OfflineWith interest rates still hovering near all-time lows, and property values in many places improving but still far below 2007 highs, investing in real estate may seem like a smart move — especially for anyone squeamish about investing in the stock market. (A whopping 76% of consumers are saying no to equities, according to Bankrate’s latest Financial Security Index.)
But new mortgage lending rules , which went into effect Jan. 1, will have a direct impact on many of these investors’ plans. Credit requirements have tightened, in some cases dramatically, and lenders are now also looking at the number of leveraged properties an investor owns — not just the equity of those homes — before lending any more cash for any purpose.
Here’s what you need to know if you’re going to borrow to invest in real estate:
•The new mortgage rules were drawn up by the Consumer Financial Protection Bureau, created following the enactment of the Dodd-Frank Act in 2010. Some new regulations are designed to protect homeowners from lender and mortgage-service abuses. But others are designed to ensure that borrowers won’t have trouble making their mortgage payments by taking on more debt than they can handle.
•The new rules don’t affect the vast majority of people seeking a new mortgage or who want to refinance an existing one. According to the CFPB, only 12.8% of mortgages originated in 2012 don’t meet the new standard.
•The new rules strictly define a “qualified” mortgage up to 30 years. A borrower’s maximum debt-to-income ratio must be 43% or lower. No negative amortization or interest-only payments.
•If you want to invest in real estate, either to improve and quickly resell (flip) or to generate rental income, know that Federal Housing Administration loans, which require modest down payments, now have lower maximums than before. The top loan amounts vary from state to state, and even within states; in some places, like Florida, the top FHA loan amount plummeted from $417,000 to $285,000 for a jumbo mortgage. So if you have your sights set on a high-end flip or a multi-unit rental property, be prepared to pony up a lot more cash up front.
•Even for more modestly priced structures, for the best rates, down payments on investment properties are typically higher than for a primary residence. Be prepared to pay 25% down vs. 20% for a standard mortgage.
•If you own several properties and want to use the equity in them to buy another property or refinance an existing one, you may be turned down — even if you have stellar credit scores, substantial net worth and a low debt-to-income ratio. Lenders are setting arbitrary thresholds for the number of mortgages a person can hold. In some cases, that number is four.
•You may find your home equity line of credit canceled at the lender’s discretion. Read the fine print.
How to Be a Credit-Smart Real-Estate Investor
Make investment decisions with the expectation of a long-term hold. You may have had an easy time getting a mortgage on an investment property, but your potential buyers may not. Even well-off corporate executives may have trouble buying a new house after a job transfer if they don’t sell their old home before trying to buy a new one.
Build your financial model around liquidity. An unsold flip can end up costing you dearly, since you’ll be on the hook for the mortgage, taxes, insurance and utilities until you can sell it. In other words, don’t tie up all of your free capital in investment property.
Barron’s Phil Roosevelt and Richard Morais discuss America’s 20 most-attractive locales for upscale vacation homes. After a false start last year, prices look ready to rebound. Last call for bargains?
Grow your real-estate investment portfolio by buying those properties you think will give you the greatest return from asset appreciation. Why? Because counting on rental income alone can be tricky. Your property may lie vacant for months (or longer) before you can find a qualified tenant; you may have a deadbeat renter who’s in arrears for months (or longer); you may have to rent at a loss because there’s too much supply in your market, depressing prices; you may have expensive repairs that wipe out your profit for a year or more. And if your property requires Homeowners Association fees or other monthly maintenance fees, you could be blindsided by fee increases or unexpected assessments.
If your lender has a cap on the number of loans you have outstanding, consider only all-cash deals. (Your other alternative, of course, is to develop a secondary investment strategy that doesn't involve real estate.)
Work with experienced professionals, beginning with your real-estate agent and mortgage lender — as well as insurance agents, appraisers, property managers and contractors. They’ll know how recent changes in the mortgage and real-estate markets should factor into your investment decisions.
Don’t get so attached to your investment properties that you hesitate to sell when you can lock in a solid profit. The real-estate investors who saw their property values skyrocket from 2000 to 2007, but who held out for even more profit found themselves with a portfolio of properties they couldn't sell, even at a loss, when the market tanked. In other words, don’t let greed interfere with your strategy. Be prepared to sell the moment your property reaches a predetermined value, and market demand supports it.
If traditional lenders say no to your mortgage application, consider either self-financing (through family and friends) or finding a seller who’s willing to privately finance your purchase.
If you’re eager to ride the real-estate recovery wave but don’t want to (or can’t) invest in individual properties, consider investing in real-estate investment trusts instead. tslater
The clock is ticking for buyers and homeowners who want to grab a low mortgage rate in 2014. But if you stay on top of your game, keep your finances in order and act quickly, you can still grab attractive mortgage deals.
These 10 mortgage tips can help you with your mortgage decisions in 2014.
