Podcast Interview—The Smart Agents Podcast with Michael Walter
Episode 93: Securing a Mortgage for the Self-Employed
Episode summary:
When it comes to getting a loan, you would think that the successful entrepreneur would have no problem, but Alejandro has found that to not always be the case and now focuses on helping these borrowers secure loans.
Throughout our conversation, Alejandro shares some of the challenges these borrowers face and how he helps. He also shares some tips for agents to help better prepare their buyers for the loan application process.
Podcast Transcription:
INTRO:
Alejandro Szita: Ninety percent of the loan is based on the ability of the borrower to make the payment.
Michael Walter: Hello, and welcome to episode 93 of The Smart Agents Podcast. My name is Michael Walter and I'll be your host. On today's episode, we are joined by mortgage broker Alejandro Szita.
When it comes to getting a loan, you would think the successful entrepreneur would have no problem, but Alejandro has found that not to always be the case, and now focuses on helping these borrowers secure loans. Throughout our conversation, Alejandro shares some of the challenges these borrowers face and how he helps. He also shares some tips for agents to better prepare their buyers for the loan application process.
Now, before we get on to the day's featured interview, make sure to subscribe to The Smart Agents Podcast. You can find the show on all major podcasting platforms such as Apple podcasts, Google podcasts, Spotify, and now Amazon music. Also, if you or someone else in your team has an awesome story or tip to share with our community, send us a message at feedback@smartagents.com. We're always on the lookout for new stories to share.
Alright, let's get on to the day's featured interview with Alejandro. I really enjoyed our conversation and learned a lot, and I hope you do as well.
MAIN INTERVIEW:
Michael Walter: Really, the way I like to start everything out is if you could just introduce yourself a little bit, tell us who you are and what you do.
Alejandro Szita: My name is Alejandro Szita. I'm a real estate broker and I'm a mortgage broker, too. I'm based in Southern California, in the city of Irvine. We are licensed in California and in Florida, and our niche market is the independent professional, such as CPAs, lawyers, highly-skilled tech professionals like programmers, or people that work in the IT world, artists, and entrepreneurs.
Alejandro Szita: And the reason why we specialize in these people is because I'm one of those, and I always have had a hard time getting a loan, even though my credit is okay, even though I have the money. It has always been a problem. So I decided to help people like me, basically.
And about myself, I used to be in marketing in what I call my other life. But since 2005, because one of my clients, one of my marketing clients, said, “Alejandro, would you like to come to a financial seminar?” At the time, I was doing infomercials, you know those long television commercials. So I said okay. And so since 2005, I have been doing loans, but through different relationships. I have been a buyer's agent. I have been a commercial agent. I have been a luxury residential agent. I have worked for hedge fund in bringing money for real estate projects. I have worked for hard money lender, bringing in investors so he then can loan out the funds. And after doing a little bit of different aspects of the real estate industry, I decided to specialize in loans, which is what I love the most.
Michael Walter: Great. I'm really interested about this specific niche, the type of client that you work for, or work with and you said that you are one of those people yourself. So what are some of the challenges that you see that these artists and these self-employed people are having when it comes to their financing?
Alejandro Szita: They have many. I'm going to tell you just a few that to me that were very striking challenges. Last year we did a loan for a VIP client. He's an artist. He wanted to buy this condo, and in his checking account, he already had the money to just buy it cash. But he said to me, "you know Alejandro, I don't want to use a great deal of my money just to buy this place. Could you give me a loan?" And I said okay. And I was surprised, not surprised, but again, I saw that he could not "qualify", that's a term, the qualified term, it doesn't mean that you don't qualify. It means that according to the lender-specific criteria, you don't happen to meet them, but it's not that you don't qualify. It's not that you cannot afford it.
So, I was having a lot of trouble getting him qualified until we found a program that caters to entrepreneurs, who caters to artists. But he couldn't understand that, he said, "Alejandro, the money is already there. What else do they need?" You know his mind is like, what are you talking about? I have already the money, can't you see it, it's in my bank account.
