Investing in Real Estate with No Income, No Job Requirement DSCR Loans | Curiosity Code 016
10 Jun, 2024
In this episode of the Curiosity Code podcast, Alex sits down with Liz Lopez, a seasoned professional with nearly two decades of experience in the mortgage and real estate investing industries. Liz, currently a team leader and loan organization specialist at Nexa Mortgage, shares her insights into the wide range of loan products available to clients, from government loans to jumbo mortgages, and discusses the innovative DSCR loan product that she specializes in. She explains how this product, which is based on the cash flow of the property rather than the borrower's income or job, is a game-changer for investors. Liz also touches on the importance of doing due diligence and how her background as a conventional government underwriter influences her approach to risk management and client service. The conversation also delves into the impact of technology on the mortgage industry, with a nod to the potential of AI and machine learning to streamline processes, although Liz admits to being somewhat old-school in her methods. Lastly, Liz offers her perspective on the cyclical nature of the real estate market and provides advice for investors looking to navigate current economic fluctuations. This episode is packed with valuable insights for anyone interested in real estate investing or looking to understand the complexities of the mortgage industry.

Alex: Hey, and welcome to another episode of the Curiosity Code podcast. Today, we're excited to chat with Liz Lopez. Liz has nearly 20 years of experience in the mortgage in real estate investing industry. As a team leader and loan organization specialist in nexamortgage, she's an expert in wide range of loan products, from government loans to jumbo mortgages. Liz has held key positions with major companies such as Fairway independent Mortgage Corporation and Wells Fargo Home mortgage. She's also an experienced real estate investor in over her creative financing techniques. Well, let's dive deep into her journey and find out what she has to share in the mortgage and real estate industry. Welcome to the show, Liz.

Guest: Amazing. Thanks for having me.

Alex: Hey, it's time for a short break. This episode is brought to you by productera, your fintech innovation partner. And this is why that matters. Over seven years ago, I created an agency to help fintech entrepreneurs create exceptional user experiences and cutting edge software. And over the years, our team has expanded to over 30 experts in machine learning, engineering and cloud architecture. We've guided our clients through all stages from idea conception to multimillion dollars. Acquisition when it comes to secure fintech solutions. Product era, easier choice. Now, back to the show. All right, let's start with your current company, Nexa Mortgage. There you have access to a wide range of loan products. How do you decide which product is best suited to a client's unique financial situation? And can you talk about any innovative loan products that you think are game changers in the industry at the moment?

Guest: Sure. Yeah. So at Nexa, I'm a mortgage broker, and I have over 200 lenders that I can go to any type of loan product anywhere from conventional government, non QM. So under non QM, we have the DSCR loan product, which is what I specialize in. We also have bank statement loans for self employed borrowers who write off a lot of their income, 1099 loans. We've got foreign national loans and jumbo loans. Working on a lot of commercial deals right now. So higher units and mixed use type properties. Got some restaurant financing that I'm working on, just all different kinds of loans.

Alex: Fascinating. Any innovations like loan products that's happening at the moment that you particularly fascinated about?

Guest: You know, I just love this DSCR loan product, and I know a lot of people have never heard of it before. And I have over 80 lenders now, 80 DSCR lenders, and they all have a different set of guidelines. So something that people aren't aware of is they have a different minimum credit score, minimum DSCR ratio, minimum loan amount. I have so many different. I have a spreadsheet with all the different tabs of all the different guidelines from all the lenders. But as far as innovative, I mean, so with the DSCR, it's a no income, no job requirement loan. So it's strictly based off the cash flow of the property. So for investors, I think it's a very innovative product and a lot of investors have never heard about it, even though the product has been around for a long time.

Alex: To be honest, it's the first time I hear about it. When I start researching. When we met on other call and I started researching deprivation and your job title and what you do. Like what is DSSR?

