Investment Property and Loan Qualification

| | Comments (0)


One of the things that has constricted the most with the current paranoid lending environment is the ability to use rental income to qualify for a mortgage. It seems that lenders are seizing upon any excuse to deny income from rental property. Since the denial of rental income usually means that debt to income ratio is too high to qualify for a new loan, this means that if all of the ts are not crossed or if any i is left undotted, you don't qualify for the loan you're applying for.

The lenders do not have an unreasonable concern. Due to bad advice telling people to walk away from upside-down real estate (Seriously, don't walk away from upside down real estate if you can avoid it), and the phenomenon of "buy and bail" the lenders are losing money. It is not unreasonable of them not to want to lose money, and if you're planning to stiff your current lender, that is quite rightly something they should expect you to disclose and they are within their rights to guard against. It is a reasonable position to take that someone who stiffs one lender is more likely to stiff a second. Indeed, the entire credit model currently used is based off this well-documented fact. If you're planning to stiff someone, even though you haven't yet, that's something a reasonable person would agree should be grounds for rejecting your loan.

However, loan standards have gone completely overboard. One phenomenon that was (barely) tolerable when it was just a requirement for government loans was the requirement for appraisals on all property a loan applicant might own. Even if there's a stable, fixed rate loan in place with a positive cash flow, for the last couple years FHA loans and VA loans have both required exterior appraisals on other property the loan applicant might own. Furthermore, the standard for acceptance is a minimum of 30% current equity! As you can imagine in the current market, even if someone bought six or seven years ago, this can be hard in a lot of cases. Someone with an 800 credit score and thirty year fixed rate loan on their investment property, and 28% equity cannot get credit for rental payments, no matter how positive the cash flow! Is that brain dead or what? These people have taken care of their credit rating their whole life, invested frugally, managed their money well, have no late payments, have a positive cash flow every month on the investment property, have eighty or a hundred thousand dollars net equity even in a severely trashed market (as in that's what they'd get if they sold their $400,000 property), and the situation is even completely sustainable because the loan they have now is never going to adjust. Nonetheless, because they are being tarred with a broad brush of general market trouble, these folks cannot afford to buy a new property in the area their employer moved them to, thousands of miles away. If you know of a set of circumstances more likely to encourage people to do something shady, I'd like to hear about it.

At a cost of $300 per rental property appraisal, that's a not inconsiderable additional cost, either, especially since it has to be paid before the new loan funds in most cases. However, due to limits built into government loan programs, this didn't strike all that often when it was just official government loans. Now that the feds have their fingers into Fannie Mae and Freddie Mac, however, it's been expanded to include the entire A paper loan market, as even non-conforming loans tend to copy the standards expressed by Fannie and Freddie in all particulars except loan amount. The only exceptions currently being made are in portfolio loans, with all of their disadvantages, chief of which is a higher interest rate. We should all send Chris Dodd, Barney Frank, and other unindicted co-conspirators (including Barack Obama) a note of heavily sarcastic thanks for preventing the overhaul of Fannie and Freddie long enough so the government could take them over after ruining them. Maybe if all the guilty parties would take the "campaign contributions" made to encourage them to do this and use it to ameliorate the fallout, it might amount to a tenth of a percent of the damage they did, and are continuing to do.

In short, getting credit for rental income on an investment property has now become incredibly difficult when you're applying for a loan. This has the effect of artificially constricting the real estate market, because the mortgage market controls the real estate market, and it also constrains the start of any recovery. People in good solid situations cannot qualify to buy investment property, and the loan standards are making it harder for them to qualify for buy a new primary residence if their employer has transferred them or they've had to move to get a new job. The alternative of selling the previous property has a lot of reasons against it right now (off the top of my head, adding to supply in an oversupplied market, turning temporary losses on paper into hard losses with permanent consequences, and having to give up extra equity in order to compete with other properties on the market). Lest you misunderstand the socioeconomic consequences of this, it isn't the rich folks with mansions in La Jolla, Rancho Santa Fe, or up on Mt. Helix who are getting toasted by this. The people getting hurt are the middle class folk in the corporate trenches who work hard, save their money, and have to go where their job is.

Once upon a time, this was a legitimate use for stated income loans (and "no ratio" or NINA loans as well). The lenders would (and will) only allow a 75% credit for rental income, despite vacancy ratios consistently in the 2-3 percent range in markets like San Diego and New York. It is very possible to be making money hand over fist, even showing such on your taxes, and still have the accounting lenders use in loan qualification show you as losing what was left of your shirt and undershorts every month. Unfortunately, once people figured out the illegitimate uses to which stated income could be put, it was only a matter of time until lenders stopped accepting stated income loans and regulators started regulating it out of existence. There are no longer any lenders offering stated income loans that I am aware of. Federally Regulated institutions cannot, and since people who needed them went to few remaining institutions like a shot, they got nervous about stated income being too large a proportion of their portfolio and stopped offering them.