So one of the first challenges that we have with entrepreneurs is that entrepreneurs or self-employed people, they already make good money, they already have the income. And to them, it's always surprising that the lender questions their ability to make the payment. The other thing that is surprising for entrepreneurs is that usually intrapreneurs or independent professionals work on cash flow. You know, they take decisions based on cash flow. They don't take their decisions based on "oh, the bill is due then I have to pay it". Because to them if the bill is due and they have to pay it, they never think that they're not going to pay it, but to them paying or not paying is not the issue. The issue is, should I use this money now to pay the bill? Or should I use this money now because I work on cash flow, or should I use this money now to pay this other thing? So they opt to use their cash flow in the most efficient way, and that sometimes takes a hit on the credit report, because the credit report, and this is what was very interesting for me, the credit report score does not reflect whether you are a good business person, whether you are successful, or whether you've done your finances well or whether you've paid your bills on time, because you always hear pay your bills on time and then you will have a high credit score. That is not totally true.
The credit score was invented by a group of financiers to identify those people that will make them the most money. That is what the credit score measures. It doesn't measure your business acumen. It doesn't measure that you're responsible or wealthy. All of those are additional meanings that have been built into it. It's just a tool for people that want to put their money to work to identify those people that want to make them the most money. And it so happens that the financial professional is not one of those, usually, because he's caring about his money. He's not caring about making money for someone else. So, we have to work a lot and we help them. I mean, we're not credit specialists, we don't pretend to be, we don't charge them anything for this. That's not really "our job", but we do it anyhow because otherwise, we cannot get them a loan. I don't know if I answered your question or if it took too long.
Michael Walter: I'm really interested in what is it that makes these people that are obviously successful in their professions and in their careers and very successful businesspeople, what is it about the way they use their money that is hurting their credit scores?
Alejandro Szita: For example, they get a credit card. Let's say they go and apply for a credit card, and just for the sake of the example, let's say that they get a $20,000 credit card. They're going to use it all right away. Why, because they got $20,000, they use it. However, according to the rules of the credit score, you only need to use 10%. So you get a $20,000 credit card never use more than $2000. That sounds at the beginning a little bit like, what, they gave me $20,000, and then if I don't use it, then they reward me?
Again, I ceased to look for the logic behind these things because these things don't follow the logic that you and I may have. These things follow criteria that remember financiers looking to place their money to get the most return, they came up with these things because that suits them.
So for example, the independent person goes, takes his credit card, maxes it out, or nearly. Once you start hitting above 50% of the credit, you'll start getting penalized for using what they gave you, which doesn't make any sense. Once you start to hit 75% of the usage, then you really are hurting your score. And if you happen to be one day late, forget it, for seven years, you have the mark of the devil. So that's one of the ways that they penalize the credit score by overusing credit and by not paying attention to paying the bill exactly on time because you see, a self-employed person or business person thinks about paying. Like if they owe let's say $50,000 and they pay it, to them it's done. They move on. They don't think, "did I pay it exactly what they wanted?" Usually, they are very busy. Usually, accounting is not their expertise. They employ other people for that and usually, they're not on top of that because they are creating their business. So all the minutiae of when exactly to pay the card, how much, it's something that to them is a waste of time, so they don't spend time on that. That's one of the ways that it costs them on their credit score.
Michael Walter: Right, so for these people, when they are in need of helping in getting these credit scores improved and helped out to be able to secure that home financing, what are some of the things that you can do to help them?
Alejandro Szita: Well, fortunately, this is an industry that is very mature. So when we run their credit, first of all, we do something unusual. We run their credit first of all in a soft pull mode, meaning nothing that we do counts toward their score, sometimes it doesn't even show up. Why? Because if we don't do it that way, it becomes what they call a hard pull, it affects their credit score, it's already an inquiry. So we don't want to go there unless the person really wants to move along.
We want to see first where the person is at and what we can do for them so we run a soft pull. However, the soft pull, even though we cannot use it for anything, and pretty much it doesn't show up anywhere, and it doesn't affect their score, it gives us all the information.
