Finding a Loan For Investment Property

Finding the Best Mortgage for an Investment Property

If you are considering buying properties either to hold as investments or to sell then you need to look at mortgages and mortgage rates differently. In order to make the most amount of profit you need to borrow as little as possible. Remember: the most important aspect in the process is retaining the capability to turn the property around to the buyers without causing you payments in the. Thankfully, there are several ways you can mortgage these investment properties to your benefit.

What Can You Afford?

Take a moment to review your current financial status. If you can afford to make the down payment on a property, you may want to go ahead and do so. You will be able to use the equity to both build your profits and the number of subsequent investment properties.

Finding The Best Mortgage

Since you want to spend as little money as possible when buying properties to sell, you will want to acquire a mortgage that requires minimal financial output during the time period in which you are trying to sell the property. This means looking for loans with low initial interest rates or loans that pay off the interest first too. For example, if qualified, you may want to go with a no deposit loan through which you would be lent 100% of the property value provided that you can demonstrate a solid savings history. The initial mortgage payments will be smaller than they would be in a traditional mortgage agreement and you will be able to purchase the property a lot sooner.

Also, a hybrid loan- one in which the interest is fixed for a period of time and then becomes adjustable- is another good option for investment property holders, and works well for those either concerned about the future movement of interest rates or investors that don’t want to take a particular stance.

How to Get the Best Loan for Your Needs

When you find a property that you want to invest in, it is important to discuss financing options with a variety of banks and lending institutions. Be sure to explain your plan for the property as well as what you are prepared to contribute monetarily. Keep in mind that it is best to work with a lender that has a background in working with investment property holders as they will often be better suited to serve your needs.

Converting Your Primary to Investment Property: You may not qualify.

When a homeowner buys a new home, he has 3 options of what to do with his current residence:

1. Sell the home, paying off the mortgage in full
   
2. Keep the home as a second/vacation home
   
3. Convert the home to an investment property

The most common action plan is the first one -- sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".

Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy.

Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.

Among the highlights of Fannie Mae's Changes:

Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.

Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.

Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.

If it seems like mortgage rules are getting strict, that's because they are. And they're expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.

Mortgage rates may rise through 2009, or they may fall. We don't know. But what we do know is that borrowing money to buy a home will be tougher.

If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead. Guidelines for jumbo mortgage programs are likely to follow as Fannie/Freddie set the tone for the overall market. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.

Huge Impact on 2nd homes and Investment Properties

Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

• Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.


• With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement.

Investment Property Guideline Changes

• With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.


• Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:

1. The demand for homes reduces because fewer buyers qualify for mortgages


2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.

An option for today's home sellers:Lease-Options

The subprime fallout has made the once-slam-dunk home loans more difficult to obtain. While some neighborhoods continue to be very active, other areas have slowed considerably.
In addition, the first notion of "back to school" already has hit many second-home owners who are beginning to schedule the "winterization" of the family cabin. Instead of going through another off-season with little use and significant maintenance, some owners will use the last few weeks of the summer season to show -- and hopefully sell -- the family getaway, raising for-sale real estate inventory levels in popular areas.
If your house or cabin already has been sitting for sale long enough to bite into your comfort and affordability zones, you might want to consider a lease-option.
A lease with an option to buy often can solve a two-mortgage problem for a seller, and provide a cash-poor buyer with an opportunity to "try out" a house while getting a portion on the monthly rent credited toward a down payment.
Many sellers make a commitment to purchase another house contingent on selling the one they're already in. But when it comes time to purchase the second house, or lose it, the prospective buyer can be faced with making payments on two homes if the first one has not sold.
A 12- to 18-month lease agreement, with an option to buy within the lease period, can solve problems. Here's how a typical lease-option works:
1. The buyer and seller agree on a purchase price, usually a figure somewhere between today's market value and the anticipated market value 12 months down the road.
2. The seller gives up tomorrow's presumably higher value for money in hand today. The buyer pays a bit more than today's value in exchange for very little cash down. Let's say buyer and seller agree the price will be $335,000.
3. The seller charges the buyer a nonrefundable fee for agreeing to this option. The amount can vary depending on factors such as how eager the seller is to move and the size and quality of the house. Typically, the higher the fee, the better the buyer maintains the property.
4. Let's use $3,000 for the fee in our hypothetical transaction. The fee is in addition to the monthly lease payments. And we'll have the seller give the buyer the right to purchase the property for $335,000 at any time within the 12-month lease period. If the option is exercised, the fee could be considered part of the down payment.
5. The lessee has made no down payment, hence the monthly option fee is typically higher than rental market rates. The two parties agree on what portion of the rent will be applied to the down payment. Any amount can be credited. For example, if the monthly fee is $2,000, $800 could be credited to the down payment. (If the seller really is not eager to sell, he may not agree to a higher rent credit.)
6. Buyer and seller must be sure to specify both lease and sale terms in the agreement. For example, when the time comes for the buyer to exercise the option, if the interest rates are at 8 percent, the buyer may not be able to qualify for a loan. It's a good idea to set an interest-rate ceiling in the agreement, or ask the seller to finance the home when conventional rates hit a certain level.
Sellers should read their mortgage agreements carefully before entering a lease-option agreement. Some lenders may activate a "due-on-sale" clause if the seller enters into a lease-option with another party. Many times, lenders will permit a specific lease-option period if notified in advance. And, lenders usually are more willing to participate when they are assured of future business -- like the seller's or buyer's new mortgage loan.
Some realty agents have been reluctant to seek lease-options for clients because they have been unwilling to gamble their commissions on whether the option would be exercised. Others are skittish about deferring their commission until a deal is solidified. However, when open-minded agents understand a lease-option could keep a deal together and result in future business, the concept is readily accepted. A small piece of something is better than a large piece of nothing?

