The Current State of Investment Property Mortgages

September 19, 2012 By Leave a Comment

It ain’t all that pretty…

If you are actively searching for investment real estate, it’s a good idea to be aware of the current state of the investment property mortgages market.  While credit remains relatively much more difficult to obtain compared to several years ago, new banking regulations have made things even tighter in the mortgage arena since the beginning of the year.  So you’ll need to have your creditworthiness all lined up before you try to close on any deal.  You certainly don’t want to waste your time searching for a good investment property deal, only to find you can’t obtain the requisite financing.

Increased credit tightening

The most notable change in the credit markets this past year has been an intense scrutiny (and concomitant tightening of documentation) required on all residential  investment property mortgages.  Private investment from Wall Street has all but dried up completely for  riskier loans, and as such, lending in most areas of the country will not allow for any form of  “no documentation” (also known as “stated income” or “low documentation”) types of mortgage financing.  Pejoratively, these loans have been called “liar loans,” mainly because one could lie about one’s income with impunity in order to qualify for the loan.

Currently, even stated income investment property mortgages that can be had allow lenders to audit your past federal tax returns (usually in case of default) to prove you were not truthful on your loan application.  This further places more protection into the banking system to further avoid the wide use of fraud that contributed so strongly to the real estate collapse of the recent past.

Make your mortgage lender your ally

Armed with this investment property information, it is always advisable to discuss your financial situation with a mortgage lender before you start to locate your next investment property deal.  This way, if you are self-employed, for example, you’ll be able to prepare in advance what documentation you’ll need for the future.  You’ll know what amount of mortgage you can comfortably qualify for, and be able to plan for future financing as well.  You can also get prequalified and preapproved for any investment property mortgage loan now, rather than waiting until you have a great deal in place, and then finding you don’t qualify.  In that scenario, you could end up potentially losing out on the deal (and all the work you put in on it) since you couldn’t secure your financing in a timely manner.

So try to work with a local lender you’ve worked with before, get to know them, and let them advise you on your best plans of action for qualifying for your next investment property mortgage.  Once you, do, you’ll be able to return to them, and cut through much red tape in the process for all subsequent investment property loans you will be trying to obtain.

photos courtesy of worldpropertychannel.com, allstate.com, realtybiznews.com,  socalfools.org

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President Obama’s Latest Proposal and It’s Effect On Investment Property Loans

January 25, 2012 By Leave a Comment

Some potentially good news for those looking to refinance existing investment property loans

In his State of the Union speech last night, President Obama offered up a new proposal for helping the current housing crisis. While designed specifically for home owners, property investors who rent out part of their homes could take advantage of the new legislation if it were to get Congressional approval.

The hallmark of the new law would be to help out those whose mortgage debts are greater than the value of their properties. The program would benefit those who have continued to make payments on their existing mortgages, whose properties are not already in foreclosure proceedings, and who currently do not have loans backed by the government.

A potential windfall for some property investors

On the surface, Obama’s latest proposal appears to be a boon for property investors already living in their own multi-family homes that are currently under water, whose mortgages are held by private companies. Eligibility for refinancing existing loans that are held by either Freddie Mac or Fannie Mae was increased last October to help those property owners whose homes were already under water. And those changes did not require any Congressional approval. However, this proposal does, since the loans will be backed by the Federal Housing Administration (FHA).

Many owner-occupied property investors have taken advantage of historically low mortgage rates by refinancing their investment property loans in the past year. But others are still unable to do so because they don’t qualify for refinanced mortgages, due to their mortgages exceeding the value on their properties.

Requiring legislation

The new proposal by Obama will require legislation since the FHA is currently prohibited from making refinanced loans on properties that exceed the value of the owner-occupied property investor’s house. These types of loans are inherently of greater risk, mainly because the property owner has no further equity remaining in his house. So if the FHA were to not be paid back on any new loan due to this proposed legislation, taxpayers would have to bail out the FHA.

