Financing Your Investment Property
©Meridian Pacific Properties December 2008
Overview. Financing investment property has become increasingly difficult due to the sweeping changes adopted by the mortgage industry in the latter half of 2008. Lenders now want to mitigate their risk and ensure they are making very safe loans, as such, they have made many changes to their lending guidelines.
The net effect of these changes is that interest rates are higher, origination points and fees are higher, credit scores need to be higher, income relative to debt must be higher, the size of the loans that a bank will lend are smaller, and the number of loans that an individual can have has been reduced. While loans are still available, they are much more difficult to obtain except for the most qualified individuals.
Rates and fees. Interest rates on non-owner occupied investment property are generally 1.00 – 1.75% (100-175 basis points) higher than residential owner-occupied rates. If an investor qualifies for a loan on a single family residential property, the interest rate for a 30 year fixed loan generally ranges between 6.5% - 7.5% at present, and the loan origination fees are between 1 to 3 points, depending on market conditions and the strength of the borrower.
Current qualification guidelines. Some of the changes in effect since late November 2008:
Credit scores: The best loans are available to investors with FICO scores above 740. In most cases, a minimum score of 680 is needed for investors to qualify for a loan at all, but the interest rate and/or fees will be higher. Investors can examine their credit report for free once per year at www.annualcreditreport.com .
Back-end debt to income ratio: This is the metric that the banks use to determine how much house a borrower can afford. It is the ratio between how much is owed each month on personal debt and one’s income. Lenders like to see this ratio below 36%, but for borrowers with outstanding credit, it can be up to around 45%. Use a debt ratio calculator to determine how much house value can be supported by a given level of income and debt.
Income documentation: There are virtually no “stated income” loans anymore. Lenders will require a borrower’s two or three most recent tax returns to verify income, including income from existing rental properties. If the property being acquired is already rented, up to 75% of its gross monthly rent may be allowed as income.
Loan to value (LTV) ratio: This is the percentage of the property’s appraised value that a lender will lend against. For investment property, the LTV must be 80% or less, meaning that the minimum down payment is 20%. Some loan programs now require an LTV of 70-75% or less.
Maximum number of loans: the maximum number of mortgage loans that an investor can have is 4 as of Dec. 1, 2008 under Fannie Mae guidelines. The mortgage on an investor’s primary residence is counted as one of the loans against this limit. It is possible, however, for an investor to obtain additional “non-conforming” mortgages from many banks, albeit at higher interest rates. In same regions, it may be possible to get commercial loans for multiple properties that have strong cash flow and low LTV ratios (below 70-80%) for more than 4 properties.
Financing assistance. Meridian Pacific Properties has relationships with qualified mortgage professionals who can assist investors with their lending needs at very competitive rates. These mortgage professionals will ask for the information in sections III – VI of the Uniform Residential Loan Application (Fannie Mae form 1003), and can assist investors once this information is made available to them.