I have been focusing for so long on trying to find the “right” property that I haven’t put much thought into financing the property when I find one that works.
So I decided to call some brokers in my area to get a feel for the market. I was surprised be a few things:
That 3 families are considered higher risk then 2 families.
Most lenders require 10% down for an investment property
The most mortgage brokers are not willing to “work” with an investor. They give you only what you ask for instead of laying out all options.
So far the best deal I have found is a 5/1ARM with 10% down, PMI and a rate of 6.75% with 1 point. Any thoughts on this…we both have great credit and income with some debt.
Also I really feel lost when dealing with finance people…I just don’t feel confident enough to know if I am getting a bum deal and I really don’t know the right questions to ask.
Should we opt for a 2 family first and then move onto a 3 (in general cash flow is much better on 3 family). How does having multiple properties effect the ability to qualify for financing?
Our mid Fico scores are 770 & 780 (husband & wife team). Steady work history (6 years each), good debt to income ratio, no credit problems.
We are looking to tie up as little of our capital as possible. What other info would you need to know. Also, what other info should I have as the borrow (ie - prepayment, points, max cap rate etc.)
Putting 10% down and paying PMI is not such a good deal. If you wish to invest 10% I would suggest doing a Pay Option Arm. However, I don’t know of any lenders that do 100% financing on a pay option arm.
Again, it is not necessary to put money down, as there are great loan programs for 100% financing on investment properties (1-4 units)…especially with your credit scores. There are lenders that specialize in these types of loans (which can range from full doc to stated/stated), so it may be worth your while to look into it.
Yes, 100% stated will help eliminate the issue of debt to income ratios being too high. However, it will depend on one’s situation to see if going stated is worth it. It very well may be. But it may also be the case where going full doc w/a bit higher than normal debt to income ratio will still produce lower interest rates (especially on the 2nd lien) than trying to avoid the hassle by going stated.
Alt-A non-owner occ. loans are our niche (stated 100% financing…and for primary residence NINA loans 100%, etc). But, it may be in some people’s best interest to go full doc if they can. So, in sum, if one would like to maintain full doc. level, we can go up to 45% DTI.
Hope that is helful info Investor007. If you have specific questions, just post it and I’ll do my best to clarify.
Okay…so here is what I learned so far from the replies.
I don’t have to put 10% down on an NOO 3 family. It can be done with 100% financing assuming all other things are in order (credit, work history, cash reserves etc.). However, I will most likely take a hit on the rate.
The broker should take into consideration the current rent rates and if the apts are occupied.
What I still am unsure about are what are “standard” terms for a NOO mortgage. For instance:
A. Is it reasonable to pay points
B. " " to expect prepayment penalities (I think
this is also called seasoning - but I am not sure)
C. Will I have to pay PMI (or does this depend on % down)
D. What rate should an ARM be tied to
E. What are reasonable closing costs - how much should I
expect?
F. Any other pieces of advice?
By biggest fear in REI is not the financial risk, becuase I think that can be mitigated to some degree with education and careful planning…but I am afraid to get screwed and not even know it…
Mackie:
I believe it is reasonable to pay points as it gets you better rates. Also, rates of course will be a bit higher as you already know, as this is a pretty high risk loan for an investor. They are lending you money knowing that this is an investment property, and if something God forbid ever happened and one was forced to foreclose, it will most likely be on the investment property as opposed to someone’s primary residence.
A pre-payment penalty is typical. It is like an insurance policy the investor has on you and therefore gets you a bit better rate. Ask your lender what type of prepayment penalty you have (Hard or Soft). Let’s say it was a 3 yr prepay…this means that if it is a Hard 3yrpp, then you cannot refi or sell the property for 3 years w/o paying a penalty fee (which can be steep). If it is a Soft 3yrpp, then you can sell the home at any time, but cannot refi for 3 years (or you have to pay the penalty fee).
PMI is avoided by splitting the mortgage into two: 80% on the first and 20% on the second (this is the typical split). Be aware that the second lien will have a higher interest rate, but it is on a lower loan amount. If I was in your shoes, I would pay towards the balance on the 2nd lien each month with whatever extra bit of money I have so as to pay it off quicker.
ARM rates will be lower than fixed rate programs as the investor has the opportunity to make more money when your rate begins to adjust.