Jumbo Mortgage Meltdown Freezes Luxury Housing

The media has done a very poor job of relaying the collapse in the jumbo mortgage market. The term jumbo mortgage loan refers to any loan that is higher than the maximum dollar amount established in Fannie Mae and Freddie Mac's guidelines. At this time, any loan for a single family property greater than $417,000 is considered a jumbo loan. The limits increase to $533,850 for two-unit properties, $645,300 for triplexes and $801,950 for 4-unit homes. There are also some areas of the Country where the limits are higher including Alaska and Hawaii.

But, what does that mean for housing in high cost areas like CA, NY, FL, etc? The guidelines for doing a jumbo mortgage have tightened dramatically in the last few days. Lenders such as Indymac, Countrywide and WAMU have increased reserve requirements and stopped taking stated income for loans with less than 20% down. The interest rates for full doc jumbo loans in CA have risen by .50-.75% for the most prime credit worthy borrowers. A client making $200k gross income(everybody right?), with 1k monthly payments on the credit report for cars, putting 20% down qualified for an 825k purchase using standard debt to income ratios two weeks ago. You move rates to 7.75% and the client only qualifies for 777k. Jumbo mortgage rates are averaging 7.75% for this scenario for a 30Y fixed. Which everyone should have, it makes no sense to gamble with an adjustable if you are planning to live in the home more than a few years.

As the guidelines continue to tighten, and the reality of the freeze in the jumbo market sets in you will see sellers drop their prices as we move toward the credit freeze of winter. Buyers can no longer go to their mortgage lender and get the rocket fuel financing that propelled the luxury market between 650k-1.5m. Above these loan sizes clients tend to have substantial active and passive income from stocks, bonds, and small businesses to manage almost any lending squeeze. Working class vs asset class. Don't worry about the rich, they always find a way to make it. Keep your head on and remember it's never different this time. Please post your thoughts.

Musical Mortgage Chairs!

In speaking to investors, clients and realtors; I came away with the idea that the mortgage freeze is like a game of musical chairs. Some of us can remember the feeling of scrambling for that last chair as the music stopped. Many property investors that have a large number of single family home rentals(10-15 in some cases) are trying to grab at financing that doesn't exist in today's mortgage market. They will be forced to sell. Many investors are barely holding onto rentals that only made sense for the property appreciation that happened between 2001-2006. The negative cashflow was big to the tune of 1-2k a month with the taxes and insurance per house. Many of these folks took interest only mortgages or negative amortization loans because they were really betting that housing would rise in the next few years and they could sell with huge gains. Now that housing prices are falling; the music has stopped, but so many people just don't realize it yet. Did you know the music stopped a few months ago? Better find that last chair.