Then we have two or three software tools that we can use. We take their credit score, we'll run it through the software tools, and the software tools tell us right away, hey, pay this card, open another one, close this one, and then your credit score will, we usually get about 50 points just by using the tool. And since management is usually an issue for them, like for instance, a software tool may say, pay this, pay this, pay this and the software tool is very precise. For instance, if you have a $5,000 credit card, it will tell you to pay it down to $1,436 and it's very precise. It's not 37, it's not 34. It's 36. And if you do that, then you get the bump up and usually they have to pay down 10-15, sometimes 20 or more thousand dollars in order to get to the score, but since they do have the money, they usually do it right away. So that's one thing.
When that software tool doesn't really work out well, or there is not much we can do, or we've used the tool and we cannot bump it up, we're maybe getting one or two points and we need 50, then we use another software tool which is a simulation. In the simulation, I will manually, and using my experience, basically, it's trial and error, I start to change each account individually one by one by hand, and looking at the score because in the simulation, you change something and it shows you the score. You change something and it shows you the score. And I have to do this manually for each bureau - Equifax, Experian, and TransUnion, because the lenders, what they do, they look at the three scores and they take the middle one, like if you have 700 in one, 650 in the other, and 680 on the other, they take the middle one. So by trial and error, using those tools, we get to the maximum that we can bump it up, but there are many things you can do. The credit score is just part of it.
Michael Walter: And having somebody like yourself to be able to do this for their clients, I imagine this is something that is valuable to any agent out there that is working with these types of clients and I guess where you're currently located, that can be, that's a big pool of people that are out there.
Alejandro Szita: Yeah, we can help people in Florida too, by the way. We are licensed in Florida where you are.
Michael Walter: Right, exactly. So, what is it for agents to know that there are people and tools out there to help their clients secure this financing?
Alejandro Szita: This is what I would tell agents because there is a lot of confusion and I want to talk to borrowers, the first thing they ask me, what is my rate going to be? And the rate, believe it or not, is to some degree immaterial. When I talk to agents, they go, "Oh, his credit is not up there". But it's not about the credit either. I'm going to tell you the most important thing when you do a loan.
Ninety percent of the loan is based on the ability of the borrower to make the payment. What any lender, it doesn't matter if it is expensive or cheap, or higher or lower, what any lender, the first thing they are going to do is look at your income and see that you can sustainably afford the payment. If you can sustainably afford the payment, the loan is 90% done. After that, they look at the credit score. Why they look at the score is to price the loan. If you have a really high score, they're going to give you a lower rate. If you have a lower score, they're going to charge you more. So that's basically the function of the credit score.
And lastly, they look at the collateral. Okay, what is the collateral for the loan? In this case, the house. Because some people go, "Well, my house is worth a million, it's fully paid off. How come I cannot get a loan?"
The reason is, it's because the collateral is the last tail end of the loan, and it's actually somewhat unimportant for institutional lenders, not for, let's say, a hard money lender, but for institutional lenders, not really.
So if you're an agent, the first thing to determine is can your borrower afford it, and it has nothing to do with the tax returns. Don't look at the tax returns. Just talk to him or her. "Look, you want to buy this house? The payment is going to be about $6,000 a month. Can you comfortably pay this for the next five years?" When I have a borrower, my first thing, my first conversation with him is, I have a spreadsheet that I made that is really, really simple that I share with him over Zoom, and I said, "Look, this is your payment. How does it feel like? How much are you paying now? Can you pay this in the next five years? Is it something that you can easily do?" If they say yes, we go on. If they say no, then, we just stop there and we keep working on that payment until it comes down to a number where they can say, you know what, I can do this. I can do this for the next five years. Why five years because in five years inflation alone would make the payment more insignificant. So I will say to agents focus on whether the person can afford it. Don't only focus on the downpayment because the down payment can be a gift from someone else. Just focus on the payment. Can he do the payment? Okay, the credit. If it's super, super bad like 500, probably he won't be able to do it this month. It will probably take a year, okay? If the house is run down and it's like a piece of sh, then forget it. You're not going to be able to get it, but usually, most agents are not selling those properties.
Michael Walter: Right. So, I think it's really important for agents to have that conversation right out of the gate when they're working with buyers of what's the budget that we're working with, and not the overall budget but that monthly budget.
Alejandro Szita: Yes, because that's what a loan is. A loan is leveraging your monthly income into a payment.
