In the last 5 years, there have been a lot of changes to the ways that residential investment properties can be financed. Lenders have changed the rules about credit and income that used to stop many people who wanted to invest in real estate from doing so. Also, borrowers who meet the requirements no longer have to make a down payment. This article looks at the different kinds of lenders who offer products for financing residential investments.
Different kinds of lenders are: The different kinds of lenders can be put into the following broad groups: Conforming Alt-A Non-conforming or below prime Hard cash. Each of these gives loans for buying homes to rent out ( 1-4 unit properties).
Conforming
Conforming lenders are the A-Paper mortgage banks that work with people who have good credit and can prove how much money they make. In today's world of interest-only ARMs and low down payment loans, the loans that conforming banks offer can be thought of as "plain vanilla." Conforming lenders offer full-doc and stated loans up to a 90% LTV for investor loans. Private mortgage insurance, or PMI, will be added to a loan from a conforming lender with an LTV of more than 80%. Conforming lenders always want you to have a credit score of at least 620, and they use a computerised underwriting process to decide if you can get a loan. In addition to credit score, other important factors for approval include payment history for mortgage and revolving accounts over the last 24 months, debt-to-income ratio, employment history, amount of down payment, and amount of liquid reserves.
Countrywide, Wachovia, Suntrust, and Flagstar are some of the top conforming lenders. Even though these are national lenders, this category also includes any local bank or savings and loan.
Alt-A lenders
Alternative "A" credit lenders, also known as "Alt-A" lenders, offer aggressive loan products to people with credit scores of 660 and above. Even though these lenders have programmes for people with scores as low as 620, the aggressive programmes usually aren't available to people with scores below 660. In the past few years, alt-A banks have been the ones to come up with new loan products.
There are many interest-only products, including the Option Arm loan, loans with as little as a 5% down payment and now even loans with no down payment. There are also standard fixed-rate and adjustable-rate products. The main difference with these lenders is that their debt-to-income ratios are more flexible, they require less proof of income (stated income, no income/no assets, and no doc), and most of their products can be made interest-only. Alt-A lenders have made it common for investors to use 80-10 and 80-15 loans to avoid PMI.
Aurora, GreenPoint, SunTrust, First Horizon, and IndyMac are some of the top Alt-A lenders. Aside from these, there are literally hundreds and hundreds of lenders that have sprung up to fill specific needs.
"Non-conforming" or "Sub-prime" lenders
Non-conforming or "sub-prime" lenders help people who have had credit problems in the past, which is a growing market. These lenders offer fixed and adjustable loan programmes to people with bankruptcy, foreclosure, judgments, tax liens, charge-offs, and many other credit problems.
Most of the time, these lenders set the prices of their loans using a matrix that compares the credit score to the loan-to-value. Subprime lenders will give loans to people with middle scores as low as 500, and they even have programmes for people with great scores of 700 or more. Most of these lenders will give 100% financing for owner-occupied homes with a score of 580 or higher or a middle score of 580 or higher. Investors who use subprime lenders will start to see products for people with a credit score of 550.
The most important thing to know about these loans is that they cost a lot more than a conforming loan or even an Alt-A loan.
Most of these lenders offer 2-year adjustable-rate mortgages, with the idea that the borrower will refinance or sell the property in two years. A pre-payment penalty of 2 or 3 years is also very common with these lenders.
LongBeach Mortgage, which is a division of Washington Mutual, Fremont Investment and Loans, Meritage Mortgage, which is a division of NetBank, and New Century Mortgage are all examples of top subprime lenders. Aside from these, there are literally hundreds and hundreds of other lenders that have sprung up to fill different subprime niches.
"Hard Money" lenders
Hard money lenders do one simple thing: they let people buy "fixer-uppers" or homes that need work with no money down. These lenders have programmes that none of the big banks does.
Most hard money lenders are private people or small businesses. They give loans with very high-interest rates (between 12 and 18 per cent) based on how much a property is worth after it has been fixed up. They will give you the money you need to buy the property and fix it up, up to an LTV of 65% or 70%. Most hard money lenders give loans for 6 months.
These lenders are a great, but pricey, way to buy properties that need work. After the repairs are done, a long-term conforming, Alt-A, or subprime loan can be used to pay off the hard money loan.
There are a lot of products. Some of the different products you can buy today are:
100 per cent investor loan - 1 loan or 80/20. Alt-A lenders are the only ones who offer credit scores that start at 660.95 per cent investor loan - 1 loan or 80/15
Alt-A and Subprime lenders offer loans to people with credit scores as low as 600. 90 per cent investor loan - 1 loan or 80/10
For Conforming and Alt-A lenders, credit scores start at 620, and for Subprime lenders, they start at 560. 80 per cent investor loan
For Conforming and Alt-A lenders, credit scores start at 620, and for Subprime lenders, they start at 560.
All of these things can be found in both fixed-rate and adjustable-rate mortgages, and most of the time, an interest-only option can be added to help maximise cash flow. PMI is usually required for any loan with an LTV of more than 80%. However, you can avoid this unnecessary cost by "piggybacking" a first and second mortgage together, such as an 80% first mortgage and a 15% second mortgage.
This is a very brief overview of the residential mortgage market, which should help new investors get a sense of the lenders and products that are out there.
