Investment Property and Loan Qualification
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
MortgagesThe Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read
Links to free samples here
The Man From Empire
Man From Empire Books2Read link
A Guardian From Earth
Guardian From Earth Books2Read link
Empire and Earth
Empire and Earth Books2Read link
Working The Trenches
Working the Trenches Books2Read link
Rediscovery 4 novel set
Rediscovery 4 novel set Books2Read link
Preparing The Ground
Preparing the Ground Books2Read link
Building the People
Building the People Books2Read link
Setting The Board
Setting The Board Books2Read link
Moving The Pieces
Moving The Pieces Books2Read link
The Invention of Motherhood
Invention of Motherhood Books2Read link
The Price of Power
Price of Power Books2Read link
The End Of Childhood
The End of Childhood Books2Read link
Measure Of Adulthood
Measure Of Adulthood Books2Read link
The Fountains of Aescalon
The Fountains of Aescalon Books2Read link
The Monad Trap
The Monad Trap Books2Read link
The Gates To Faerie
The Gates To Faerie Books2Read link
Gifts Of The Mother
Gifts Of The Mother 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:
dm (at) searchlight crusade (dot) net
(Eliminate the spaces and change parentheticals to the symbols, of course)
Essay Requests
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!
Add this site to Technorati Favorites
Subscribe to Searchlight Crusade
My Links
-
Heavy Lifters
- Instapundit
- Hot Air
- Wizbang
- Victor Davis Hanson
- Q and O L Places I get to as often as I can
- Soldier's Angels
- The Anchoress
- Argghhh!
- Armies of Liberation R
- Asymmetrical Information
- Belmont Club
- Tim Blair
- Eject! Eject! Eject!
- Jihad Watch
- Michelle Malkin
- Neo-neocon
- Powerline
- Protein Wisdom
- Real Clear Politics
- Mark Steyn
- Strategy Page
- Vodkapundit
- Volokh Conspiracy Personal Finance, Economics and Business Sites
- Bloodhound Blog
- Financial Rounds
- Free Money Financea> Other sites I've linked and visit
- Ace of Spades
- Ann Althouse
- The Anti Idiotarian Rottweiler
- Atlas Shrugs
- Professor Bainbridge
- Baldilocks
- Beldar
- Blackfive
- Classical Values
- Coyote Blog
- Daily Pundit
- Drudge Report
- IMAO
- The Jawa Report
- Just One Minute
- Libertarian Leanings
- Liberty Papers
- Normblog
- Patterico's Pontifications
- Right Wing Nut House
- Samizdata
- SCOTUS Blog
- Stop the ACLU
- Unalienable Right Consumer and Research Sites
- Better Business Bureau
- Consumer Reports
- NASD Home
- California Department of Real Estate
- California Licensee Lookup
- California Department of Insurance
- National Association of Insurance Commissioners (NAIC)
- Do Not Call Homepage
- IRS Charities Search
- Internet Fraud Complaint Center
- SEC Home Page
- Stop Mortgage Fraud
- Report Mortgage Fraud Debunking Many so-called Real Estate Gurus
- John T. Reed Worthwhile Web Comics
- Sluggy Freelance
- Day by Day It is site policy to list the main page of every site I reference. Sometimes the real world intervenes and I haven't gotten to it yet, or one falls through the cracks on a long post with multiple references. It is also site policy to list the main page of every site that lists this one on their equivalent roll, as well as the main page of all sites that are members of any of the same groups this site is a member of. Please send me an email with a link to the main page of your site if I've overlooked you (dm at the domain name). For the clue-challenged, note that it is a requirement for your link to appear on every page of your site, just like mine does, and I will not link to spam sites.
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