Issues with Multiple Mortgages

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We have several rental properties that we own (more than 10). When we were younger, before we got married, we both moved around a lot and bought houses, moved, stayed a year or so and did it again. I of course don't have to mention why we did this (no money down, low fixed rates, etc.) However, now I am running into a dilema. I am finding that no one wants to refi or do purchase money loans now that we have 10+ mortgages. I need good rates to make my cash flow work. I have recently herniated one of my discs and have been out of work for almost 3 months, so I need to take money out of our house that is paid for, but no one wants to do it. Any suggestions on how to get around that? My credit scores range from 763-805, so that is defintaely not the problem. Any advice would be greatly appreciated as I am down to crunch time in needing to get some money.
Tough situation.

The reason for this problem is that whereas nationally, vacancy rates are much lower, and here in high cost California they are only running about 4 percent, the bank will only allow 75 percent of rent to be used in the calculation of whether you qualify or do not (debt to income ratio). Furthermore, on the negative side they charge the full payment, taxes, and homeowner's insurance, as well as maintenance. To "pile on", Fannie Mae and Freddie Mac won't buy loans where the applicant has more than ten loans, period. But note that this is ten loans, not ten properties.

Here in the high cost areas of California there was a while where it was unheard of for a recent purchase rental to be turning a positive cash flow. But for properties purchased a decade ago here as well as right now, and nationally in many markets, there are people making money hand over fist on rental properties whom the bank believes must be cash destitute. There is no way they will qualify for a mortgage loan without tweaking something.

There are two main ways to solve the problem.

10 mortgages (assuming you still own the properties) gives one serious status as a real estate investor. The loan should then be able to be done. Not necessarily A paper, but subprime with that kind of a credit score and a prepayment penalty will give them comparable - perhaps even better rates. Furthermore, on investment properties, there's a minimum of about a 1.5 point to 2 point hit on the loan costs just due to the fact that it is investment property. So refinancing an investment property is not something you want to do often. If you can't go 10 years between refinances, something is probably wrong. Especially given the extremely narrow spread between long term loans like the 30 year fixed rate loan and shorter term fixed rate hybrids, for investment property a 30 year fixed rate loan is likely the way to go.

The alternative is to go with a commercial loan. Commercial loans are much easier than residential, and they will allow a real estate investor to qualify where they wouldn't under residential rules. However, the rates are both much higher and variable ("Prime plus margin") rather than fixed.

But the key part is "real estate investor."

This is a business. You're going to need an accountant to attest to the fact that you've been operating this business at least two years. But that gives you standing as at least partially self-employed as the operator of a real estate investment business.

Which once upon a time gave you an out to do stated income, possibly even A paper. Unfortunately, that is no longer the case - one more instance in which people who abused stated income really ruined the market. You're going to have to state that you earn more income than you do. There are no longer stated income loans available from any source that I am aware of. Given the environment today, a good loan officer looking to cover themselves is going to want you to acknowledge that you can make whatever the payment is really going to be. I don't care if you need $6000 per month to qualify and you tell me that you make $12,000 per month, or $120,000. Any time you are looking at stated income, you're looking at a situation that is vulnerable to abuse, both from the point of view of a consumer being put into a loan they really cannot afford, and from the point of view of a bank lending money based upon a credit score and source of income that really may not be there. This one is especially vulnerable to the latter concern in the current market, and I would likely take a real careful look at any bank statements that pass through my hands to make certain it's not patently disprovable. If it makes a borrower uneasy, well half of the reason is to protect them. Stated Income may have been colloquially called "liar's loans", but that is not what they are intended for, and in this case you are intentionally overstating income in order to qualify under unrealistic underwriting rules.

The second approach was NINA - a No Income, No Asset loan, also known as "no ratio" - meaning no debt to income ratio. These were much easier to do for the loan officer, as they're completely driven off credit score, but carried still higher rates, and unfortunately, despite these being less fraudulent, I no longer have any idea of where to find one outside of "hard money" loans carrying interest rates above 12%.

The only general solution available today is a portfolio loan. If you really do make a million dollars a year from something else, you can get a loan on any number of properties from a lender who holds the loan in their own name rather than trying to sell it to Fannie and Freddie. This begs the question of how you make the money or where it comes from, but it is possible. Nor can your lender de-fund existing loans unless it's for a reason allowed in the Note (loan contract)

There always was serious potential for abuse in this situation, a potential that lenders were willfully refusing to see back in the Era of Make Believe Loans, but now the pendulum has swung too far in the other direction. The lenders are now so paranoid about these loans for which there is good reason and a valid market for existence, that these markets are going completely unserved. Self-employed people and commissioned salesfolk have to file taxes, also, and tax forms are the preferred method for documenting income. Nonetheless, because there are significant deductions that would not otherwise be allowed due to the fact that these professions are largely paying bills with "before tax" money whereas most folks are paying with "after tax" money, people in such professions needed the alternative documentation methods in order to qualify for loans. With those alternate methods all but non-existent now, people in many professions (including real estate agents and mortgage loan officers) are finding it difficult to get loans at all. There always was the danger of talking yourself into a loan that you could not really afford, but while lenders were being willfully blind to it until recently, now they've got an obsession with avoiding that market completely. I am sure that business models will spring up allowing that loan market to be served within a another year or two, but in the meantime it's going to be really hard for people who are confined to that market to get a loan.

Caveat Emptor

Originally here


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This page contains a single entry by Dan Melson published on January 10, 2014 7:00 AM.

Reserves for Real Estate Loans was the previous entry in this blog.

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