Michael Walter: Yes and is that something that, when you're working with buyers, is that something that you're really kind of focusing in on? Is that monthly, how does this fit in with the rest? And they need to understand how that also fits into the rest of their bills and everything. It's not just the house payment. It's everything else.
Alejandro Szita: Yeah, yeah. You know, I have a background in financial advising. I wanted to do that, so I studied for my Series 65 [an exam that, when passed, allows a person to give financial advise in relation to buying and selling stocks] and I did a bunch of other things. I also have an insurance license and so on. So when I look at this, like you said, I look at it from the whole picture. It's not just the payment. Okay, I can make the $5000 loan payment, but what are your other bills, because I'm going to find out anyhow when I run your credit report. Well, I have this and I have that, so it's important to have a comprehensive look of what the person can do for many reasons. Me as a lender, by the way, I'm on the hook. If I do a loan for someone, and the person within six months or a year cannot pay for it, that's a big no-no for me. So I have to make sure the person can afford the house, not just for one year, but for longer than that. It's not just making a loan and just next. We really have to be responsible for what we do.
Michael Walter: Right, and obviously, so we're recording this interview in the middle of May here, and economically, things are kind of up and down a little bit, and we're starting to see interest rates go up a little bit. Inflation is obviously a huge topic. How do you, and how do people navigate getting these large loans and being financially secure when there is so much unstability or just a lot of stuff out there when it comes to world finance?
Alejandro Szita: That's a very good question. Let me spare a few moments to talk about the rate. Usually, there is this misconception that there is a rate for you, like you call me and say, "Alejandro, I want to buy this house, what's the rate?" And they expect the number from me, but this is the reality. The reality is once I have your scenario and I put it in the bank's computer, most people will qualify for about a hundred rates. Not one, a hundred. Out of those hundred, probably only five or six will make any sense. And those five or six is a matter of preference. There are many things that you can do. So it's going to be a range. Now usually, most mortgage brokers and bankers just pick one, pick the one that is sort of neutral. I call it neutral, they call it the "par". The par rate is the rate at which you don't have to pay much or anything and they don't give you anything. They pick that one and they say this is your rate. But this is not your rate, you have another five rates. You have a range of rates and that's why I say that you can massage with these certain limits, okay? So that's the number one thing, it is not a rate. It's a range of rates. And you'll decide, I go over with you or we go over with you, explain each one of them, what are the advantages and disadvantages, and then you pick one. It's not me telling you, I'll just give you a range and you pick one.
But to answer your question, it's interesting that even though you have all of this news on TV, all of this complicated economic analysis, most of them are incomprehensible. Normal regular people have a sense in their mind of what is going on. Houses are really flying off the market in every market, in every state, at every price level. Why is that? People say, oh well, you know, here in Southern California there is a shortage of 300,000 homes. So it's the shortage. It's not only the shortage, and you can see, I love history so I am an avid student of history. This has happened before many, many times, not only in the United States, but everywhere in the world. People sense automatically and intuitively that things are not good. They're not doing well. So they know that the money or the currency they may have sitting under the bed or in a checking account is going to lose its value or disappear, so they want to put it somewhere, and one of the traditional areas where people put their money is in real estate.
So, to answer your question, people intuitively see what is happening and it's not going to get better, it's going to get worse for many, many reasons. They're putting it in real estate. Yes, prices are going to fluctuate, but if you have $100,000 in the bank today, you know that a year from now it's not going to be the same. If you have $100,000 in your house, yes, your house can go up or it can go down, but as long as you can sustainably, and that's why I like to add the word sustainably, afford the payment, you know that those hundred Gs [100,000 dollars] are not wasted. They are into something.
And if you allow me, I will tell you a little story about that. Very interesting. One of my first transactions as a buyer's agent was with this couple—because they only spoke Spanish and my broker said, "Hey, you speak Spanish, right?" I said, yes I do. I come from Chile. So he said, "Would you like to make double commissions?" I said, "Yes, how can I do that?" At that time you could do that, today you cannot do it. The law changed. But at that time, I was just doing the loan. He said, "Go there, they don't have an agent. You can be the agent and you can make the real estate commission and you can make the loan commission." So I said okay. So I talked to this gentleman, this gentleman from Mexico, he said to me, "My first house I bought it in Mexico in the 80s. At that time the house cost me 50,000 pesos. And it was such an enormous amount, and the payment was such an enormous amount, I could barely make it." Then the situation in Mexico got worse. There was a devaluation. There were other economic upheavals that happened and then what happened is he still always saved 50,000 pesos. The payment was still the same 300 or 400 pesos a month that he had to pay. But now that sum became so insignificant because of the devaluations, because of what happened in the economy that in two months, just with his regular wages, he was able to get rid of his mortgage and pay it off.