Closing costs including any fee associated with closing your loan (ie lender fees, title company fees, etc) will be around 3% of the sales price. However, expect to pay a bit more at closing if you are going to have an escrow account. If you choose to have an escrow account, then your mortgage payment will include payments for insurance and taxes that will be put into the escrow account…this is to take away the hassle of paying all at once at the end of the year).
Your goals of what you want to accomplish will determine what the best scenario will be. If you plan on using the property as a rental property, then a prepay is recommended. If you know how long you want to keep the property, that helps too. If you think it will only be for 5 years, then choose a 5 year ARM. If longer, perhaps a longer ARM or a fixed rate mortgage. Again, inform your lender on exactly what you wish to accomplish so they know exactly how to structure your loan.
Thanks for all you great comments…it certainly cleared some things up for me. Is there a set of questions that I should pose to each lender so I can get an apples/apples comparison.
I keep feeling like I don’t know if one deal is better then the other becuase I can’t quite figure out what the bottom line is.
Also…what would be the reasons for going with a sub-prime lender.
Not a problem at all. One thing that I notice in this industry is that there is a lack of education (meaning mortgage brokers aren’t educating their clients efficiently). However, the lenders that I’ve seen post messages on this website, I have found, do an excellent job of trying to clarify mortgage related issues/questions/concerns.
Basically, to compare apples to apples, you want to know these things: LENDER
Origination points
Discount points
Interest Rate (of course)
Documentation level
Make sure you see equal LTV/CLTV between comparisons (ie compare a 80/20 to an 80/20)
Processing/Underwriting fees
Appraisal Fee
2nd lien origination (if any)
Any pre-pay? if so, soft or hard?
Title Co.
Closing/Escrow Fee
Attorney’s or Doc Prep Fees
Title Insurance
Other misc. fees
Survey
Other third party fees: Make sure you lender is not underestimating your taxes or insurance. For example, you may look at a good faith estimate where everything matches except your monthly payment is lower or your cash to close is lower. This may look like it’s a better deal, but it may be the case that the lender is underestimating the insurance and taxes (and other fees…such as title fees) that obscures the numbers. If amounts are underestimated, then expect to pay more per month and/or bring more cash to close.*********
Remember too, that the lender only has control of their fees. All other fees or amounts for reserves are estimates based on common fees associated with closing a particular loan. If you have a couple of different lenders working up good faith estimates for you, have one of them compare all of them in front of you and have them break it down…and don’t settle until you understand what the differences are exactly between the different estimates.
I hope all of this info is helpful to you. Feel free to email/call/or post another message should you need any further clarification.
Best regards!
Pros: You can roll in up to 6% closing costs (again, closing costs may be more than 3% if you include reserves into that figure).
Cons: Higher interest rates. Much higher.
Some lenders may tell clients about going subprime (even if they have great credit) simply because they consider a certain type of loan subprime. For example, let’s say LenderA specializes in full doc, primary residence, 5% or more down type of loans. Well this LenderA may not also specialize in Stated income, investment property, 100% financing type of loans. To further the illustration, the company I work for considers these higher risk loans (100% financing…higher risk documentation levels, etc) A paper loans (but in mortgage terms it’s call Alt-A or Alternative A paper). Each lender can specialize in a particular type of loan, although probably has the ability to do a wide array of different loan programs.
Rylee, some GREAT info there…that’s being printed and put into my binder.
Mackie, I’ve also just acquired an investment property (3-fam) with 100% financing AND with rehab costs thrown in…it was due to the seller willing to be creative. is the seller you’re dealing with willing to hold any financing? Or another option to help reduce closing costs, is maybe you’d suggest raising the puchase price if the seller would pay all closing costs?
I think we as loan officers sometimes get so tied up in our mortgage lingo that we forget that others may not understand some of the terminology.
Also, it’s frustrating to me when I show a client an estimate and they come back a few days later with a “better” offer. More often than not, it’s that the other lender has structured the loan differently, or hasn’t taken all aspects of that particular person’s situation into consideration before blurting out rates/numbers. Or, in many cases, they have also underestimated third party fees or taxes and insurance which makes the offer seem better…and then of course they change things further down the road.
So, it is my pleasure to try to share the knowledge of this process. It makes everyone’s life so much easier! And, before I got into this industry, I was in your shoes.
As far as the New England area, I believe we are about 4 months out. I will definitely keep you posted.
And, before I got into this industry, I was in your shoes.