COVID-19 Mortgage Update – Interest Rates, Refinance and Self Employed Borrowers Update

COVID-19 Mortgage Update – Interest Rates, Refinance and Self Employed Borrowers Update

Broker | Owner | Mortgage Consultant
Josh Lewis
Published on June 8, 2020
Josh Lewis - Jeb Smith June 2nd Mortgage Market Update

COVID-19 Mortgage Update – Interest Rates, Refinance and Self Employed Borrowers Update

Josh Lewis of BuyWise Mortgage and Jeb Smith of Coldwell Banker in Huntington Beach, California discuss refinancing, interest rates, and how COVID-19 has changed the way self-employed homeowners and homebuyers document their income.

Hey guys, welcome back. So Josh Lewis and I are back with our weekly biweekly update on, you know, the mortgage market, the real estate market, and things that are trending between the two.

This last week some information came out that I wanted to discuss with regards to self-employment and how self-employed borrowers can now you know, how they’re going to qualify for refinancing and purchasing, you know, with all the changes in COVID and how it’s affected income, et cetera.

So they’ve done guidelines, which I did a video on yesterday, which I’ll link to here below, which is essentially me reading the guidelines, but Josh is gonna give us an interpretation of those guidelines, help us understand them a little bit more.

And then we’re also gonna go back and touch on interest rates, right? We did a video last week where the audio was absolutely awful. And for those of you who stuck through that video, we appreciate it.

But I wanna touch on what we discussed in that video in a little bit more detail with some clarity because you know, I’m still getting people emailing me coming on the videos constantly.

I mean, a couple of times a day where I discussed UWM United Wholesale Mortgage in the conquest program that they’re offering where they’re offering two and a half percent interest rates on 30 year fixed.

And a lot of you guys have reached out and said, hey, can you put me in touch with one of these brokers? And I’ve had a lot of you guys, I refer to two different people. And then the last few have hesitated on sending you anyone just because of the video that we did last week.

And so I’d like to get Josh to clarify, you know, kind of not the, you know, I don’t know the quasi marketing they’re doing to get you to click on it, the clickbait advertising to get you to look at the two and a half percent. But anyway, he’s gonna touch on that.

And hopefully, the audio is better through this case, but before we get into it, I’m Jeb Smith. I’m a real estate broker here in Southern California. Josh Lewis is a mortgage broker here in Southern California. And you know, we’re here to guide you through the mortgage real estate process, help you understand it.

If you’re new to us, do me a favor, hit that subscribe button to keep updated on everything real estate and mortgage-related, including trending topics like forbearance and all that good stuff. And I’ll link to Josh’s contact information below if you wanna speak to him directly as we’ve done in the past, but let’s get into it.

So sorry for the long intro there guys. But so this week Josh, we heard from Fannie Mae and they’ve come out and said that, okay, these are the guidelines that, you know, we want you know, servicers lenders to use in qualifying self-employed borrowers going forward.

So let’s touch on that for the moment and get into it. So if you’re like me, you’re self-employed, right? And I’m in a position where I want to refinance right, in my current interest rates in around 4%.

And so I’d love to take advantage of the market right now, but because I’m self-employed as a real estate agent, my income was affected with deals falling out of escrow and just, you know, all of that good stuff through February, March, and April.

Now we’re back on track and what have you. But if you looked at my financials from those three months, you know, I’m not in a position to qualify right. Based on what we’re talking about here. So let’s get into it and kind of explain it a little bit more detailed.

Absolutely the guidance from Fannie was overdue. And for the most part, we haven’t seen Freddie with their follow followup announcement, but everything so far COVID related, those two have mirrored each other identically.

So Fannie Mae, Freddie Mac, the conventional loan underwriting guidelines, they came out and actually gave us written guidance as to how we should be underwriting self-employed borrowers, which is super helpful because, for the last couple of months, every lender has made up their own guidelines.

And some of them are far more restrictive than what Fannie has come out with a few of them a little bit less, but in super simple terms, what they’re saying is we have to have a year to date, profit and loss that confirms income, and it needs to be consistent with where you were the previous year. Because the reason why that’s important is we can’t go with a profit and loss.

A lot of times people will come to me and say, I’m self-employed, last year the business made $200,000, but this year we’re on track to make $2 million and say, well, that’s wonderful, but we can’t go off of year to date figures. We have to go off what was actually presented to the IRS.

