The changes in financing options available for residential investment properties over the last 5 years are staggering. Lenders have relaxed the credit and income guidelines for qualification that formerly deterred many would-be investors from entering the real estate. In addition, the down payment requirement has been eliminated for borrowers who qualify.
This article surveys the landscape for lenders offering residential investment financing products.
Types of Lenders:
The lender landscape can be broken into the following broad categories:
Non-Conforming or Sub prime
Each of these offers loans for residential investment properties ( 1-4 unit properties). There are other loans for investors and commercial loans which we can get into at another time.
Conforming lenders are the A-Paper mortgage banks that cater to borrowers with excellent credit history and the ability to document income. Conforming banks offer loan products that can be considered “plain vanilla” in today’s world of interest-only ARMs and low down payment loans. In terms of investor loans, conforming lenders offer full doc and stated loans up to a 90% LTV. A loan from a conforming lender with an LTV greater than 80% will incur private mortgage insurance, or PMI. Conforming lenders always require a minimum of a 620 credit score, and use a computerized underwriting process to determine approval. Besides credit score, other important factors for approval include: payment history for mortgage and revolving accounts over the last 12 months, debt-to-income ratio, employment history, amount of down payment, and the amount of liquid reserves.
Some examples of leading conforming lenders are Wells Fargo, Wachovia, Suntrust, and Bank of America. While these are national lenders, any local bank or savings and loan would fall into this category. Mortgage bankers can offer more flexible terms and rates with easier underwriting criteria. You can qualify for a conforming loan HERE!
Alternative “A” credit lenders, or Alt-A, offer aggressive loan financing products catering to borrowers with credit scores from 660 and up. While these lenders offer programs to borrowers with scores down to 620, the aggressive programs are typically not available to borrowers below a 660 middle score. Alt-A banks have driven the creation of innovative loan products over the last few years.
These programs include the many interest-only products, the Option Arm loan, loans requiring as little as 5% and now – no down payment, as well as standard fixed-rate and arm products. The big difference with these lenders is the relaxed debt-to-income ratios available, the reduced income documentations (stated income, no income / no asset, and no doc), and the ability to add interest-only to most products. Alt-A lenders have popularized the use of 80-10 and 80-15 loans for investors to avoid PMI.
Some examples of leading Alt-A lenders are SunTrust, First Horizon, and IndyMac. Besides these, there are literally hundreds and hundreds of lenders that have emerged to fill certain niches.
Non-conforming / Sub prime
Non-conforming or sub prime lenders fill a growing niche – borrowers with past credit problems. These lenders offer fixed and adjustable loan programs for borrowers with bankruptcies, foreclosures, judgments, tax liens, charge-offs, and many other credit blemishes.
These lenders typically price their loans using a matrix that evaluates credit score in relation to loan-to-value. Sub prime lenders will offer financing to borrowers with as low as a 580 middle score, and even have programs that cater to borrowers with excellent 700+ scores. The sweet spot for most of these lenders is a 580 or better middle, as they will provide 100% financing for owner-occupied properties at that score. For investors using sub prime lenders begin to offer products for borrowers with a 550 credit score.
The important thing to understand about these loans is that they are priced much higher than a conforming or even Alt-A loan.
The most popular product with these lenders is an ARM (Adjustable Rate Mortgage). These loans typically start with a lower starting rate and adjust periodically. The most popular ARM’s are typically 5, 7 and 10 year arms.
For one of the top mortgage lenders that has access to all of the products discussed, click the link below.
Hard money lenders serve a very simple purpose – they allow the purchase of “fixer-upper” or rehab properties with no money down. These lenders offer programs that none of the
Hard money lenders are typically private individuals or small companies that make very high interest rate loans (between 8% and 15%) based on the after repaired value of a property. They will lend the money to both acquire and fix-up the property, up to a LTV of 65% or 70%. The loan term for most hard money lenders is 12-mos.
These lenders are a great, albeit expensive, way to purchase rehab properties. After doing the renovation, one can refinance out of the hard money loan with a conforming/Alt-A/Subprime long-term loan.
Wide Range of Products
Some of the various products that are available today include:
100% investor loan – 1 loan or 80/20
Credit scores begin at 660 – only available from Alt-A lenders
95% investor loan – 1 loan or 80/15
Credit scores begin at 600 – available from Alt-A and Subprime lenders
90% investor loan – 1 loan or 80/10
Credit scores begin at 620 for Conforming and Alt-A lenders and 560 for Subprime lenders
80% investor loan
Credit scores begin at 620, 580 for FHA loans and for Conforming and Alt-A loans and 560 for Subprime lenders
All of the above can be found in either a fixed or ARM, and can usually have an interest-only option added to help maximize cash-flow. While any loan with a LTV above 80% will typically incur PMI, you can avoid this unnecessary expense by “piggy-backing” a first and second mortgage together – eg. 80% first and a 15% second.
The above is a real brief introduction to the residential mortgage landscape, and should help orient new investors to the available lenders and products available. For more information call 800-826-5077.
Expert Mortgage Loan Blog