So I have no problem with that. I think that they offer great products. You just want to try not to go that route if you can save a ton of money because they're going to take a pound of flesh and they should take a pound of flesh because they're taking on a whole different risk factor and they're solving a problem with regard to that. But there's a lot of lenders out there, there's so much capital that's looking for a home in relationship to a return.

Raziel Ungar: Right. So Mike, if we go back for someone who this is resonating with, they're like, "Hey, I'd like to have a conversation. I'm thinking about buying but maybe I'm not going to buy for a year from now, or maybe I want to buy a month or two from now." When does it make sense for a prospective home buyer to engage with a lender, at what point in the process?

Mike Treon: Sure. I get those calls all the time where someone's like, "I don't think I should be talking it. I may be looking a year." I always tell people it's better for us to talk now because what I'm going to do is answer questions for you and then it'll get you closer to whenever you're ready in terms of that piece. So that person, it's good just to get your ducks in a line to understand, "Okay, here's my target, what does it look like?" Because I may be able to quickly tell you you're right in line or I may quickly tell you that you got to readjust to what you're trying to target.

So better to know that at that point. But because of my past underwriting experience, I don't want to drive people through a long process. I want to give them quick answers and then be like, "Here's what you want to do." Then a lot of times those clients will come. Once we give them a comfort level, oftentimes they're like, "A year later," and I get a call from them two months later because they've thought about it and they're like, "Well, the market, et cetera." So that conversation alone can give them oftentimes comfort to potentially move sooner, but at the very least it's getting them ready, okay?

Now, in the other situation when clients come to you and go, "Look, I really think next two months we want to do this." To that client, I'm always like, "You want to get fully approved. You want to get it underwritten, so it's checked off your list in terms of that piece." You can wait if you want to. Sometimes client's like, "I don't want to do anything." Then they call me on a Saturday or on a Sunday a week later and go, "Well, I found a property. I'm going to write on Monday." I'm like, "Sometimes that happens and that's great. So if you're really in that one to two-month mark, I suggest you talk to lenders, get those rates, find out who you want to work with, feel comfortable about that, and get approved."

Raziel Ungar: Makes sense. So after someone's already talked to you about the approval process, you're going to have a conversation with them about the several different types of loan products. Walk me through that and what that looks like.

Mike Treon: Sure. This is where I am a bit of a geek in terms of that because I probably over-disclose to people and I think people do appreciate it because I've actually explained things that a lot of lenders don't. So what we're really talking about is what is the yield curve right now, it's what I call the arc of the yield curve, right? So the arc of the yield curve goes like this and what we're talking about is money over time, right? So there's three main products that you're looking for in the marketplace right now. You have a 7 ARM, it's called a 7/6 ARM.

Raziel Ungar: While you're talking about ARM, what does it stand for?

Mike Treon: So the seven prefix number, it always refers to how long that rate is locked or fixed for. So the 7/6 ARM, the 7 refers that rate is fixed for seven years, it can't move. The 6 is based on the six-month index that it's based on. So there used to be braced on LIBOR in terms of that. Now, we're using the six-month index versus the one-year LIBOR.

Raziel Ungar: So the interest rate is fixed for the first seven years and then after the seven years it'll adjust based on whatever the interest rate is in the market plus a premium on top of that?

Mike Treon: Correct, on the eighth year. Now, most people choose the ARM because-

Raziel Ungar: Over?

Mike Treon: Over a 30 year fix.

Raziel Ungar: Got it.

Mike Treon: Probably best, let me do the rates, the seven, the 10, the 30 and then I'll talk about the difference.

Raziel Ungar: Okay.

Mike Treon: So let's just say a snapshot today and we're going to show you the spreads between these two. So let's say a 7 ARM today was 5.25%, a 10/6 ARM was 5.5. So that quarter point delta there represents how the market is pricing that extra three years of duration, okay? Then the third year, which is more over time, right now let's say that's six in an eighth to six in a quarter. So you can see how some people look at it and go, "Well, I really want that 30 year but that's higher than I want and I like this 7 at five and a quarter."

So you have to look at what that difference is with regard to how long you think you're going to be in the property. In the Bay Area, you have all these people who think, "Oh, I'm only going to go be here for five years so I'm going to go out of this particular property." So the 7/6 ARM encompasses the time period that they expect to be in the property. They're good with that. Others may have a company that they're going to sell or a big stock payout, they're going to pay the loan down.