As part of the new law, and since the FHA currently has so few reserves, Obama is proposing that any potential default costs due strictly because of this program be covered through new fees to be levied on the banking industry. The Republican-controlled Congress will be a large obstacle in getting this legislation passed given the current antagonistic political climate in Washington.  For now, it’s wait and see…

 

photos courtesy of outcomemag.com, articles.sfgate.com, justinperry.net, myweathertech.com

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Getting On Board The Interest Rate Train

October 14, 2011 By Leave a Comment

Falling interest rates…

The latest news is that long term mortgage interest rates have just dropped this week to historically low levels. Of course, this presents yet another enticement for property hunters to consider real estate as a go-to investment in such down economic times. So, is it the correct move?

Possibly.  In addition to interest rates, two other key things to take into account when considering jumping in to purchase your next investment property are your property holding time frame, as well as optimum purchase timing.

Your investment holding time frame

If you’re planning on holding your next purchase for a mid-range to long-term time frame (ie. – at least 3 years or longer) then by all means you would meet this criterion for jumping in and purchasing now.  The sluggish real estate market will definitely remain stagnant for the next few years, especially with the latest news that banks are now picking up their rate of foreclosures, after sitting on the sidelines. This is due to allowing time to soften the blow of negative publicity, as well as deal with the injunctions from state attorney generals nation-wide to the robo-foreclosure process that enveloped the lending industry late last year.

So now that foreclosures are up approximately ten percent over this time last year, you’ll need to hold any newly purchased investment property a solid three years at the least before expecting any increase in valuation from anything except your own improvements (ie. – building upgrades and/or new tenant leases that have rent bump-ups in them, that will raise your overall valuation of the property).

Purchase timing

The other main factor to consider when looking to invest now to take advantage of such currently low interest rates, is your purchase timing, and when it’s an optimum time of year to close on any deal.  As I’ve mentioned in my prior article on the best time of year to buy investment property, August and January/February are prime months to be swooping in to make your deals. Right now, you have the opportunity to research and locate the best buying opportunities. But concurrently, you should be meeting with your lender to investigate how best to lock in these current interest rates for any Winter buys.

Lower rates and their effect on your bottom line

Also, keep in mind the effect lower interest rates will have on your bottom line. You’ll either be able to afford more investment property, or be able to yield a higher return on your investment with the advent of these lower rates. Obviously, purchasing a “larger” property (eg. – a four family house instead of a three family) should throw off more cash flow in the long run. However, by buying that three family now, and not stretching yourself to get the most house for your mortgage dollar, you should realize a more immediate greater cash flow return due to such low interest rates.

 

photos courtesy of  cahomestrategies.com, wingwire.com, dsnews.com, taste-of-poland.com, homefinder.com

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Fannie Mae and Freddie Mac Attack! (Is this good for investors?)

September 8, 2011 By Leave a Comment

So by now you’ve probably heard that Fannie Mae and Freddie Mac are about to bring a lawsuit to a number of rather large lending institutions to recover alleged damages from all those mortgages granted with some (euphemistically speaking) less than stringent lending guidelines a few years back.

Like a scene from “Animal House”

I can see the courtroom scene now – I think it would look something like the fraternity courtroom scene from “Animal House.” The one where Tim Matheson’s character  brazenly exclaims in the Delta house’s defense: “You fucked up – you trusted us!”

Well, yes, indeed.  Banks did mess up royally. And we as a nation did trust our lending institutions.  Silly us.  And of course, we end up bailing these same lenders out to the tune of several hundred billion dollars.

Now, I’m not going to make the argument for the merits of Fannie Mae and Freddie Mac’s suit here. Clearly, the banks took liberties with their lending standards. However, it’s also clear that Fannie Mae and Freddie Mac had a great deal of pressure on them (both economic and political) to make large investments in these mortgage-backed securities. It also strains credulity to think they weren’t aware of the inherent riskiness of their  investment choice.

The potential effects on property investment

But let’s say they are somehow able to prevail in court, and will be able to win a judgment in the hundreds of billions of dollars against these banks. How would that effect the small property investor?

Well, for one, the already tight credit market for everyone, not just investors, will get squeezed even tighter. If you thought it was difficult getting approved for a mortgage now, just wait for the fun to begin if Fannie Mae and Freddie Mac win their suit! For investors, days of putting 30% down with credit scores in the high 600’s will be but a golden memory.  I wouldn’t be surprised if 40% down with scores in the low to mid-700’s will become the norm for investors if this were to happen.

