Once you become a lender and you're looking for people to purchase your property, how do you find the buyer? How do you make it look affordable? How do you know which rules and regulations to follow? An RMLO or a residential mortgage loan originator will do just that. Learn from Sarah Montes who is the President of Texas Pride Lending on why you need an RMLO. Joining Keith Baker, Sarah explains how an RMLO guides the lender on the payment process. Listen in today on how Texas Pride helps lenders in this regard.
I would like to thank you for sharing your time with me as well as your consideration. If you're seeking practical tips and advice on how to increase wealth without cheap banks or unpredictable Wall Street through private mortgage lending, then you are in the right place. If you want to learn from my mistakes so that you can both avoid and profit from them, then pull up a chair and pour yourself a drink because this show is for you. This episode has been more than four years in the making. It has got a bit of a story behind it.
Before we get to that, I want to encourage you to join the Private Lender Podcast Group. It is a public group, but I personally vet the applicants to ensure that it truly remains a group of just us private lenders. After years of empty threats and promises, the Private Lender Academy is finally launching in July 2021. You have the opportunity to get in when the doors open as a founding member, which means you won't be charged full price and you'll receive founder pricing on additional courses in the future. Go to PrivateLenderAcademy.com for more info. Click on that Apply Now, fill out some information, tell us a little bit about yourself, and you'll be on the list for the founding member.
It is time to get down to the brass tacks of this episode. It's when my best borrower switched his business model from buying and converting into owner-financing notes using private lender money as the underlying lien. He streamlined his business and went more into a wholesaling model, which means he didn't need a private lender. He also went into a small apartment complex, which was way above what I had to offer. He did me a favor and introduced me to his friend, Landon Rothstein, who has been on the show. I initially was Landon's private lender before coming as his partner in Asset REI in 2017.
At that time, Landon was a student of Mitch Stephen. He was looking to use my money as a first position and then wrap it with seller financing with an additional lien. He explained that we would use an originator to keep everything legal and above board. Since this came from Landon, I was skeptical and decided to investigate things myself. Ultimately, I came to the conclusion that Landon wasn't BS-ing me. He was indeed accurate, right, and correct. Before we put an owner-occupant inside a house with my money providing the lien, we used Texas Pride Lending, which took the end buyers' application, financial information, records, and everything that a bank or loan officer would take. They confirmed that the borrower could reasonably be expected to make the mortgage payments based on their finances, how the note was structured and the length of the note. It would be reasonable for the borrower to be expected to make these under the federal guidelines, Freddie Mac and Fannie Mae.
It was during this process when I met our guest, Sarah Montes. She took care of everything and made the process extremely easy for me as a lender. If I had a question in the morning or afternoon, it was answered with the package, documents, or whatever was requested. The lender is quick and customer service-oriented for me. After I started this show, I begged her to come on the show and talk about Dodd-Frank. Why do we need RMLOs? Why do we need a loan to be originated? Our schedules never aligned. I hadn't reached out to her for over a year. I sent an email, "How are you doing? Here's a link to my recording schedule. I still want to get you on. I would love to interview you."
[caption id="attachment_3145" align="aligncenter" width="600"] RMLO Lending: The main thing the RMLO does is to make sure that the buyer can afford the payment of the lender.[/caption]
She booked it and replied almost immediately. That was the universe or God's way of telling me, "The time wasn't right before, but the time is now." Speaking of that, the time is now for you to pay attention. If you've ever thought about having your first mortgage wrapped or you're an investor looking to utilize seller financing as an exit strategy, which I suggest you do, then you need to read and take notes because Sarah is about to educate all of us. She takes a complicated federal law and breaks it down to where somebody like me can understand it easily. Without any further yip-yap from me, let's go ahead and get to the interview with Sarah Montes of Texas Pride Lending.
I have a very special guest for you. This is the first RMLO on the show and only so far and for a good reason, you're about to find out why. Please help me welcome Sarah Montes to the show. Sarah, thank you so much for coming on.
Thanks for having me.
A little background with everyone. I've gone on ad nauseam about my foray into lending and into owner finance with my partner, Landon. That's how I was introduced to Sarah. Landon was using her Texas Pride Lending for RMLO. What is RMLO?
It stands for Real Estate Mortgage Loan Originator. That's what we're doing. We're originating the loan on your behalf, the private lender/owner finance. We've been doing originations for Landon for years. Thanks, Landon, for introducing us.
I always tell people never to loan to an owner-occupant because it's no longer a business loan at that point. Now, you're in the consumer world. There are a lot of protections that are in place for the consumer and some obstacles to do business with them that we have to comply with. If you are going to loan to an owner-occupant, or in this case, my loan is going to be wrapped to the owner finance model like Mitch Stephen and Landon use, then it has to go through the RMLO process. People ask me, "Why do I want to go through the RMLO process? It's an extra step and cost." I like to twist a quote from Chuck D and tell them that, “The reasons are several and all of them are federal." I'm going to let you go into that part of it, why we need the RMLO, and all that fun stuff. The floor is yours.
