As a mortgage loan consultant, I have learned to capture my investors’ attention by announcing that I used to be able to get them a 100% loan for a non-owner occupied property. When that was true, I tried to explain to them that 100% financing may not be the best financial structure for cash flow. The thought of getting into a property with no money down is very enticing and there are many ways to make that happen with such things as subject-to contracts, assuming loans (VA loans are still truly assumable with no qualifying), 100% seller financing. There is no such thing as 100% Loans anymore. Now, 25% down is the norm at a 5-7% rate. The lenders require that the buyer pay 3-6% of the closing costs and that the buyer have 6 months PITI in the bank. Lenders expect the investor to be stronger financially than the “average Joe”. Their way of thinking is that if a borrower should get into a little trouble, it is the non-owner occupied mortgage that will likely not get paid first.
Which brings me back to the reason that low equity loans may not be the best use of cash flow. Unless you are buying the property at 25% below market value, it is difficult to get the rent to cover the mortgage payment plus expenses. Lenders only count 75% of your actual rental income to go toward the mortgage payment, taxes and insurance. This can hurt your debt to income ratios when you go to apply for a mortgage on more property. It is also possible to end up “upside down” in a deal without meaning to. I received a call just today from an investor with 10 plus properties who would like to get some cash out of 5 properties to take advantage of a strong incentive offered to him by a seller held 2nd. . Unfortunately, the investor purchased the homes with a low equity loan and the properties did not appreciate over the past 5 years as he had hoped and is unable to get a refinance at the loan to value needed to save a large chunk of cash.
I also see both new and seasoned investors setting up loans on 15 and 20-year terms. Their goal is to get the houses paid off early to use the equity to purchase with all cash or enjoy their retirement as early as possible! That sounds like a great plan, but what are you going to do when you have a couple of unemployed renters that don’t or can’t pay the rent or you have trouble renting in a slow economy and you are vacant for a few months or more? You are stuck paying the 15-year payment. You will wish you had trusted yourself to pay as if you had a 15-year term when the funds were available to do so and left yourself the option to pay the 30 year payment or an option arm interest only program. These types of programs are designed to the investor’s advantage for both long-term ownership and short term.
Contact your mortgage broker or banker for information on any creative financing they may have available or call me at (803) 831-2856.
Wendy Sweet, Carolina Hard Money