Financing Investment property | MD VA DC
Buying or refinancing your investment property in
Maryland, Virginia, Washington, D.C. and Delaware
Currently, more than 30% of American households are renters. That number has grown in recent years due to foreclosures, tougher financing rules and a fear of the market among some who might otherwise own homes. This is why owning investment properties works: there are millions of American households who need to rent. As we noted earlier, if you own your own home, you are already a real estate investor. For some, that is sufficient, but others are seeing opportunities in today’s battered housing markets.
So how do you go about acquiring investment property? If you are buying with cash, you are in a very strong position. Most, however, need financing. As with mormortgage lending in general, rules for real estate investors have been tightened. Don’t look to the government for help. The current focus of programs is on encouraging owner-occupants. Too, these days, lenders have a heightened sensitivity to any loan that presents a higher risk. Unfortunately, real estate investment properties are viewed as being higher risk than are those that are owner-occupied.
In the past, one of the best strategies had been to use your residence as the entry into the next level of real estate investing. Most people who purchase another home usually sell their current one in order to move up to a larger one. Instead, you could simply keep the first home as a rental property. Many investors have patiently converted a succession of residences to investment homes, steadily accumulating properties whose rents serve as an annuity! More recently, some homeowners have converted their homes to rentals rather than sell into a market where prices are depressed, becoming reluctant landlords. Converting to a rental can still work, but tightened mortgage standards have made it more difficult in the current restrictive lending environment. For example, Fannie Mae has added a requirement that you have to have 30% equity before you can count part (75%) of the rental income toward offsetting the mortgage payment.
If converting your home to a rental is a possibility, advance planning is of paramount importance. Before you start looking for a new home you need to free up, as an owner-occupant, any available equity from the old home needed for your downpayment and closing costs. As a first-time investor, you will be required to maintain substantial reserves, twelve months mortgage payments or more. Most lenders are now requiring a “cash-out” letter in ALL refinances to explain the intended use for any extra funds. By and large, doing a cash-out for future investment is not viewed favorably unless you have a large amount of equity left in the original property after you take out the funds.
For those looking to purchase a property for rental, there is investor financing. These programs come with higher hurdles and costs than in the past. For instance, Freddie Mac will only purchase loans on investment properties where the owner has no more than four other units. The limit had been ten. You must make a 20% downpayment since no mortgage insurer will underwrite an investment purchase. A high credit score is of paramount importance, especially if you are a first-time investor.
**There are outlets for financing if you have more than 4 properties. See this article by Alex Echeandia of Choice Finance.
Even with a 20% initial investment, be prepared for rates that are 0.5 to 0.625 percentage points higher than owneroccupied rates. This translates to an additional 1.5 to 2.5 discount points or more, depending on your credit score. On the bright side, there are still opportunities for investors with REOs (bank-owned properties). Many banks are willing to sell these properties, even to an investor, with financing at below market rates. However, owner-occupied contracts get preference over investor deals, as do investor contracts with outside financing.
Another possibility is the pre-foreclosure sale. Banks want to avoid having to foreclose. If an investor is willing to make up the back payments and take the loan over at the original terms, banks are very open to negotiation. The original owner even gets a benefit, avoiding a foreclosure on their credit report. The risk is in negotiating a value for the property, especially if the current owner bought during the peak of the market. You may get favorable terms (less than a 20% downpayment), but the bank will be loath to create a “short-sale” especially if they are still liable for the original mortgage.© 2009, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc.