If you need a loan but are unable to qualify because of these ridiculous requirements, what can you do? Well, most people can't really create thirty percent equity while at the same time coming up with a down payment. Even if they've got the cash for one, they don't have the cash for both. For those in such situations, there are some serious decisions that need to be made: whether to sell their former residence so they can buy now, rent for a while until they do have the required thirty percent equity, or pay higher rates for portfolio loans. A general knowledge of phenomena like leverage and the fact that Buyer's Markets Are A Great Time For Moving Up (but a lousy time for moving down) gives me general ideas of what's likely to be best, but every situation needs to be evaluated individually, and there is no such thing as a risk free move. Anything options you might have - including to do nothing - all have their downside risks.

If you can meet the basic qualification (30% equity on all investment properties), you can prevent something stupid from disqualifying you. All monies received on rental properties need to have a paper trail leading back to the renter - especially deposit checks. Do not accept cash if you can avoid it. If you can't avoid it, create a receipt and make a copy of everything, and have the tenant sign everything, including that receipt for money they are paying you. Include a clause about cooperating with any mortgage applications you may submit in your rental agreements. Lenders are requiring a canceled deposit check, and the only way to get that may be from the tenant. All leases should be for at least a one year period. I hate to say it, but it may be worth paying a management company to manage your property in order to have third party verification of the accounting, even though lenders are increasingly skeptical of any third party attestations. There have been too many attestations that did not tell "the truth, the whole truth, and nothing but the truth."

It isn't impossible to get credit for rental income, but due to the current environment, most lenders are making it far more difficult than it should be. Take action ahead of time, and be aware that having a rental property can severely impact your budget for buying a new primary residence, particularly if you don't have the required equity. Better to limit yourself in the first place to something you will be able to afford per current underwriting guidelines, because otherwise you are risking the deposit and any money you spend investigating that property. If the lender won't give you credit for rental income, a property that you thought you had good reason to believe within your reach can be completely beyond the realm of possibility.

Caveat Emptor

Original article here

Categories

Delicious Bookmark this on Delicious StumbleUpon Toolbar Stumble It!
Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites) All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.

Leave a comment

Copyright 2005-2020 Dan Melson All Rights Reserved

Search my sites or the web!
 
Web www.searchlightcrusade.net
www.danmelson.com


The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
What Consumers Need To Know About Mortgages Cover

The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
What Consumers Need To Know About Buying Real Estate Cover

Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read

The Man From Empire
Man From Empire Cover
Man From Empire Books2Read link

A Guardian From Earth
Guardian From Earth Cover
Guardian From Earth Books2Read link

Empire and Earth
Empire and Earth Cover
Empire and Earth Books2Read link

Working The Trenches
Working The Trenches Cover
Working the Trenches Books2Read link

Rediscovery 4 novel set
Rediscovery set cover
Rediscovery 4 novel set Books2Read link

Preparing The Ground
Preparing the Ground Cover
Preparing the Ground Books2Read link

Building the People
Building the People Cover
Building the People Books2Read link
Setting The Board

Setting The Board Cover

Setting The Board Books2Read link

The Invention of Motherhood
Invention of Motherhood Cover
Invention of Motherhood Books2Read link



The Price of Power
Price of Power Cover
Price of Power Books2Read link

The Fountains of Aescalon
Fountains of Aescalon Cover
The Fountains of Aescalon Books2Read link



The Monad Trap
Monad Trap Cover
The Monad Trap Books2Read link

The Gates To Faerie
Gates To Faerie cover
The Gates To Faerie Books2Read link
**********


C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information

Questions regarding this website:
Contact me!
dm (at) searchlight crusade (dot) net

(Eliminate the spaces and change parentheticals to the symbols, of course)

Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
-----------------
Learn something that will save you money?
Want to motivate me to write more articles?
Just want to say "Thank You"?

Aggregators

Add this site to Technorati Favorites
Blogroll Me!
Subscribe with Bloglines



Powered by FeedBlitz


Most Recent Posts
Subscribe to Searchlight Crusade
http://www.wikio.com

About this Entry

This page contains a single entry by Dan Melson published on January 18, 2020 7:00 AM.

Getting A Loan In A Paranoid Lending Environment was the previous entry in this blog.

Transaction Coordinator: For The Agent's Benefit, Not The Consumers is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.

-----------------
Advertisement
-----------------

My Links