Guest: So it stands for debt service coverage ratio. And the basic gist of it is that your cash flow covers your mortgage payment. So if your rental income is $1,000 and your mortgage payment is $1,000, that would be considered a one to one ratio. That's what most lenders are going to look for. It's not DTI driven. So it's not debt to income driven. We're not going to ask for your income, we're not going to ask for your tax returns. That's why my investors love it.

Alex: Interesting. So this specifically for investors, it's not, it has anything to do with the conventional loans that most people are familiar with, correct?

Guest: Yeah. So it's an investment property product. It is only for investment properties. Correct. Other innovative loans, like I mentioned, that bank statement loan. So if you are self employed and you write off a lot of your income, you can buy a primary, a second home or an investment property on the bankstate. Milan.

Alex: So you mentioned that you have like a spreadsheet with the Milan tabs open. How do you do this magic matching work? How do you find a perfect solution for a particular client?

Guest: That's the first phone call. I do a deep dive into what they're looking for and then do my due diligence up front. So you got to cover a lot of basis as far as the entity structure. So DSCR allows you to close in an LLC. Conventional loans, government loans do not allow you to close in an LLC. So it is unique loan product in that way. So there's different things, you know, for your LLC. How is your entity structured? Is it nested? Meaning does an LLC own another LLC or is the trust own the LLC or do you own it individually? Because it depends what, each lender has a different set of requirements. Some lenders don't allow nested llcs so I do a lot of due diligence up front. You know, what's your estimated credit score and where are you looking to purchase? What is the purchase price? We dig into the DSDR ratio. We have to gather the taxes, the insurance, the market rent, calculate that ratio up front. And then I go to my spreadsheet and I'll say, okay, based on their credit score, that loan amount, what is the LLC structure? Has the home been listed on the MLS? Because that's, that's a big deal. Some of these lenders won't allow it if it's been listed in the last six months. You know, are they trying to do a cash out refi? If they are, how long have they owned the property? Because there are seasoning requirements with these lenders. So just based on the parameters and the due diligence up front of me talking to the client, I'll look on the spreadsheet to decide which lenders could finance that property. And then based on which lenders, then I go ahead and I reach out to them with the scenario and I will get pricing from those lenders and whichever one comes back with the lowest interest rate is the one I normally will present to the client.

Alex: Wow, lots of, lots of back and forth, lots of communication.

Guest: Yeah, so I mean like DSCR, half of the lenders will report to your credit report and half of them won't. So some investors, they don't want it on their credit report. So we have to make sure we're going to the right lender.

Alex: Speaking about the mortgage lending companies, can they call Nexus a mortgage lending company?

Guest: We're a broker.

Alex: A broker.

Guest: We are now a correspondent lender with a few lenders. So yes, I guess you technically are a lender now with three lenders, but for the most part we're mortgage brokerage. We're one of the largest mortgage brokerages in the US. We have over 2600 loan officers.

Alex: So in your opinion, what kind of competitive advantages successful company like that should.

Guest: Be having, especially for DSCR? If you go directly to one DSCR lender, you're only going to have that one set of guidelines, one interest rate that you can get from them. So it's definitely beneficial to use a broker for the DSCR loan product. You know, conventional loans, government loans, whether you go to chase or rocket or you know, Wells Fargo or use a broker, you're pretty much going to get that same underwriting guidelines the way that a broker gets paid. I'm a loan officer, so whether you come to me or you go directly to chase and go to a loan officer there, we're going to get paid the same way. So, you know, my origination fee is the same as an origination fee to a chase or Wells Fargo loan officer.

Alex: But you get access to way more.

Guest: Larger offerings of probably I have so many lenders. So you're not just getting set into, this is what the interest rate is and that's all you can get. We can shop that loan and make sure that we're getting the lowest interest rate available for the client.

Alex: Given your experience in real estate investing, how do you mitigate risk associated with economic fluctuations? Maybe you can share strategies that can be employed to maintain profitability during downturns like we're observing now.

