If you are like me and have kids in college/ young professional years, I’m guessing your kids have posed the question “How will I ever be able to buy a home in a high-priced area like California?”

Qualifying for a home loan boils down to 4 factors, namely:

1. 1. Credit:  This is a pretty easy obstacle to overcome as a minimum of 620 score is all that is needed for “A” paper loan.  For young borrowers, it is important to keep in mind that they should have at least 3-4 pieces of credit rating each month to build up their credit scores, as well as meet minimum credit thresholds for some lenders.

1. 2. Down Payment:  See above for all of the new low/ no down payment programs

1. 3. Debt-to-Income (DTI) Ratio:  This is usually a very straightforward calculation, whereby conventional loans will go as high as 50% DTI, and FHA/ VA loans, up to 57% DTI.  By providing us with some basic income documentation, we can calculate how much max home sizing you will qualify for.

1. 4. Cash Reserves:  This is another very easy obstacle to overcome as FHA loans require zero cash reserves after close and conventional loans, a mere 2 months of the new house payment.  You can even use retirement funds for the reserve requirement.

At the end of the day, the best thing a young borrower can do is to minimize/eliminate debt, slowly save (by being consistent, you will reap the power of exponential growth, earning “interest on interest”), and keep a good credit rating.

A Young Professional’s Real Estate Odyssey: …Jumpstarting a Real Estate Empire

I recently had the pleasure of working with a young professional that was referred to me.  For identity protection, I will refer to her as Molly.  Molly had just graduated college 2 years prior and was making $80,000/ annually.   She had just paid off all her debt and was starting to save.  She thought that there was no way she could afford to buy a property in CA anytime in the near future.  She also expressed that if she was ever able to afford something that she wasn’t afraid to “roll up her sleeves and put sweat equity” into the property.

With the recent huge announcement by Fannie/ Freddie, whereby if you buy a 2-4 unit property and occupy one of the units, you can now get in with only a 5% down payment (previously it was 20% down minimum), I suggested looking at 2-4 unit properties.   She ended up finding a cute, but bit rundown, 4-plex in a nice location in northern SD County.  She settled on $800,000 sales price.

How could she possibly afford this?   

Molly was able to use rental income offset (at a 75% factor) of the 3 units she wasn’t living in to qualify for a much higher mortgage amount.

Here is how the numbers penciled out:

5% Down payment = $40,000 (we can show you some creative ways to make this happen as well)

1st Loan Amount:  $760,000 @ 6.5%       $4804/month
Mortgage Insurance                                      336
Real Estate Taxes                                          833
Homeowners’ Insurance                               200
Total house payment                                 $6173/month

Rental Income Offset                                ($3375)
75% of $4500/ (rents for 3 units not being occupied by her)

Net Rental Payment                                    $2798 month / $6667 monthly income
= 42% DTI

Molly could have even afforded closer to $850,000 sales price with these offsetting rents; compare this to what she can afford if she was buying a single-family residence with no rental income offset: a mere $400,000!

Talk about making a huge initial splash into the real estate world!   While this was able to get her into the property, she knows she needs to maintain the property and manage a few renters.   For Molly, who is a super go-getter, this will not be a problem.  She has plans to renovate each unit as each renter eventually moves out.  After doing this, she is confident she will be able to raise rents in line with local averages.

Taking it one step further, Molly and I spoke of the tremendous tax benefits of owning real estate:

• For primary residences, as a single person, she can take up to $250,000 tax-free gain if she lives in the property 2 consecutive years out of the next 5 years ($500,000 tax-free gain for married couples)
• As this property also has investment property component, if her gain was over $250,000, she could also 1031 exchange into another property and defer any additional taxes (over $250k tax-free gain).

Molly’s plan is to live here and fix up this property over the next 2-3 years, then sell it and repeat this process, moving up in property value.   While we all know moving is a pain, if you can endure it, this is a great way to becoming a real estate tycoon; I have seen it firsthand by more than a few clients!

Rates are improving and the real estate market is starting to move. Contact us today and let us help you strategize how to put you in the best position for your next real estate purchase and then maximize that deal!

These are extraordinary times. Regardless of your political views, it’s undeniable that significant changes are underway, changes that will shape real estate and mortgage markets for years to come.

Economy and Interest Rates

It will be interesting to see how current fiscal economic policy will impact mortgage rates, both in the short and long-term.  From a fundamental standpoint, it only stands to reason that if the cost of supplies and labor increase, this will produce more inflation and thus, higher rates.  With the widespread proposed tariffs and “reciprocity” agreements, you would have to think this will cause the price of just about all goods to go up.  Furthermore, if there is less migration into the country and perhaps foreign workers leaving the country, this will probably lead to the cost of labor going up, also inflationary in the short-term.

Taking a longer-term approach, with DOGE and the current administration hell-bent on reducing the footprint of government and eliminating wasteful spending, perhaps this could lead to sustainable productivity gains, the only real way to combat higher material and labor costs.  With a $36.2 trillion deficit and adding almost $2 trillion every year lately to this deficit, we need to reduce this debt or it will eventually lead to a slow downfall as we will have to print more money to pay our debts. It also helps that the current admin wants to create a lower interest rate environment to spur investments, both on a macro and micro level.