[bctt tweet="Your debt-to-income needs to be at least 50% to buy a house." username=""]
If you're going to be loaning to the consumer, to the end buyer, if you're an investor, you're going to do your fix-and-flip or whatever you're going to do to a part of that property. Once it's finished, you're going to be a lender. You're going to lend money to a person to purchase this property. If you're acting as a lender, you have to follow the rules as a typical lender like the banks would because now, you're acting as a bank. That's where the rules and regulations come in. It's to make sure that you're following all the guidelines and not taking advantage of the buyer.
They put some guidelines in place in 2014. The guidelines are good because they are pertaining to a small creditor. We have guidelines for the big banks and then for the little people like us that are going to do a few a year. We're going to be lending under $1 million. What we need to do is make sure the main thing on Dodd-Frank rules and regulations is to make sure that the buyer can afford that payment. That's where we come in. The RMLO will gather all of the proof of income. The lender, seller, and RMLO, we're not putting that buyer in a situation where they're not going to make that payment. It's going to be common sense underwriting. Does this person, after he pays his car payment and credit card bills, is he still going to have enough money after paying his house payment to live?
It's all the whole DTI, Debt-To-Income ratio, but I want to say it’s common sense underwriting because we're not looking at their credit. We're not doing any of that like a bank. The main thing is the ability to repay that loan. That's one. The reason why also that you use an RMLO is because if you ever have to foreclose on that person, if they default and you go to court, you want to be able to say, "I checked the financials. I had a third-party RMLO check their financials to make sure that they could afford this payment." If you don't do that, they can come back to court and say, "I couldn't afford that payment and they still gave me that loan."
If that happens and the judge on their side, then you would have to pay back all the interest that you ever earned on that loan and pay their attorney costs. It's going to cost you more in the long run than doing everything you need to do now. In the beginning, do it right and be compliant. The other compliance side of that is to make sure that the buyer has disclosed all the loan terms. Whatever the loan terms are going to be, for us, we send out the loan disclosures in writing. They sign off on it. If you have to go to court, they can't say, "I didn't know that was my interest rate. I didn't know this or that." Here it is. It’s all in writing in a pretty little package for you.
It goes to one of our core values as a private lender. There are two ROIs. One is the return of the investment first. If you're going to loan $100, make sure you get your $100 back. The second one is a return on that investment. If I have to go to court, I would not want a judge to say, "I'm sorry. You're going to have to pay everything back." I'm a stickler for this, especially with my money go through the RMLO process. Depending on what state you're in, make sure you're under usury as well because you don't want your loan invalidated in court.
The other thing that we do with your RMLO is we know all the laws, regulations, and thresholds for you to stand there. This is where we come into is to guide you to say, "These are your terms, but let me suggest this because of the thresholds that we have as small creditors." That's another great reason to use an RMLO that knows the laws for a small creditor. An RMLO is a licensed loan officer. The majority of them out there are trained in the conventional world. They're only going to know the big predator regulations. They're not going to know the small creditor regulations like Texas Pride does.
You provide services in Texas. Do you go out of state as well?
No, we're only licensed in Texas, but we are opening up other states in 2021.
I was a little ahead of the curve. That's fine and good to hear.
I want to add. Everybody asks me all the time, "Why can't you do other states? There's so much need out there." We have so much going on here in Texas that it's hard this whole time that we've been doing it. That's what's kept us back from doing it.
[caption id="attachment_3146" align="aligncenter" width="600"] RMLO Lending: A qualified mortgage is that the buyer has the ability to repay the loan terms. To make sure that there are no risky features in the loan terms, that you're under the thresholds for a small creditor.[/caption]
I'm in the same boat. I don't even have to leave Houston, let alone Texas, to put my money to work. Unfortunately, I run out of my own money. It's not like I have a whole lot, but I do try to put it out there. People say, "Why don't you lend here?" I'm like, "Why?"
I have a lot of private investors do that come from out of state. They specifically want to loan in Texas because they know the market is so hot.
I look forward to seeing what states you guys do pop up in. This isn't just, “I'm bringing somebody on.” I've used Sarah and Texas Pride myself. This is like a testimonial coming from me. We're Dodd-Frank compliant. You've provided all the documents to protect me, the lender and/or real estate investor, for doing owner finance. We're compliant there. What are some of the other benefits on the backend of having the RMLO go through the loan?