Guest: You know, does the property cash flow? If the property cash flows, it's, it might be a good investment. You know, if interest rates are high right now, and I let all my clients know it's a high rate environment, you know, most likely in the next couple years the rates will decrease and at that point you could refinance and be cash flowing even more. So you just want to make sure you're doing your due diligence. And does it cash flow as a long term rental? That's definitely the most important piece because we can look at DSCR loans from a short term rental perspective or long term rental perspective. Short term rents are definitely going to be riskier, you know, Airbnb type of income. You want to make sure that property can cash flow long term rental. And then if you can get short term rental income, that's a bonus on top. But yeah, I mean, the market's always going to fluctuate. You know, I watch the interest rates daily. They go up a little, they go down a little. So as far as, you know, investors are always buying. It doesn't really matter to them if it's a higher rate environment or lower rate environment. As long as the property cash flows based on your risk as an investor, what area you buying in is very important. You know, especially if you're going to do a renovation product, they always take longer. It always costs more money than you think it's going to when you're renovating a home. So, I mean, finding the right area, you're always making money in the buy is what they say in the real estate investing world. So buying a good property, buying a little deeper if you can, meaning, you know, you're going to get a little bit, a lower purchase price than if it, you know, maybe it was listed on the market. You can talk the seller down to a lower purchase price on the buy. You're going to make your money. As long as it's cash flowing initially upfront, most likely it's going to be a good investment as long as it's managed correctly. Also, managing these tenants is definitely an important piece of this, making sure that you cash flow.

Alex: You mentioned short term and long term type of business. In terms of cash flow and how you rent these properties out based on your experience, do you see more of short term projects recently or is mainly long term?

Guest: Depends on the area. So in that, you know, that midwest area where the homes aren't as expensive, most of the investors just do long term rents in that area. But when you're coming over to, you know, Arizona, California, Washington, even Texas, and that's when we're going to see more of that short term rental income, higher property values, because they won't cash flow as much on a long term rents perspective as they do as short term rental. Now, you know, we pull air DNA. So the paid version of air D and A, there's a button on there that says projected income for that property. We're going to pull that report. We want to make sure that it's between 60% to 70% occupancy and we want to see what the income is for that property. So we're going to determine upfront on a purchase if that's a good short term rental, to even look at it that way on a refinance, we're going to do a twelve month look back of what that property has earned to determine the income. So, I mean, short term rents, yes, I have seen them a lot more. I think investors are definitely getting more innovative. They're, you know, trying to do sober living type properties. Assisted living properties. You know, this pad split models coming up a lot lately, which is basically rent by the room. Now, a lot of lenders haven't come on board with that. There are assisted living financing, but a lot of the lenders haven't even heard of what a pad split is.

Alex: It's first time I hear it, to.

Guest: Be honest, more innovative. And the market is changing to that, you know, more of a, let's see how many people can, we can pack into that house to stay there. The market's definitely changing towards that.

Alex: Any regulation challenges that you can observe at the moment that actually shifting how people invest?

Guest: Yeah, I mean, you definitely want to check if you're looking to make it a short term rental type of model or a midterm rental, which could be like nurses that travel nurses. You want to make sure, number one, does it have an hoa? If it does, does the Hoa allow for short term stays? You know, a lot of those hoas have requirements where a tenant has to sign, be there at least 30 days or longer. Hoas are definitely becoming more stringent and strict on those rules. You know, Dallas, Texas, recently, I think it was like a year ago, they don't allow short term rentals anymore. So if you weren't grandfathered in, you can't even have that model in Dallas. And I think that cities are going to slowly be moving towards that because I mean, there are a lot of complaints on that when areas have homes with short term rentals in them, just parties and lots of cars and just transients. And so a lot of hoas are moving towards that. So definitely there's regulations on it. You want to make sure you're covered there and that I've known people who bought properties, started the short term rental model and find out six months down the road they're getting letters from the HOa that they're going to be fined if they don't stop doing that. So yeah, definitely doing your due diligence up front. Make sure that you can have a short term rental in that area.

