subject: Houston Investor Mortgage Loans in Today's Tight Underwriting Environment [print this page] Houston Investor Mortgage Loans in Today's Tight Underwriting Environment
The Federal Housing Finance Agency is reporting that US home prices have fallen 14.9% since they reached their peak in April of 2007. Mortgage rates have increased less than 1% from their all-time lows during 2010. Underwriting standards continue to be more restrictive each passing day leaving a large percentage of would-be buyers unapproved. Combined, these factors have created a "near-perfect" storm for investors who buy and hold rental properties. So what do investors face when they finally decide to make an offer on a foreclosure, bank REO, or short-sale property?
Loans to investors are available through a variety of sources: Local banks, national banks, non-recourse lenders, mortgage brokers and bankers, hard money lenders, and owner financing. Each has their distinct advantages and underwriting requirements.
Down payment and reserves
In general, an investor needs a minimum of 20% "skin in the game" down payment to begin the process. Additionally, a minimum of six months cash-equivalent reserves must be documented to cover mortgage, tax, and insurance payments after closing. This condition is required of all rental properties in the investor's portfolio. Therefore, if an investor has three mortgaged rentals with an average P.I.T.I. (principle, interest, taxes, and insurance) of $1200 per month, they will need to prove reserves of $21,600 ($1200 x 3 rentals x 6 months).
Income and debt
The investor's debt to income ratio cannot exceed 45% by most traditional lender standards. Rental income from existing units must have a minimum 12 month history and a 25% discount is applied to recognize periods of non-occupancy. This must be substantiated by signed and executed rental agreements and tax returns.
Maximum number of properties mortgaged
Currently, Fannie Mae has set a limit of 10 properties financed for any individual. However, there are only a small handful of national lenders who will approve more than four properties, and that is including the individual's personal residence. A further restriction is imposed by those lenders willing to recognize more than four financed properties: limited loan program selection. Generally these more liberal lenders will require 30-year amortizations for fixed or limited adjustable rate programs. Shorter term loans are not available through the major banks to investors with more than four financed properties.
Credit scores and risk-based pricing adjustments
The minimum mean credit score is generally quoted as 680 by most lenders. Portfolio and non-recourse lenders have lower limits with higher rates. Private (hard money) lenders generally ignore credit scores but offset that risk with onerous rates, upfront fees, and lower loan to value requirements. Some owner financing can be found with a minimum of 25% down payment at the highest rates. Loans for FICO scores below 740 are available from major lenders, but the rates increase with each 10 point increment in score. This "risk-based" element can add up to 1% to the rate of an investor with a 680 score as compared to that available for the 740 qualifier.
Rates and programs
Major lenders price investor loans using the same daily table structures that they use for owner-occupied properties. The major difference is the imposition of discount points. Investors who make 25% down payments are required to pay 1.75 discount points. For those paying more than 25% but less than 20%, the hit increases to 3.0 points. These points are normally paid by locking higher rates. This normally equates to a rate of only % to % higher than those available for owner occupants. Along with purchase loans, refinance programs are generally available. Cash-out loans on investment properties are available through a very limited number of investors.
If you are an investor with all of your financial "ducks in a row", this is a fantastic time to buy an investment home. Be sure to call your Houston mortgage home loan lender for more information or to get pre-qualified.