In addition, other lending tightening may occur. When banks normally allow 75% of gross rental income to be imputed on lending pro formas, it wouldn’t surprise me if that percentage got lowered to increase lender safety standards on rental property mortgages.

Another way for lenders to increase their degree of safety for income producing property, would be to raise interest rates even higher relative to home purchase rates. Of course, this too will make financing investment property even more difficult.

Crippling an already crippled economy?

Naturally, the macroeconomic effect on the entire economy will be to slow it down from the already existing snail’s pace it currently is creeping at…which will only keep credit markets tight for the foreseeable future.

Ultimately, while Fannie Mae and Freddie Mac may have a viable case, I’ll be rooting for the banks to win this particular court battle. Otherwise, I fear some serious damage and resultant hysteria will occur in our entire lending industry, not to mention the horrible byproduct –  hurting individual property investors as well as our overall economy even further.

 

photos courtesy of uncoverage.net, metaezra.com, thisdopeknows.com, afrmortgage.com

 

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Short Sales 101

August 22, 2011 By Leave a Comment

Some Short Sale Basics

Put simply, a short sale occurs when the value of a property goes down from when an owner first purchased it, and the current market value has fallen below the amount remaining on the owner’s mortgage. When the owner decides to sell the property, assuming he’s not going to make up the difference with his own funds, he must get permission from his lender, who has some financial exposure, and must approve any sale price, since that price will dictate the amount the bank will ultimately be losing.

Recent history of short sales

As the financial crisis deepened after 2007, and property values decreased precipitously nationwide, while concurrently initially low-rate adjustable rate mortgages adjusted upwards, an increasingly larger number of homeowners began to default on their loans. With this double whammy occurring in the marketplace, more people fell behind enough in their mortgages that many had to place their properties up for sale. Unfortunately, because there was usually a shortfall in what their properties would fetch in the current realty market and what they owed on their mortgages, a large number of properties fell into this short sale category.

Short sale considerations

When finding a potential deal as an investor in a short sale, you need to be aware of the pros and cons associated with this type of transaction. Consider that you can usually pick up a bargain in the short sale process, though not necessarily a steal. Since the seller has no equity in the property any more, they will be amenable to almost any offer. The bigger issue, of course, is what the owner’s bank who holds their mortgage will allow for a sale price. This is directly related to how much of a loss the bank is willing to take. And banks don’t appreciate taking huge losses if they can be avoided.

So the banks set limits on any given property in their portfolio subject to a short sale, as to what price level, and their potential loss, they are willing to allow. Do not make the mistake of thinking you’ll be able to negotiate much with any lender on this point. Just know what amount you need to acquire the house for to make the deal happen in a positive manner for yourself.

Additionally, banks notoriously are slow in their response time, especially in relation to the overall size of their portfolio of short sale homes. So while an average house sale may take 2 to 3 months from accepted offer to closing, a short sale could take at least twice as long – or 4 to 6 months on average. Sometimes longer. So you need to be extremely patient when considering making an offer on any short sale.

More considerations…

Also, consider the fact that short sales may have greater competition than the average house on the market, mainly due to their initial market pricing being somewhat lower than like homes on the market, to help induce a quicker sale. But also because buyers are naturally drawn to the enticement of a “sweet deal” – which as I’ve already mentioned, isn’t necessarily true.

Another key point to take into account when bidding on short sales, is that investors as a whole will be drawn to them, because, as a pool of buyers, investors don’t require a quick closing, and they are more prepared to wait out the length of time necessary in closing on a property. In addition, investors are also more prepared to offer all cash (or remove mortgage contingencies from the deal) in order to entice the seller and their lender to accept their offer. With more investors making these all cash offers, your advantage over the general population is severely reduced. And lenders, naturally, will want to accept an all cash offer, further reducing their risk and overall exposure on any given property in their short sale portfolio.

Another negative to consider, is that you’re uniformly purchasing any short sale in “as is” condition. So once you get an accepted offer, make sure your house inspector’s report is quite thorough, and you can anticipate a sufficient amount for fix-up and/or maintenance issues with the property. Certainly, the seller and their lender will not be making any further improvements.

How best to find short sales

One can find short sales easily enough looking through your local Multiple Listing Service. Their will be a category for short sales where you can run a search based on this criteria, and meld it with your other search criteria, such as price and location as well. Your local Realtor can also provide assistance in your search.