At the end of our processing, underwriting, we'll give you a full underwriting package for you to keep for your files. If you ever decide that you want to sell that note, later on, you have this compliant underwriting package that says you have a qualified mortgage. It's a stamp of approval that you have a qualified mortgage. Note buyers typically will pay a lot more when you have a qualified mortgage. That's probably one of the biggest reasons too why you should if you're planning to sell that note later. Even if you say, "I'm not interested in selling my note," you never know. Later on down the road, maybe you package them up. You have ten, sell the whole portfolio, cash out, and start all over again. That's another reason to have an RMLO package in your files for each property that you do.
I tend to hold my notes until the end. However, that's not to say that I might not get in a bind or need to sell 1 or 2 years' worth of a note that income stream.
Maybe you have another opportunity you want to go after.
I need to recapitalize to go off into something bigger and better. I'm only teaching and coaching on residential, but in my personal lending, I've gone out into multifamily and commercial as well. There's a whole other set of underwriting and everything else beyond that. To circle back, let's define a qualified mortgage.
A qualified mortgage is you have made sure that the buyer is qualified through the ability to repay. That there are no risky features in the loan terms that you're under the thresholds for a small creditor. The interest rate has to be under 6.5% plus time. That number is continuously fluctuating every week. We have to check it and see where we're at. Whatever the prime rate, plus 6.5%. That's your max threshold for the interest rate. As far as the terms, you can't go over 30 years. You can't do a 45-year mortgage or something like that.
There are all these little different things that we need to do to make sure that the terms are within the threshold to call it a qualified mortgage. Once we run everything, we'll give you a qualified mortgage report that says, "Check, it's passed." Another thing is points and fees. You can't charge over 3% in points and fees. It's different things like that we make sure. As we RMLO, I'm the one that's going to make sure to keep you within those thresholds and guidelines to make sure that you have a qualified mortgage.
[bctt tweet="Keep your purchase price payment affordable." username=""]
I'm used to hearing points and fees. If I lend out of my self-directed IRA, those fees that I pass onto the borrower would be included in that 3%?
That's right. It has to be under 3%, but those are the lender fees, the fees that are going to hit the APR. It's not title fees and escrow reserves.
Is it 3% points in junk fees?
Yes, just lender fees. It’s anything that you're going to tax the buyer with origination fees, funding fees, and transaction fees. Anything that's going to be paid directly to the lender, that's where you're capped.
Thank you for clarifying.
If you're paying the title company or an attorney, it's not in that.
Normally, when I've done owner-financed notes or wraps, we don't even charge points to the end buyer as long as they've got a big enough down payment or whatever threshold Landon has set. Whoever has got the most money when we do these things, he's the one with the boots on the ground doing it.
Ninety-nine percent of the lenders do not charge origination fees.
We're trying to help someone who's unmortgageable get into a house with a mortgage. Let's roll back here. I'm curious and know I can Google all this. I tried to Google what the prime is but I didn't get the prime rate is what I'm looking for. I was trying to search the prime rate now.
I usually go to Bankrate.com. It will say conventional, FHA, VA, and all of that stuff if you just do a conventional loan. It's typically right around 3.5%. Now, the interest rates are super low. You might see 3.2%. It goes for the week. Every week, it changes. It's hard for us to charge higher interest rates. We're about at 9.25% since we don't know what the future holds and when these interest rates will start rising again because we used to be at 9.99% or 10%. We're struggling with that because of the low prime rate. What I would suggest is to do a five-year ARM, Adjustable-Rate Mortgage, so that you don't have to guess what's going to happen in five years. You can start off at whatever it is now and then you say, "In five years, I'm going to add the 6.5% to prime, whatever the prime is at that point." As interest rates start going up, so does yours as well. You're going to be with the market. You're not going to be left behind. As interest rates go up and your threshold is up to 13%, you're kicking yourself. It's another way to protect yourself when it comes to interest rates.
Correct me if I'm wrong. In Texas as the consumers, you got to be under 10% or no higher than 10%?
It's based on the 6.5% plus time.
Back to the consumer side of things, DTI, Debt-To-Income. I like to give people quick stuff like, "Average guy or lady on the street wants to buy a house." What kind of DTI do they need?
For quick, fast numbers, I would always say 50%. Say, "How much money do you make? The 1% rule for the payment is a good tool for you." I always say, "One percent of the sales price is typically your mortgage payment that includes taxes, insurance, servicing fees, and everything." If you use 1% of your sales price, then that will give you what your estimated payment would be. It's easy numbers. If you have a $100,000 house, your payment is going to be $1,000. Maybe that's a bad scenario. If you have a $200,000 house, your payment is going to be $2,000 a month. That person has to make $4,000 monthly to afford that payment. You're out in the field, walking the property with a client for fast, quick numbers that you can put in your head, say anything under 50% would qualify the buyer. I...