The lenders, look at it and say, hey, if you gave it to the IRS and you signed under penalty of the law with the government, then we can rely on those numbers, with the P&L that you’re just signing saying, yes, this is real. You can create that in QuickBooks. You can do it in Excel. Anyone can do it.

But what Fannie is saying is we have a year to date, profit, and loss, and we need two months of bank statements supporting that level of income and it needs to match the previous income. So we can probably go more in-depth on this later when we have, it should have a few files where we’ve gone through and seen how it works in the real world.

But the biggest takeaway from that what most lenders were reacting to before this guidance came out with their guidance or overlays, was that we need bank statements for the last month showing income consistent with the previous income. So if we said, hey, based off of 2019, you made $12,000 a month. I need deposits to your bank account equivalent to $12,000 a month.

Then we need something written from you stating why your business wasn’t shut down or negatively impacted by the coronavirus and then a P and L showing year to date where you’re at. So really we see it to me, it breaks down it’s about 50, 50 in terms of clients that are self-employed borrowers that either was, or were not impacted by this. I have a client that he runs a janitorial service, and a lot of their customers are medical facilities.

They actually have made 125% this year relative to what they had made the previous year. So obviously with that, we document everything and then everyone was, hey, this is wonderful. I also have a buyer who wanted to buy here. She owns a hair salon. The salon was completely shut down We’ve had no deposits for the last two months.

So it’s been a big, big question for us in the interim and going forward of what that’s gonna look like. The one that’s gonna be crazy is what happens next year for people that wanna buy, whose businesses were shut down for two months. So their income dropped 15, 20% for 2020, but it wasn’t their fault. It wasn’t anything negative about the business. It was simply the fact that their business got shut down for two months, which should not recur. So I think this is not the last of the guidance we’re gonna see from the agencies. We’ll need a FHA and VA to chime in as well. But it’s a pretty good first start in that it’s a reasonable way for lenders to ensure that borrowers actually have the income that they’re being qualified off of. Because as we all know, lots of businesses have been negatively impacted and don’t have the income that they showed on their most recent tax return.

Okay so let’s use your example for just a second. So you’re saying $12,000 a month in income, so let’s take the hairdresser, right? And just play this out so she didn’t have deposits for two months and let’s say, say less starting in May. She has that $12,000 deposit, hypothetically hairstylist, or whoever.

And then in June, she has another $12,000 deposit. So in July, she’s now got that 60 days of $12,000 deposits, right, So that is in line with her income, although she missed, you know, February, March, April, hypothetically in this example that makes any deposits. But in theory, she could say, hey, this is my profit loss that made $12,000 a month every month.

And I’ve shown you the last two months, does that meet qualification guidelines or that you think they’re gonna go back and say, okay, well, let me see that make statements from those previous months as well.

The guidance they don’t need any additional bank statements, just the most recent two months commensurate with what you’ve had on the P& L, and in previous years we’re gonna have to put some files through and see how underwriters come back of what they’re asking for. Because again on some businesses, I mean, there are so many different types of businesses.

I have people that, you know, their gross receipts are $2 million a year, but by the time all the expenses go through, it’s an $80,000 income. And that looks very different when you’re analyzing bank statements. And is that income coming in and two months off for that business, could be a much larger negative than it would be for the, you know, the hairstylist that, you know, brings in $125,000 a year and writes half of that off.

So it’s gonna be interesting and it’s largely gonna be as much as we would love for the agencies and underwriting guidelines to tell us exactly specifically what happens. We’ve never been here before. We’ve never seen this stuff.

So largely to me, it always comes down to how do we package the loan and remembering an underwriter wants to stay within the guidelines so that they can have a saleable loan in the secondary market, whether it’s FHA, Fannie, Freddie, VA that’s number one, but also even if they’re within the guidelines, they wanna make sure that this borrower has the ability to repay.

They don’t wanna put people into bad situations and put them at risk of losing their home, having a negative credit event. So a lot of this comes down to common sense and packaging it, right, and saying, why is this person a good credit risk? And you know, we’ve talked about this before unfortunately in the mortgage business, it’s an 80, 20 business just like real estate.

You know, 20% of the people are really good, really proficient, really experts and 80% fall below that standard. If you’re self-employed, it’s more critical for you than almost any other type of borrower to get with someone that really knows what they’re doing. There are so many potential ways for a file to go wrong when someone doesn’t understand tax returns, tax analysis, and these guidelines that we’re talking about.