Who short sales work best for

Short sales work best for more experienced investors with deep pockets, who can make all cash offers, and, having crunched their numbers properly, are prepared to wade through the bureaucratic red tape that lenders throw at you when bidding on their portfolio of short sale properties.

Who should avoid short sales

If you don’t have the time and patience to negotiate, then wait for 6 months or so, then short sales are not for you. In addition, if you’re not prepared for the increased competition from other investors, as well as running into many counter bids that are all cash offers, stay away from short sales.

 

photos courtesy of orlandorealtyexperts.com, massrealestatevoice.com, orlandorealtyexperts.com, iconarchive.com, donnygamble.com, bar-nauctions.com, library.thinkquest.org

 

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Residential Investment Opportunities

June 18, 2011 By Leave a Comment

Types of residential real estate investments – an overview

When we refer to residential investment property, the two main types are single family and multifamily houses. Land for development purposes is also another form of real estate investment, as are condominiums and cooperatives.

Single family houses

Single family properties are the most widely used investment types for property investors. They are traditionally the easiest to obtain and to finance, making them the preferred entry point for investing amongst first time real estate investors…

Multifamily houses

Multifamily houses are another attractive investment opportunity for beginner investors. They offer the investor the option of either renting all the units in a building out, or making one of the units in the property their own home, while at the same time renting the other units out and managing the entire property. The obvious advantage to this latter scenario, is that as on on-site landlord, you won’t have very far to travel when a tenant’s unit requires repairs, or when they have emergencies. There are also many tax benefits from being the landlord of your own building.

There are several types of multifamily properties you can invest in. The simplest ones are the two family or the three-family. Some two family properties are duplexes, which are side-by side homes, separated by one common wall. Likewise, a triplex is comprised of three side by side houses, each with a common adjoining wall. In addition, two or three family houses can look like a single family house, but be comprised of units on top of one another.

Four-family homes are usually comprised of four units on several levels – some are vertically grouped, with one unit in the basement, and the others on separate succeeding floors. Others have a couple of units on each floor. However, four-family houses represent the largest multifamily houses that can be financed utilizing residential mortgages. From five-family and above buildings, properties are considered commercial.

Land

Land purchases and development are not usually in the scope of beginner property investors. Most residential land purchases are done by experienced developers who have the deep pockets necessary to accept the increased risks of this type of investment. Purchasing tracts of land, whether small or large, requires a great deal of market research into the areas in question. Since mortgages are not traditionally given by lenders on land alone, developers require a great deal of cash on hand to finance the initial land purchase, prior to actually beginning the development of the property.

Condominiums

Condominiums (condos) can be created for any type of real estate – not strictly apartment buildings. Condos traditionally create a legal structure whereby some of the land of the condo complex is owned in common, but each individual unit (and the land under it) can be bought and sold under separate title.  So each unit has it‘s own separate tax assessment.

In addition, bylaws are created for the entire condo complex. These bylaws, among other things, define the exact common areas of the complex (for example, a pool area, clubhouse, parking spots, tennis courts, etc.)

These bylaws also allow for the creation of an association of the owners to manage the entire complex. Each condo unit owner is allowed one vote in the association, and elects a board of directors to take on the duties of managing the complex. This board also sets the budget for the entire complex, including the amounts each unit will have to pay for property taxes, insurance premiums and costs for maintaining all the common areas.

Cooperatives

Most cooperatives (co-ops) are actually private corporations. The corporation owns the land and building with all of it’s apartments on it.  The corporation also provides for the election of a board of directors (the co-op board) made up of some of the apartment owner/shareholders. The officers on the board take on the responsibility of managing the entire cooperative. Stock in the corporation is issued and sold to apartment buyers in quantities that are proportionate to the value of the apartments available for sale. In effect, buyers are purchasing a proprietary lease within their own company. These tenants are then required to follow the rules and regulations that were created in the corporate charter.

Co-ops can set their rules for buy-ins to the corporation. As an example, a co-op can require only all-cash purchases of it’s units/stock, so that it can attract strictly high-end buyers. But it also can control it’s own economic and social environment as well in so doing.

photos courtesy of  3dluxe.co.uk, philcebuproperties.com, newpointeestates.com

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Types of Investment Property Loans

June 17, 2011 By Leave a Comment

Conventional investment property loans

Most conventional investment property mortgages are standard income and asset verified loans. They can be conventional 30 year terms, or short-term adjustable rate mortgages (ARMs) with balloon payments.

