Strategy lets client compete with all-cash buyers

Mortgage broker:

ProMortgage.

Property type: Appraised value: Loan amount: Loan type: Rate: APR: Backstory:

Liz Bayer,

Ranch home in Palm Springs.

$1.2 million. $834,000. 30-year fixed with 10-year “interest only” payment.

4.875%.

5.034%.

A client of mine, whom I have worked with for many transactions in the Bay Area, reached out to me to get mortgage financing to buy an investment property in Palm Springs.

Like the Bay Area, Palm Springs is extremely competitive, with the lion’s share of the accepted offers being “all cash” with no loan nor appraisal contingency. After a year of making offer after offer and getting beat out by the all-cash offers, I recommended that we take a two-step approach.

The first step was to use hard money on the first mortgage, which does not use borrower’s income to qualify, nor is an appraisal required. This put my client into position to make an offer with no loan nor appraisal contingency, and the first offer made was accepted! The transaction closed in 21 days.

This loan had a balloon payment at the end of 11 months, so the second step involved refinancing into a new mortgage well before the balloon payment came due.

The loan product that worked best for my client was a debt service mortgage that uses rent payments as the income and no other income from my client was needed. In the second loan, an appraisal was required, so this loan took a bit more time, but we were no longer under the gun as is the case on a purchase transaction.

The mortgage also had an “interest only” payment feature for the first 10 years of the 30-year term. In order to keep the rate down, we opted for the three year prepayment penalty, which ended up working quite well in this rising rate environment that we are in. The cherry on top of this second transaction is that the appraisal came in $50,000 higher than the original price my borrower paid for the property, so we were able to easily fold in all of the closing costs into the new loan so that my client did not have any out of pocket costs at closing.