It’s a Great Time To Be An Investor
With home prices falling across most parts of the country, investors in real estate are finding good value in certain rental properties. Unfortunately, they’re also now finding it harder to get approved for a home loan. Things have definitely changed over the past year.
It’s Been a Tough Time To Be a Mortgage Lender
After getting hammered by defaults, conforming mortgage requirements for non-owner occupied home loans tightened dramatically the last six months.
Lenders Want Less Exposure
One major change was the reduction in the total number of homes Fannie Mae or Freddie Mac will finance for any one borrower.
Prior to the change, the number of financed properties could be as high as 10. Today, that number is 4, immediately hurting investors with large real estate portfolios. Going forward, buying properties isn’t the problem; financing them with conforming mortgage money is.
Keep in mind this is not a limit of 4 properties per lender. It’s 4 financed properties total.
More Skin In the Game
Another guideline change mandates larger downpayments on loans.
Back in early-2008, a real estate investor could buy a home with 10 percent down. Today’s investor is required to pay 15%. But, as an added wrinkle, few private mortgage insurers write policies against rental homes anymore. Thus making the 15% downpayment insufficient. If you cannot get PMI to protect the lender, you’re then left with 20% down payment required.
Ouch.
Higher Risk Assessment
When a lender sees a larger risk on a ‘pool’ of loans, they tend to charge a higher interest rate in exchange for providing a mortgage.
As part of this “pay-for-risk” pricing model, Fannie Mae added mandatory fees to all of its investor property mortgages this year. Based on loan-to-value, the fees are:
- 75% LTV or less: 1.750 percent of the borrowed amount
- 75.01 – 80.00% LTV : 3.000 percent of the borrowed amount
- Greater than 80% LTV : 3.750 percent of the borrowed amount
Don’t look at the rates normal homeowners are getting on mortgages (i.e. 4.75%) when considering purchasing an investment property. They are vastly different.
Now You Know!
So, if your personal plan includes the purchase of investment properties in 2009, consider the impact that tighter conforming guidelines, larger downpayments and higher fees will have on your bottom line.
All things considered, now may be a good time to make that rental property bid. Sure, prices may fall going forward, but increased acquisition costs may wipe out the long-term gains.
Let’s talk if this is a part of your plan. I’d be happy to help you put together the figures and make sure that buying investment property is a decision that will cash flow for you.
