Harjeet Bhatti has been working as a loan originator for more than 21 years. Today she works for Wintrust Mortgage, a local lender in Chicago. Her experience with investors led her to understand that the information that’s being put out on social and online forums is hugely misleading, leaving many unprepared for the reality of traditional lenders. This prompted her to go online to start educating the public and share the real facts about how to prepare and what to expect when taking a mortgage from a lender.
Bhatti is active on the real estate forum Bigger Pockets and recently started doing Facebook meetups to educate about down payment assistance programs. “Most people just take a program. They come back to refinance, and they don’t know the insides of the program, what they contribute into it, or where they stand when they want to refinance. My job is to give them all these insights in advance”.
Creative Financing May Be Buzzing, but Most People Still Take a Traditional Loan Program
A common mistake Bhatti sees among investors who are use creative financing, they don’t do proper research when it comes to creative financing, such as hard money loans. Hard money loans are typically short-term and secured by the property itself, rather than the borrower's creditworthiness. Bhatti stresses that customers need to understand that creative financing cannot and should not be mixed with traditional lending. “It’s a totally different set of guidelines, it varies from lender to lender and it’s crucial to understand everything, you can’t mix both products together”.
The cash-buyer pitfall
In a competitive market with housing shortages, a cash purchase is often preferred over traditional financing by the seller. But even if an investor has the resources to buy cash, they usually don’t want all their money to be tied up in a single investment. Bhatti says she does a lot of delayed financing exceptions, a method commonly used by investors who prefer to buy cash and then get a mortgage after the purchase in order to move on to the next project. This is very common for BRRRR investors. However, delayed financing exceptions have a set of rules that many first-time investors are not aware of.
For example, the property must have been purchased by a seller who is defined as being at “an arm's length”, meaning it cannot have been purchased by a family member or a close friend. An investor should know if they come back to cash out under delayed financing exception that may not serve their purpose for higher LTV. You can cash out the initial purchase price or 70%LTV of appraisal value whichever is lower.
Bhatti sees a lot of costly mistakes made by investors who are relying on delayed financing exceptions. “They know they don’t want to block all their money in a single investment only, but they don’t know the guidelines. And often, everything has changed since they purchased the property. Their cash flow changed, the interest rate changed, the maximum amount for cash-out is different than they thought”.
Essential tips for first-time investors
Bhatti usually spends around an hour on the initial interview with the customers. While loan applications are individual and different clients may have very different goals and needs, there are some points that tend to repeat themselves. In addition to general guidelines such as proper budgeting and surrounding yourself with knowledgeable people, Bhatti stresses the importance of the following:
Remember that taking a mortgage is a 30-year commitment. The interest rate today might not be relevant next year. You have to be prepared for that
Investors often focus only on rental income for their down payments and cash flow. Don’t forget to calculate rehab costs, property management fees, closing costs, lenders fee, mortgage insurance and additional costs. This will change your budget entirely.
Don’t go and see properties that are not within your budget! Of course you’re gonna like a higher-end property, but you’re much better off taking small steps. Once you are in your property, you can take a rehab loan and slowly make the improvements. Just be careful with the location, remember that it’s not a car that you can sell quickly.
You can follow Bhatti on Bigger Pockets and on her Facebook page.