These loans usually require a minimum of 30% down in most instances. In that case, you’d be obtaining a loan of 70% of the purchase price. Your loan-to-value ratio (LTV) would therefore be 70%. When buying investment property, you’ll usually want to try to obtain the greatest return on investment (ROI). Leverage (also known as cranking) is one of the ways you can purchase multiple properties over time, and thereby maximize your ROI. Depending upon your credit rating, as well as the type of property you’re purchasing, the down payment required may be higher, and could go up to 50% – and therefore your LTV would be a low 50% as well. In addition, the points charged on the loan (pre-paid interest) are roughly twice as high as for a conventional home loan.

There are some lenders today who will make no income verification, or no income and no asset verification type loans to investors. Due to the inherent extra risk of these loans (from the lender’s perspective), you can expect to pay more in the way of  higher interest rates, as well as more points on these type mortgages.

Commercial investment property loans

When considering the purchase of 5-family or above rental buildings, or more typical commercial space (for example, office buildings, retail stores, warehouse buildings), you’ll need to obtain a commercial loan. Lenders have separate divisions to evaluate and extend credit on these type properties. Since commercial properties are much more specialized, their inherent risk need to be evaluated as a niche within most banks.

Lenders will rely very heavily on the expertise of commercial appraisers, who themselves are sort of like the Jedi knights of the appraisal industry. Unlike conventional residential mortgages, expect much heavier scrutiny of your assets and income, as well as the existing income statement of the property you’re considering purchasing. Also expect rates and points to be higher than standard residential loans.

FHA 203K (fixer-uppers)

If you know you’ll be living in a multi-family rental building, then you can consider an FHA 203K type of mortgage. If you won’t be living there, this type of loan will not be allowed.

If you find a 2 to 4 family rental property that needs a ton of work, and you’d like to finance the renovation costs as part of the first mortgage (rather than self-financing the improvements, or trying to obtain a second mortgage after the work is completed), you can consider an FHA 203K type loan.

Before the mortgage can be approved by the lender, your contractor will need to have all the improvements, their time frame and his payment schedule approved by the bank. (You can also choose to make the payments to the contractor directly, and then you’ll be reimbursed by the bank – also known as a draw.)

These loans can be structured in a step fashion. In the first step, you receive the funds to close on the property. In the next step, some funds are released to your contractor when he begins the renovation work. Funds are then released to him in succeeding steps based on the intervals of work completed on the project, until it is completed.

This type of loan is great for leveraging all the necessary improvements needed on a run-down multi-family property. It also helps increase your ROI on this owner-occupied type of investment.

Home equity lines

Use the equity in your home to create a credit line for further property investments. This is a great way to finance investment property. The costs for loan acquisition are typically low for home equity loans, especially compared with conventional mortgages. And you can structure the loan as a revolving credit line. So when you sell a property, you can pay off the credit line. Then you can take it out again when you’re ready to purchase the next house. And home equity lines typically allow for interest only payments during their first 10 years. This will help increase your cash flow on your investment properties, as your monthly costs, relative to standard mortgages, will be much lower, since you’re not paying back any principal in monthly installments. Rather, you’ll be paying the principal off when you repay the credit line when you sell off any given property.

Seller financing

Always ask a seller of a property you’re considering making an offer on if they will extend some form of seller financing. Most will usually say no, but it never hurts to ask. Even if they won’t (or can’t) extend you a first mortgage, try to obtain a second mortgage. Again, always ask if it‘s possible.

Hard money loans

When you’ve exhausted all other avenues of property investment loans, crunch the numbers to see if hard money lenders will make a deal workable. Usually used if you have poor credit, or poor cash reserves, as their name implies, you’ll pay for the privilege of doing business with hard money lenders. Their investment mortgage rates are usually at least double conventional mortgage loan rates. And their points charged (pre-paid interest) can be triple or quadruple conventional points charged.

photos courtesy of  realestatesez.com, thehomeconsultants.wordpress.com, asmartremodel.wordpress.com, hodgesrealty.net

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Financing Investment Property – Owner Financing

June 6, 2011 By Leave a Comment

Creating more financial leverage

In your efforts to create as much financial leverage as possible, you’ll want to use other people’s money whenever you can.  And one of the best ways to use other people’s money is to obtain a mortgage from the seller of any investment property.