So that would be my number one takeaway is just getting with an expert that deals a lot with self-employed borrowers. That’s really comfortable with tax returns. It doesn’t just tell you they’re comfortable with tax returns, but can demonstrate it in their discussion of your situation, that they can walk through your tax return with you and show you what an underwriter’s gonna look at, what can be added back in additional deductions that we have to take away from income.

And if they can’t answer that, it’s really critical for self-employed borrowers to get with someone that can.

And again, I mean, I’m thinking out loud here too. And you know, like for me, for example, as much as I would love to say my business is consistent every single month I make, you know, X amount of money, every single that’s not realistic, right?

There are some months where I don’t make any money. And then some months where I make four or five times what I did in one month. So, you know, it’s gonna be interesting to see how they do interpret bank statements, because you know what I mean, you know, the majority of my income can come in four or five months.

And you guys aren’t the only business, realtors are super seasonal. People love to move during the summer months, a lot of homes change hands, but there are lots of seasonal businesses. What if you run a bait shop? And, you know, people don’t fish, unless you’re in Minnesota on the ice, in the middle of the winter, you know, they’re fishing window when the weather’s good, there’s any number of businesses that are super seasonal and trying to look and see 12 consistent bank statements is pretty tough.

No, I, agreed. So I think we’ve touched as much as we can on that subject at the moment with what we know. But let’s talk about UWM and rates, right? I mean, I’m not singling out UWM, but I am because they’re the ones that came out with the initial, and I’m gonna call it clickbait, right? Because it’s, it’s easy to look at it.

That’s what got me saying, hey, they’re offering interest rates between two and a half and 2.9, 9%. I go out on a video that I’m doing and say, hey, look, this is what I read. And now I’m getting a lot of people to reach out to me saying, hey, look, you know, where can I get that rate? And we had the conversation.

And so let’s talk about them as well as the other people out there. And then also on the same line, you know, every Thursday we get an update that interest rates are at a new level. Right, and we talked about this in the last video as well a little bit, but because of the audio, I thought we touched on it again.

– Absolutely. So again, this is not to pick on United Wholesale. They actually have one-third of the wholesale business. So one-third of all, loans that are done through brokers go through United Wholesale, very well run company, a lot to like about them. In this specific situation I will call it clickbait because there’s nothing unique about it.

They branded low note rate loans and branded it and calling it their conquest program. If you haven’t done a loan with UWM in the last 18 months to get you over to their team they’ll offer you these extraordinarily low rates yet when you run it through a loan sifter, which is the program that we run our loans through.

They never come up as the best price lender on the low note rates, despite the fact that no other lender has branded their low note rate loans, call it a name and said, you have to qualify for it above and beyond qualifying for the mortgage. So, and again, for me, if they pop up and they’re one, two or three in the pricing for one of my borrowers, I know they have great service.

I know we can close loans quickly, efficiently, easily. Their technology is good for borrowers. So by all means, we might put a loan with them there, but every person that’s contacted me through your videos, the videos that we’ve done here asking about UWM pricing, never once have they popped up as the best price lender at the low note rates. And the most important thing is or I shouldn’t say the most more.

There are two really important things here. If you want to get a 2.99% interest rate, a 2.875 interest rate, and you’re really well qualified, meaning seven 40 or above credit score, 70% or lower loan to value. And with that, we can generally get you under 3% with one point a little less than one point. And that can make sense for some borrowers.

But when you run around on good morning America saying, hey, we’re offering rates as low as two and a half percent. Anyone that hasn’t refinanced in the last three to six months should be talking to a loan officer to get this rate. You gotta look at why would a lender wanna put a two and a half percent rate on the books? They don’t make it anymore.

So they’re charging you two and a half or three points to get a two and a half percent rate. It doesn’t mean they’re making more, it’s not a profit incentive but if you look back as late 2018, we had interest rates that were approaching 5% well-qualified borrowers were in the high fours, less well-qualified bar borrowers were in the low fives. Well, all throughout 2019, when rates are dropping, those people are refinancing their loans.

So the loans that were put on the books were paying off really quickly. Lenders can look at this and say, hey, there’s a chance rates could go even lower here. How could we prevent that? Let’s get people to pay for a rate so low that even if rates went lower, they wouldn’t wanna refinance that off the books.


What we’re telling most of our clients right now is if you have a three and a half a 3.375 that’s a very good interest rate. We’re doing low and no-cost loans in that three and a quarter range. But if you’re already at three and three, eight, three and a half, I would hang out and see what happens. I can give you a million actually, factually backed reasons why I think rates are going to go lower.