Now, here in the United States, we've never seen this. I come from Chile, and I've seen this because in 1970, you know in the 1970s, and stop me if I am from digressing too much, I don't mind. In the 1970s, we were taken over by the socialist government. I can tell you that it doesn't work. I mean, I'm not trying to alienate anyone. I'm not trying to say anything. I know from personal experience when you go down the rabbit hole, when you go down that route, it's not going to work, no matter what people say. It's not going to work. I've seen it with my own eyes.
So from 1970 to 1973 in Chile, that scenario that that gentleman from Mexico described happened in Chile. They changed the currency, we used to have a currency called el escudo. Escudo is a Spanish word for shield. It's like those shields that the knights used to have when they were fighting. I don't know how to describe it. So it's called the escudo or the shield. So that was the currency for years and years. They changed it to a thousand escudos will become one peso. So, if you were a saver, and you have millions and millions of escudos, all of a sudden all of your escudos, became this [smaller]. But if you had debts, all of your debts suddenly became this [smaller]. So, that's an example that I have seen, and we are heading towards that, in my opinion, from everything I read, this is not going to happen until December 2032.
So we're still away from that, but people are automatically sensing this. So, yes, to come back after this long-winded explanation to come back to your original question, what can somebody do when prices are fluctuating? It's almost impossible to time the market. I remember back in the 2000s—before the recession of 2008—in 2005, 2004, I just started doing my loans and I read an article in a Los Angeles magazine, there was a couple thinking, should we buy a home? The market was in full swing up, from the 2000s to the 2008, the house sold for a hundred. Then immediately sold for a hundred and twenty. Then a few years later it was 200. So all in the middle of that, houses were like going up like a rocket. And this couple saw this house that cost 250 and it was 300. And they were asking, should we buy this house and they were afraid of not being able to time the market. Now that house now is a million dollars, so you tell me, even in that crazy market they would still have done okay had they bought it for 300. There's nothing in LA that you can buy for 300, by the way. The cheapest that you can possibly maybe buy, if you really look and if you are really aggressive, and if you really have an agent today, in May of 2022 in LA, is almost 700.
Michael Walter: Right, and I think a lot of it, when it comes to the understanding of what you can afford, isn't you got to stop looking at the big number, the final number. It's that broken down monthly. What can your borrowers, like you said, sustainably afford month after month.
Alejandro Szita: Right, and even if you can sustainably afford it, let's say that you buy this big 700,000 home that really should cost 300, right? You buy it but you can sustain the payment. And let's say the worse comes to worst, everything crashes. And now your home, like it happened in LA, in the valley in Los Angeles there is a neighborhood called “The Valley,” because it's a valley, it's a physical valley. Houses in the last recession, well, not in the last recession, the recession of 2014, and before 2011-2014, they drop 50%. So you buy your 700 and now, it's 350. Don't worry. If you can sustainably afford the payment, just don't do anything. Just keep paying your payment, time alone and inflation alone is going to take care of, number one, your house is going to appreciate again, and number two that payment will become insignificant over time. So don't go, oh well, my house has now lost half the value. I need to sell. No, you don't have to do anything as long as you can afford the payment, just stay put, carry on with your life.
Michael Walter: Great! Well, thank you so much for taking the time to talk to us today. You really kind of break things down very easily to understand. I can see your passion working with people and getting them the financing for their homes.
Alejandro Szita: You're welcome, Michael.
OUTRO:
Michael Walter: I want to thank Alejandro for taking the time to speak with us today. And I think it'll be really interesting to see how things develop over the next several months.
So once again, if you think you or someone else on your team has an awesome story or tip to share with our community. Send us a message at feedback@smartagents.com.