Beware late night infomercials!

Now, unlike the drivel that is shoveled out in all those late night television infomercials on making riches in real estate – it is incredibly difficult to find owners willing to extend a personal mortgage on their property. They would need to already own the property outright (in which case they could extend you a large first mortgage). Or if they only have an existing small first mortgage on the property, you could obtain a first mortgage from a bank, then get a smaller second mortgage from the owner after his first mortgage has been paid off at the closing from the proceeds of your first mortgage.

Unfortunately, both scenarios are terribly rare to find. Those infomercials make it sound so easy, but you’ll be spending most of your waking hours trying to locate that rare breed – the owner who is a) undervaluing his property for sale, b) owns the property outright, and c) is so secure financially himself, that he can offer a personal mortgage without needing the proceeds of the sale of his property to purchase his next home. A rare breed indeed.

Ask for it…

That said, there are many instances where you can realistically garner a small second mortgage simply by asking. And every little bit of other people’s money helps in increasing your financial leverage.

In addition, I have found there are times, after crunching your numbers properly, where buying a rental property at market value (or even a little above market value) can make sense if the owner is willing to give a large first mortgage at incredibly good terms – an interest rate far below market rates and/or monthly payments based on very long amortization periods (30 years or more).

In this scenario, the cash flow may look spectacular because your monthly payments are so low relative to a regular “hard money lender’s” (ie., your bank’s) rates. But keep in mind it will take some time for the property to “make back” the differential in the value you’re overpaying in absolute terms to get it. So plan on holding the property for a long time horizon if you go this route. And make sure there are no early balloon payoffs required in this type of personal owner-financed mortgage.  Or at the very least, make sure the balloon payoff date is set far enough into the future (for example, a minimum of ten years) in order for you to recoup the differential in value.

Owners willing to finance – and the property value trade-off

Also keep in mind that the owner who is truly desperate to sell, wants out immediately, and will make all sorts of concessions on price to do so – is usually not able to offer any kind of financing on his property. So just be aware of this trade-off when locating your next investment property. A property priced at or slightly above market value may have an owner who is willing to extend credit in the form of a first mortgage, or even a small second mortgage. (But be sure to ask!)  Whereas a property that looks like a steal – and is priced well and/or below market value – these are the properties that will always be hardest to obtain owner financing for. It doesn’t mean you shouldn’t still ask if the owner is willing to consider financing – but just don’t be surprised in the least if they immediately say no way.

photos courtesy of  etc.usf.edu, apelbaum.wordpress.com, es.123rf.com, clownswilleatyou.com

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Investment Property Financing – Finding the Right Mortgage For You

June 6, 2011 By Leave a Comment

The fixed rate versus ARM decision

If you sort out your investment property goals, the seemingly bewildering array of mortgages available should narrow down quite easily.

You’ll first want to determine your time horizon for your investment property. Are you planning on holding the asset for many years, possibly renting it out in the process, or are you considering a quick turnover of the property? Once you determine this essential element, as well as develop a budget that keeps your monthly investment expenses at a level that’s comfortable for you, you’ll be able to make your mortgage decision much simpler.

With the average life of most mortgages being about seven years, for most investors the safety feature of a standard 30-year (or 15-year) fixed rate loan is usually not worth the higher rate and monthly payments associated with it. Of course, in the case where you plan to create an “evergreen” source of cash flow income by renting out the property for many years to come, and you don’t plan on the need to refinance the property in the short-term, the 30-year fixed rate loan may be right for you, especially with rates currently at all-time lows.

Shorter time horizons…

However, if your time horizon is short-term, then you’ll certainly want to seriously consider an ARM (adjustable rate mortgage). ARMs come in all shapes and sizes, with rate change periods generally starting at one year. There are numerous split rate ARMs, where the initial rate is lower than a 30-year fixed rate, and is guaranteed for a period of time (for example, three, five, seven or ten years), and then converts to a one-year adjustable rate loan thereafter. Of course, this type of loan has it’s dangers, as evidenced by the financial crisis of the last few years. You don’t want to be overextending yourself as rates bump up – especially if your property is, in the short-term, potentially losing value. A good mortgage banker/broker is essential here to better explain the pitfalls of ARMs, as well as help you in your decision-making as to the best ARM for you.