And I can tell you several reasons why I won’t guarantee it can’t guarantee it. You know, I’m a betting man. I’m gonna say two to one odds that rates go even lower from here. So for clients, the first lady that had contacted us about the UWM, you know, when we show her the numbers of 2.875 paying a point, I don’t like that.

Okay, well, we can do three and a quarter at zero points with, you know, $1,500 a total cost. And you can go from 3.875 to 3.25. That makes all the sense in the world. So we have a lot of people and saying, hey, we may need to do this again in 12 to 24 months, if rates slide lower, but it’s truly the burden at hand. We know what’s here right now.

There are really smart people. A guy I love to follow John Mauldin every year he does this, the strategic investment conference. They had to do it online this year, but it’s five days of videos of really smart people. And there are ones that are telling you that rates are going to zero. And there are ones that are telling you this is leading to hyperinflation.

I think the majority consensus is that rates are going to at least remain low, if not slide even lower. But a long way of saying there are good reasons why different things could happen. So if you have the ability to lock in savings going forward, absolutely do that. And sort of the last thing that you hinted at that I love to tell people is every Thursday and Friday when we’re in an environment like we are right now, I get emails, phone calls, hey, I saw our rates are an all-time low.

Can we rerun my numbers? Well, we just ran the numbers a week ago when they had hit an all-time low. And this is not to disparage consumers, but it’s the way the media presents it. Every week they wanna headline that says mortgage rates hit an all-time low. Well, if we pulled up the chart and showed it to you here, they’re literally talking about 0.02% better than the week before 0.05% better than the week before.

So when you say that, like, I know what it means, but what does that trend like? What does that mean to the consumer? So that to them 0.02% means 0.02%. Does that mean that my two and a half percent interest rate that is being offered is now a 2.3% or 2.48%

No, so think of what

Or you know what does this, what does that mean?

Let’s look at what the media reports. Every week on Thursday, Freddie Mac releases its primary mortgage market survey. So a couple of things it’s already a week out of date, it’s saying the loans they purchased in the prior week, what were the average rate and the average amount of points paid?

So a couple of things, we do very few loans with people paying points prior to the current market where people are wanting to buy rates down into the twos. But it’ll say 3.27 with 0.34 points. And then the following week, it’ll be 3.24 with 0.4 points. For all intents and purposes, that’s noise. It’s the same rate week after week after week.

If we wanted to go super inside baseball and pull up bond charts, the thing that you’ll see is the prices being paid for mortgage bonds in the secondary market have an incredibly consistent for the last 70 days. And if anything, they’ve been getting slightly lower, meaning rates are slightly worse, but through that time, lenders have been getting more capacity, getting more competitive, and getting more comfortable with the forbearance risk.

So rates have continued to slide better, even though the price paid for bonds in the secondary market is off a little bit. So by all means, most people right now can benefit from a refinance. I would say three other four people that I talked to can benefit.

And if you’re the super conservative type and you wanna lock in the 2.875 and pay a point, I’m not gonna argue with that, but I’d love to show you, the numbers are saying, hey, 3.25 at a $1,500 total costs versus, you know, a point plus $2,500 of costs at 2.875 is probably better for most people.

And at the end of the day, none of these are wrong answers. These are all great options and we’re fortunate to have them. Probably the biggest thing that I’ll leave you with is what I really really get disappointed with is seeing borrowers talking to the major big-box call center lenders. The person that you’re talking to has probably been in the business for less than two years.

When you call one of those call centers, they are not built off of getting you lower interest rates. TV commercials cost a lot. Radio ads cost a lot. So if you hear a company’s name five times a day, every day, all over TV and the radio and in any magazine you pick up, they’re not going to give you the lowest rates and you’re absolutely not getting expertise, because if you wanna be the biggest lender in the United States of America, you can’t have the best loan officers.

You have to fill a call center with as many young kids as you want. And to their credit, they do have pretty good training systems to turn a Domino’s pizza delivery man into an acceptable loan officer in a pretty short period of time. And I mean that honestly, they do that. They take people with no experience in the mortgage business and make them a reasonable loan officer in a fairly short period of time.

But nothing about that call center environment is about expertise, about advising you about helping you manage your home equity and build your net worth over time. So it’s not self-serving ’cause I can tell you I’m more than happy to compare you know, loan estimate to loan estimate against them, ‘Cause we’re cheaper, we’re cheaper and you get to talk to an expert. And I’m not the only one, I’m one little guy here in California, but I know 500 of me around the country that all of you would be better talking to.