Alex: Now let's talk about the whole technology aspect in the mortgage lending business. So we've seen the artificial intelligent technologies in the rise, blockchain technologies. So lots of things are happening that in theory may boost the whole industry up or maybe already boosting. Can you maybe share your experience how this technology been applied already in the industry, or you see an interesting application or you thinking about yourself applying this technology in your current company?

Guest: Yes, chat GPT. A lot of people are using that to promote their social media, do their marketing for them. I personally have not used it yet, but I know a lot of people. You can do a video of yourself, it's not even you, it's chat GPT. So I have not gotten into that arena and started doing that, to be honest with you. I don't really market. Everything comes to me by referral, and I'm in a couple of large real estate mentorships. As I do loans for people, my name just gets spread throughout. So I really haven't had to market. I don't pay any money for marketing, thank goodness. But I do know a lot of people are using the chat GPT. You know, you can type in a few words and it'll give you the whole paragraph to read off. And then you can have you take a little video of yourself and then it will mimic you and use those words. So it's not even you doing those videos. I don't know how to tell the difference. Do you?

Alex: No, I think there are products out there that already can tell the difference, but definitely not with a naked eye. So this is like a marketing aspect. But you mentioned something interesting that caught my attention, like the spreadsheet where you do the matching work for me with technology background. Sounds like a perfect spot to integrate machine learning, artificial intelligence to do the work for you so that you will just run the process and then a yes, ok, approved. Is it not the case at the industry at the moment or it's still all these working with spreadsheets?

Guest: I probably could get there, I just haven't, you know, I think yes, that the industry is moving towards using a lot more technology driven, you know, but I still think that there needs to be a loan officer or live person on the end of this and not just punching your stuff into a computer. I mean eventually maybe it'll get to that point. I mean it seems like computers are taking over minority of, you know, jobs, right?

Alex: Yeah.

Guest: But yeah, I mean with my spreadsheet I probably, definitely could be more innovative and, and use more technology with it.

Alex: I'm a little old school and that's totally fine. I mean sometimes AI may hurt rather than help, so in sensitive. Thanks. It's better to do it old school way. But did you see any interesting applications among your colleagues? Maybe something unique or. Not at all.

Guest: I mean the lenders are slowly, I'm noticing all the lenders are slowly becoming more, using more technology with items and things and portals, pricing loans out in their system. This is, I would say the last year or two, you know, a lot of lenders didn't even have portals before, so definitely lenders are becoming more, you know, everything's online ever since the pandemic, you know, now people can for the most part work for home. I was working at Wells Fargo at that time and they were not really allowing us to work from home where now you can work from home. Towards the end, when I left, we could work from home. So, you know, I like that companies are becoming more open to that, allowing people to work remote and you need technology for that.

Alex: Yeah, I'm gonna take my nerd head off. Sorry for grilling you on the technology aspect. Just.

Guest: I'm definitely not, you know, as knowledgeable, definitely not as you in technology and I'm not very knowledgeable and technology.

Alex: Let's talk about loans then. So I wanna briefly touch your experience at Wells Fargo, where I think you got unique experience and perspective on risk management. And I'm curious if that experience influenced your approach to risk management and decision making in your current role.

Guest: Yeah, so I've been in the mortgage industry 19 years, and twelve of those years I was a conventional government underwriter. Definitely having that underwriting hat translate over to being a loan officer. You know, occupancy fraud is probably the number one fraud that happens in the mortgage industry. So I'm very aware of when clients are trying to do, especially DSDR. Cause it's only for investment properties. If there's any hint that they're gonna be moving into the property, I won't do those loans. So I definitely, working at Wells Fargo as an underwriter for ten years, I have that underwriting hat on all the time. And I have a mortgage license to be able to do this job, and I don't ever want to risk my license being taken away from me. So, yeah, having that underwriting background, I'm definitely way more into looking at the risks of the loan, making sure that the borrower has the ability to repay that loan. You know, I want to make sure that we're putting somebody in a good position when they're getting into these loans. Absolutely. I think I have a different hat that I wear than most loan officers. Most loan officers don't have an underwriting background.