I’m fascinated to hear clients’ viewpoint on the subject, but either way, real estate fares well both in inflationary and target inflation (1.5-2%) environments.   With the tremendous investment and advances being made in AI, which should permeate all industries, I think we are safe from a deflationary environment for at least the next couple of years.

Student Loan Debt

A big issue facing our country is how existing student loan debt will be handled.  Currently, it is estimated that there is $1.77 trillion in student loan debt.  An estimated 42.7 million Americans have some student loan debt, which is astronomical as this is 12.5% of the entire US population.

During the early Covid period, Biden put in motion a plan to eliminate much student loan debt, including putting in place the SAVE plan, a program that restructures or eliminates debt based upon a borrower’s income.   Currently, the Federal courts are trying to block or eliminate some of these proposals.

This can be a very polarizing issue and one where I can see the merits of both sides. On the one hand, you can argue that borrowers knew what they were doing when they took out this debt and like any contract, should honor it.  On the other hand, there are many borrowers that want to pay the debt, but they have a current income or perhaps medical situation that does not afford them enough money to pay the debt.

This puts a lot of the American population in limbo as to what is the fate of their student loan debt.  The best advice for those holding this debt is to work with your loan servicer to make sure your payments are affordable based upon your income.  All loan servicers should work with you on this as ultimately, they want to collect the debt and better to collect less now, which the hopes of getting repaid later.  Secondarily, if you can afford it, I would strongly advise to make payments (even if they are minimal payments) so you do not screw up your credit, which can take years to fix and will materially cost you whenever you try to buy a car, house, or even open up a credit card.

The Canary in the Coal Mine

If recent natural disaster events across the country have taught us anything, it is the unpredictability of where and when a disaster will occur.  In Florida and contiguous states, every fall we hold our breaths as to where the next hurricane will hit.  In the mountain and coastal West, we worry about water accessibility, fires, mudslides, and of course, the next big earthquake.  In the heartland, we worry about the impact of tornadoes.  The reality is that a natural disaster can hit and hit hard anywhere.  Look at Asheville, NC, which prior to getting devastated by Hurricane Helene, boasted that in addition to being a vibrant city, had one of the most risk-free locations in the country when it came to natural disasters.

We have seen insurance companies pulling out en masse in many markets across the country, whereby often the only insurance option is a state-funded insurance plan.  It is clear that insurance companies are struggling to assess their risk and when you add onerous governmental regulations on top of this, insurance companies capitulate.

Fed Chair Jerome Powell recently predicted that in “10 or 15 years, there are going to be regions of the country where you can’t get a mortgage” (because of the underlying insurance requirement).  He even went on to say that vast parts of our economy are becoming uninsurable as insurance companies are underfunded to deal with “unforeseen catastrophic events.”

While I think it will be a a few years before we see a major change in risk assessment and how we protect our personal property, I believe that day is coming whereby insurance as we know it today will be a thing of the past.

Let’s Connect!

We’re here to help you navigate these complex times. Whether you’re planning your next real estate venture or brainstorming future opportunities, we’d love to work with you.

Our hearts go out to all those affected by the LA fires and pray for an end to this devastation. Words cannot even describe what a scary scene has unfolded in many parts of Los Angeles County.  The mental anguish of not knowing what is going on in your own community can also take a toll.  The Watch Duty fire app has become immensely popular as the best source of real-time fire information.

If you are affected by fires, you should immediately contact your mortgage company, insurance company, and County tax assessor.  If possible, you should have correspondence in writing (through direct mail or email) and keep a date-sensitive record of your correspondence.  While there are no laws stating that these companies have to offer you help, the reality is all should offer some form of forbearance, delaying payments without penalty until you can safely occupy your home.   Furthermore, I’m sure in the coming weeks, there will be some declarations passed by state and local municipalities to deal with the devastation the fires have caused.  If you need any help with this, please do not hesitate to contact us.

Medical Bill Credit Reporting

Under the good news category, the CFPB (Consumer Financial Protection Bureau) has passed a rule that would eliminate the reporting of medical debt in credit scoring and credit reports.  It is estimated that this would remove $49 billion in medical debt from roughly 15 million Americans.

However, the rule is not set to go into effect for another 60 days and there is concern that the new Trump administration could veto this rule, as well as severely curtail the CFPB’s authority.   While the CFPB, which was established in 2011 as a watchdog for the financial services industry, has come under fire for outgrowing its original mandate, this rule is a very positive step and should be allowed to pass.

I don’t think there is one person reading this that at some point hasn’t been totally frustrated by our complex medical system and trying to deal with medical insurers.   This rule would go a long way in preventing abuses my medical insurers.

Investment Property Loans

It has never been easier to buy an investment property, thanks to debt service coverage ratio (DSCR) loans for residential properties.  If the property cash flows (i.e. the monthly rent is more than the principal, interest, taxes and insurance on the property), then you can obtain a loan without providing tax returns &/or other forms of income documentation.  If you are selective, there are definitely deals out there as the competition is a lot less in this higher rate environment.   Buy the asset now, refinance when rates come down.