Understood so, I mean, with that said, Josh, I don’t know if you could throw your information up on the screen. I can always link to it below. I know you have the ability here to do that. So if you can throw it up there, if you wanna contact Josh, the information’s there at the bottom.

And if you’re in another state outside of California, do me a favor, either contact Josh or myself again, I network with not only top real estate agents, but a lot of mortgage professionals as well in other States that can guide you through that process and have the same conversation at Josh’s, but either way, whatever you feel comfortable with do that link below.

The last thing I’m gonna touch on Josh is just one thing that I hear often, and that is, you know, people are in a 30 year fixed there at say 3.875 maybe 4% or whatever. I don’t know what rate they’re at, but they’re at a rate that’s higher than where the market rates are at the moment. And I hear them say, you know, I’m thinking about a 15 year fixed because a 15 year fixed is the rates even lower than that of a 30 year fixed.

So are you seeing at the moment, is it, does it, ’cause when you go up, right, and when you go down and rate and you go less in terms, right? So you’re going from 360 months to 180 months, your rate is going, I mean, your payment is going to go up, right? People don’t understand the jump there that even though the rate goes down, that jumped from a 30 year to a 15 year is substantial, especially here in California with our loan amounts. But are you seeing that makes sense for a lot of people at the moment or is it still

The longer they’ve been in their loan, the more it makes sense. If someone has that 3.875 they took out in 2012 and they’re eight years into it. We’re only going from a 22-year amortization to a 15, so it’s not gonna be that bad. But a lot of the people that are two years in, you know, they look at the numbers and they just about faint.

And the funny thing is, although I may not look as old as I am when I was doing loans in the nineties, you know, and rates were at eight and a half, 9%, and you could get a percent lower for going with a 15 year because there was so much interest in that loan when you looked at the amortization schedule, just cutting, it was, you know, 50% interest and 50% principle.

Well now with rates so low, the interest portion is really low and you’re already paying a lot of the principal in the early going that principal just as now, has to be paid back over such a shorter period of time. And then you’re seeing, you know, a half percent or fewer payment savings. It doesn’t make it a bad deal. It just means it’s a bigger jump in payment. For most people, we do a handful of them every month.

And what I would like to say for most people you’re better off sticking with the 30 and either putting more into your 401k making the additional principal payment and the reason being the next time we hit something like the coronavirus crisis, you have a smaller payment, you have more in savings to rely on. We have a lot of people that had to go to forbearance options because they didn’t have any savings and they weren’t able to make their payment, the lower we have that payment.

And the more you have in savings, the less susceptible you are to a future shock. Now, if you’re just the people that I say that I love to put you into 15 years, and we’ve done this, I’m doing one for a client right now. This guy cannot save money. However much money he has he spends always makes his mortgage payment and he does qualify and can handle that 15 years.

So when we looked at the numbers, but absolutely we are putting you into a 15 year and you know, 10, 12 years from now, you’re gonna thank us for doing it. Even though he won’t have as much money to spend right now.

No, Understood yet how many, it doesn’t matter if you do you save money if you’re just spending it. So you know, there’s gotta be a plan there. So I think that’s something we’re at 24 ish minutes now. Any last parting words, anything that’s happened this week that you feel like you wanna touch on?

No, like I would say we’re only here in California. I know YouTube is nationwide. People are watching this and wanting to get information, talk to a mortgage expert, even if you wanna call one of the big call centers, make sure you call a local broker as well and just compare numbers and compare the experience.

For the most part, I think you’re gonna notice a pretty big difference between dealing with someone that’s done this for 20 plus years and someone that’s done this for 20 plus months. And if not, and you have great numbers from someone in a call center, then you at least know you did your due diligence and you can go that route.

Yeah, absolutely. And I would say the same thing with interviewing agents, right? If you’re gonna list your house, don’t just go with the one guy, right. Interview, multiple people to see what other people are offering, even if you’ve already made up your mind. Just that way you can confirm that you made the right decision right? So that’s all right, awesome.

So those of you still watching, you know, a lot of you have done this. If there are topics you want me to touch on Josh to touch on, do us a favor link below. Josh has videos that he does on Facebook will be live. And some of these other social platforms where he does live videos.

So if there’s a topic that you want him or I to touch on, you know, in one of those videos, whether it’s alive or something like this, leave it in the comments below or reach out to us directly. You have the information there as always we appreciate you watching, appreciate the support and we’ll see you again soon.

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Josh Lewis Broker | Owner | Mortgage Consultant
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