The time to be sorting out mortgage plans…

A good time to sort out these different mortgage plans available is before you even start looking for your next investment property purchase. The mortgage broker/banker is available to educate what mortgage products are out there at any given time. In addition, you’ll only be frustrating yourself and others in the investment process if you don’t know exactly what you can comfortably afford.

The mortgage professional will help by initially running a credit check early in your investment property search. This will help determine if you have a clean credit report, or if a red flag will be raised that will require a borrower to clear up some potential problems. Too many investors wait until they find a property they feel is a great deal before meeting with a mortgage pro. Big mistake. Why waste your time if you’re not absolutely sure you can afford the property?

Creating the wish list…

Mortgage broker/bankers also like to go over with potential borrowers their wants and needs list in what the investor is looking for. Is it a long-term rental? A simple fixer-upper? A complete rehab job? This helps clarify exactly what they’re looking for as they begin their quest. At the same time, the mortgage pro will usually discuss the investor’s financial comfort level, and where it lies in relation to taking on a new mortgage.

Finally, after obtaining a mortgage pre-approval letter from their lender, a property investor can call their mortgage professional just before they place an offer on a property. In this way they can go over the most up-to-date interest rates, and what their exact monthly mortgage payment would be.

photos courtesy of  mortgagenotebuyer.org, heliodeaguiar.blogspot.com, ideachampions.com, raanana.muni.il

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Locating Investment Property In Your Right Price Range

June 6, 2011 By Leave a Comment

Not sure what price range to begin your search?

When you’re starting out looking for an investment property to purchase, you just don’t have time to waste looking at houses you simply can’t qualify for. It’s a humbling experience to spot a great investment opportunity – and ultimately realize it’s way over the price range you can comfortably afford.

Whether you’re an employee, or whether you’re part of the growing number who’ve joined the ranks of the self-employed, lenders have become more adept at tailoring investment property mortgage programs. And with the meltdown in the mortgage industry over the last several years, these programs, while more onerous to obtain, are still out there. There are three basic types of programs you can use to gain access to investment property mortgages.

The three basic types of mortgages

The first of these is the “full income verification” loan. As it implies, you’ll have to document with either W-2 statements or tax returns for the self-employed (of several years worth of self-employment at the income level you’re representing). You can expect loans in this category will feature, at a minimum, a 20% down payment. But many now carry 25% to 30% down payment requirements for investment property, due to the current state of the financial credit markets. Also, lender’s products will feature interest rates comparable to standard loans issued to homeowners.

The second program, available to self-employed individuals, is known as the “non-income, full asset verification” loan. Here the down payment required is higher: starting now at 30%, but it can go up to 35% or sometimes, 40%. However, lenders will usually only require documentation of only two years’ worth of actual self-employment.  The down payment must be verified, and shown that it is not (or will not be) borrowed. Interest rates in these packages usually run slightly higher than the full income verification loans.

The last mortgage avenue, also open to the self-employed, is known as the “no-income, no asset verification” loan. These were the types of loans that in the recent past got so many individual borrowers, and their mortgage companies, into such dire financial straits as real estate values began going down precipitously. These types of loans have recently made a comeback, but only for those with the absolute best credit scores. Typically, because of the risk a lender is about to take, these loans are the most onerous for borrowers of investment property. They typically require a minimum 40% down, but can go up to 50% down. And the rates that accompany these loans are typically higher than full income verification loans. However, as the name implies, no verification is made of the borrower’s income or assets.

Your credit history

Remember though, that an applicant’s credit history will be looked at critically when being considered for these programs. Loan underwriters will analyze these type applications more rigorously to help assuage their risk.

Once you know how much you can reasonably put towards a down payment on an investment property, and have gotten pre-approved for your mortgage, you will have successfully backed into a price range you can afford, and are qualified for. Not only will you be looking at correctly priced houses, but you’ll be golden to any seller looking for qualified buyers.

photos courtesy of  reeishome.com, 123rf.com, fairloanrate.com

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