Alex: Yeah, that's definitely helpful. Speaking about consumer and your customers has like, you've been in the industry for over 20 years, right? Have you seen any changes in consumer behavior and expectations in terms of mortgage lending?

Guest: Definitely, yeah. So when I first got in the business, we were doing those pick a pay Negam loans, you know, no doc loans. Clients were used to not providing a lot of documentation. And then the Safe act happened. You know, 2008 to 2011, there were a lot of regulations put in place. Now it you have to provide. There's, there, well, I can't say there are no, no doc loans, because I do have a lender that offers a no doc loan. However, you know, you need to have a lot of reserves. So I think they require 18 months of reserves in the bank. Great credit score. But no doc loans aren't very prevalent. So now, yes, you've got to provide a lot more documentation. You know, the loans probably take a little longer because they are not a no doc loan. So, yeah, customers, you know, that did loans back then, and then they come to do a loan now, you got to definitely let them know things have changed. There's a lot more guidelines in place, regulations in place, disclosures. You have a lot more disclosures that you're signing now. You know, they want to make sure that the consumer is aware of all the fees they're getting into and loan product. And, you know, something with the DSCR loan is that they have prepayment penalties, which is different than a conventional loan. So you got to make sure you know what you're getting into. How many years of a prepayment penalty are you getting into? Typically, it's going to be a three to five year prepay. There's two different types of prepays. There's a fixed prepayment and there's a step down. You can't always ask to buy down the prepayment penalty. Some lenders will let you buy it out. When you do that, you're gonna have a higher interest rate or there's gonna be a cost. There's always a cost for that. But yeah, consumers definitely need to be aware that things are gonna take a little longer, but it's for their protection to make sure that they understand what they're getting into and that we're looking at everything to make sure they have the ability to pay that loan.

Alex: So it seems like it became harder to some extent to get the loan, but at the same time, you got access to so many different offerings.

Guest: Yeah, I mean, DSCR wasn't around when I first got in the business. So it is kind of a no doc loan because it's no income, no job requirements. But we, it's very stringent on the, on the collateral piece. So it's heavy on making sure, you know, the collateral is the condition of the collateral. We won't lend if there's health and safety issues or it's a dilapidated home that needs a lot of work. On an appraisal, they're going to tell us the condition between c one and c six. DSCR will not lend if it's a c five or six, c six on that appraisal. So you might want to do a renovation product at that point.

Alex: So it seems like it's a big evolution of products, offerings, legislation, change. I think we're getting to the point where I'd like to wrap it up in the last question. And the question is about the future. So you've been in the industry for 20 years. I hope you will stay there. I don't know. For as much as you want, as long as you want. Where do you see the whole industry of real estate goes in the next decade? Let's say, and specifically mortgage lending.

Guest: I mean, it's, this industry in general is pretty cyclical, right. We go down on the interest rates. We go up, you know, kind of every ten years is kind of how the rates go. They go down and then they go back up depending on what's going on in the bonds stock market. And where do I foresee it? You know, right now, I think because rates are high, because there's speculation of possibly going into recession, there's more foreclosures going on, a lot more people that are hurting right now not being able to make those mortgage payments for investors, probably a good time to be getting into this market. Probably a good time to be buying homes. Rates are higher. However, the sellers that need to sell, they're going to be more open to selling those homes right now. I just think in the future, rates are probably going to go down in the next, I don't know, definitely the next year. You know, they've been talking about rates going down this year. They really haven't yet. They go down a little bit. They go back up by election time. You know, rates typically do what, they go down a little bit. Run election time. So, I mean, I think it's always a good time for investors to buy. Just depends on the collateral where you're buying and does it cash flow.

Alex: Liz, thank you very much for being guest and sharing so many interesting aspects about the loans. Really glad to have you here as a guest.

Guest: Thank you for having me. I've enjoyed it.

Alex: Thank you. And for the subscribers, don't forget to like, like the video, subscribe to whatever platform you're listening this to and see you in the next episode.

Guest: Thank you. Bye.