1. Document your finances.
Lenders will be extra diligent when underwriting home loans in 2014, as new mortgage regulations go into effect in January. The rules put pressure on lenders to verify that borrowers have the ability to repay their loans.
Keep good records of your finances, including bank statements, tax returns, W-2s, investment accounts and any other assets you own. Be ready to explain any unusual deposits to your accounts. Yes, the $500 that Grandma deposited in your account for Christmas could delay your loan closing if you can't prove where the money came from.
2. Lock a rate as soon as you can.
Rates will likely climb in 2014 as the Federal Reserve is expected to reduce the pace of the economic stimulus program that has long helped keep rates low. If you are planning to get a mortgage, lock in a rate as soon as you are comfortable with the numbers.
Compare Mortgage Rates in Your Area
3. Refinance now -- if you still can.
Many homeowners lost the opportunity to refinance at a lower rate when rates jumped in 2013. But those who are still paying more than 5% interest on their home loans might still have an opportunity.
If you think you may be able to save with a refinance, but you are not sure, it doesn't hurt to try. Speak to a loan officer and take a look at the numbers to see if refinancing still makes financial sense for you after you consider how long it will take to break even with the closing costs.
4. Buyers, use your bargaining power.
As mortgage rates climbed, lenders lost a big chunk of their refinance business. In 2014, they will turn their attention to home-buyers and will fiercely compete for their business. Buyers should take advantage of bargaining power they gain with that increased competition. Shop around for the best deal and look beyond the interest rate on the loan.
5. Learn your rights as a borrower.
Mortgage borrowers will get many new rights as consumers this year when new mortgage rules created by the Consumer Financial Protection Bureau go into effect in 2014. If you run into issues with your mortgage servicer in 2014 or fall behind on your payments, make sure you are aware of your rights and put them to use.
Find the best mortgage rates at Bankrate.com.
6. Take good care of your credit.
It's nearly impossible to get a mortgage without decent credit these days. That will continue to be the case in 2014. If you are planning to get a mortgage, monitor your credit history and score until your loan closes. The best mortgage rates usually go to borrowers with credit scores of 720 or higher. You may still get a mortgage with a score of 680, but lower scores will mean higher rates or higher closing costs.
7. Don't overspend.
Lenders don't want to give out loans to borrowers who will have little money left each month after they pay their mortgages and other debt obligations such as credit cards and student loans. If that becomes the case, the lender will tell you that your DTI, or debt-to-income ratio, is too high and you don't qualify for a loan. Try to keep your monthly debt obligations, including your mortgage and property taxes, below 43% of your income.
8. Consider alternative mortgage options.
Mortgage rates are rising, but there are alternatives to grab a lower rate, depending on your plans.
A homeowner planning to keep a house for seven to 10 years could take advantage of lower mortgage rates by choosing a seven- or 10-year ARM instead of the 30-year traditional fixed-rate mortgage. Rates on adjustable-rate mortgages can be as much as 1 percentage point lower than on fixed-rate loans.
If you are not sure how long you plan to keep the house, a fixed-rate loan is probably the better choice.
9. Considering an FHA loan? Reconsider.
FHA loans have long been popular among first-time home-buyers because they require low down payments and have somewhat less strict underwriting standards than conventional loans. But they come at a price. Mortgage insurance premiums on FHA loans are likely to continue to rise in 2014, and after recent changes, the borrower is now required to pay for mortgage insurance for the life of the loan. Try to qualify for a conventional loan before you apply for an FHA mortgage.
10. Don't panic.
Yes, mortgage rates likely will climb in 2014. But don't panic, thinking you have to buy a home now to grab a low rate. If you are shopping for a home, do your best to move quickly, but remember that this is one of the biggest financial decisions of your life. Get your mortgage and buy your home when you feel ready. pdecosta
thanks Randy,
there's a lot of things that I can relate to with this article... as an investor, I've been buying and refinancing properties with no seasoning at the appraised value after renovations; however, now the bank is looking at the purchase price of the properties to base their lending criteria...
also, banks are now looking at any money that you've borrowed from your 401K as loans and taking it into consideration for your loan to income ratio.
Another thing that has changed is that in the past, if you owed less than 6 months on a car loan, for example, it was pretty much considered a paid loan and not counted as debt... not anymore.
And yes, any deposits into your accounts will need to be verifiable.
The refi loans that used to take about 2-3 weeks from application to closing are now taking 5-6 weeks...
The key is to build a good relationship with your banker, and that he is experienced so that he can help you resolve issues that may come up with the underwriter, to avoid your your loan package being rejected...
Valerie
“And will you succeed? Yes indeed, yes indeed! Ninety-eight and three-quarters percent guaranteed!” ― Dr. Seuss
"I believe in angels, the kind that heaven sends; I am surrounded by angels, but I call them friends" - Unknown
My journal: http://www.deangraziosi.com/real-estate-forums/investing-journals/59110/...
Thanks!
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