Or other people, which is very common right now, are going, "Hey, the Fed has gone nuts. Basically, they're going to go too far and we're going to see rates come back down sometime in the next total to 14 months." That's a market call. It's not for me to make with clients. It's for me to explain the products, how that arc of the yield curve is, and then where their comfort level is, right? Because I never want to have a client be forced into the 7 when they don't want it in terms of that. It doesn't matter to me as the lender. It's not like, "Oh, we get paid more for this product and I want to push you in that." We want the client to choose what makes sense.

But I always tell the client, "The house will speak to you." Certain houses, you'll be able to go, "This is it, this is the picket fence. It's going to be a long-term thing." Other properties are like, "This is good for right now." So I tell people, "Let's get you all three rates. You don't have to make the decision now. You can look at it." Some people just know like, "I want a 7." Some people know, "I want a 30-year." That's fine. The ones who don't, I always tell them, "Let's look at the rates and then see once the house presents itself to you, what you're thinking." Because a lot of times your gut is going to be correct about how you want to handle what product you want to choose.

Raziel Ungar: Okay. So we just talked a little bit about the yield curve and the ARM and the 30. Can you break it down super basic, what's the difference between an ARM and a 30-year?

Mike Treon: I always just say a 30-year is your bread and butter, old school products. 30-year amortization, it's fixed for 30 years and it can't move. You're going to keep it and you could prepay it at any time in terms of that. But if you kept it, you would start day one and you would go through a 30-year period of time and you would owe zero, okay? The ARM is a hybrid product. It's really a derivative product, to be truthful because you are only fixed for that period of time. It's amortized over 30 years.

So when I say 7/6 ARM, that rate's fixed for seven years, but the payment is calculated as if for a 30-year amortization. The same thing on the 10/6, right? It's fixed for 10 years but your payment's calculated as if over 30 years. It's only if you have that loan on the 11th year that it then goes to adjustable.

Raziel Ungar: Makes sense. Tell me a little bit about recasting the loan, and what type of client that could be a good fit for. I think, I mean, that's something that many lenders do offer. I think it's a cool feature. Tell me a little bit about that, Mike.

Mike Treon: Sure. A lot of lenders do offer it, but they only offer it on ARM loans. They don't like to offer it on 30 years.

Raziel Ungar: Right.

Mike Treon: It's only a small. That will do it. We will do it on all products. The recasting feature is really a great feature when you're selling a property down the road or you're going to sell a company or a big bonus, et cetera. So let's say you bought a property for $2 million and you only put 20% down because you just wanted to get in the property. So you owe 1,600,000 and now you're lagging. Two months later, they'll sell that other property for $800,000 of net revenue to you. So you want to take the $800,000 and you want to pay down the 1.6 million loan that you took.

The recasting feature allows you to come in, pay that down, and the loan then recognizes that you have paid that 800,000 and recalculates the payment based on the remaining amortization. So let's say it took six months to do that and you have 29 years and six months left. So we'll now take that 1,600,000, recalculate it now at $800,000 because we paid $800,000 down, and it's going to calculate it now on 29 years and six months. So your monthly payment goes away down.

The way people like that is because they want to drive that payment down and they know for a short period of time they've got to hold these two properties. I always tell them the thing about the recasting, it gives you the most optionality because you get that money and then you can decide, "Do I want to use the opportunity cost question of this capital and invest it elsewhere? Or do I want to pay this debt down?" You're the driver at that point, but I'm not making you go through a refinance, another $5,000 of cost, et cetera. You can do that recasting and drive that payment down without having to go through the refinancing.

Raziel Ungar: There's usually a minor fee.

Mike Treon: It's like $150. As soon as someone tells me that they're going to recast, we've done this multiple times with your clients, I ask them that we've just prefund it and pay it up upfront. If they do it, great. If they don't, great. It doesn't matter. It's nominal, but it's no problem for us to take care of it.

Raziel Ungar: So Mike, in the spirit of education, any last words?

Mike Treon: I think you know this very, very well, how important this is for a new buyer or a person who already owns at home. It's usually the biggest investment that they will ever do. I always tell people, "A home is not to be traded. You don't live in your Apple stock. You live in your home. It's where you raise your family in terms of that piece." So go out and find the best people you possibly can in terms of that. Make sure they can speak clearly with you and give you the best feedback. Just like how you treat your clients, the same thing in the lending world, all your clients deserve the best service, if you will. So go out and shop for it. Find what makes sense for you.

Raziel Ungar: Cool. Well, thanks for joining us today. Thanks for watching Raziel TV. Thanks for watching my video. If you'd like to stay in the know about what's happening in the real estate market in San Mateo County, or just what's going on in your local neighborhood, please consider subscribing to my channel. If you have ideas for future content that you'd enjoy, also I'd love to hear from you. Thanks.

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