Investor Financing and Mortgages in Real Estate
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Investor Financing and Mortgages in Real Estate

These days, everyone seems to be an expert on mortgages. The probable reason is that so many people have refinanced their homes and have been through the lending process that they feel confident about speaking on the subject. Basically, loans to investors usually carry a slightly higher interest rate and a slightly lower LTV (loan-to-value ratio).
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Are investor mortgages available?

These days, everyone seems to be an expert on mortgages. The probable reason is that so many people have refinanced their homes and have been through the lending process that they feel confident about speaking on the subject. The problem is that when you're an investor, as opposed to someone who's buying a property to live in, different lending rules apply. Basically, loans to investors usually carry a slightly higher interest rate and a slightly lower LTV (loan-to-value ratio). Thus, while an owner/occupant can get a mortgage for 100 percent (or more) of the purchase price, most investors are lucky to get a mortgage for 90 percent. Further, these investor loans are often written with an interest rate that is half a percent or higher and may include extra points.

Do I understand why lenders don't favor investors?

The reason is that lenders sometimes see investors as offering an additional risk. When hard times hit an owner/occupant, that person is likely to dig in and keep making the payments to save his or her home-stake. When hard times hit an investor, it becomes a business decision: make the payments with the hope of coming out later on, or simply allow the property to go into foreclosure. Lenders worry that investors may find the second option too easy - hence, the perception of greater risk and thus, less attractive mortgages.

What if I'm an investor with lots of property?

Investors who already have rental property may end up needing a higher personal income to qualify for a mortgage. The reason is that many lenders will not allow you to apply all of your rental income toward new financing. On the other hand, they will require you to note all of the expenses you have. That means that even if your property breaks even, you still need some extra income in order to balance out the expenses. That's why an investor with multiple properties often needs a higher income to qualify for the same mortgage as an investor with no additional properties.

Where do I get investor financing?

It's available from essentially the same places that everyone else gets financing. Check with a good mortgage broker or a bank. Simply state that you're an investor, and the lender will handle all of the paperwork.

Can I get an occupant's mortgage?

Probably, if you're going to be an owner/occupant. Many first-time investors will buy a home with the intent of living in it. Then, after a period of time typically lasting one to two years, they'll rent it out. They'll convert that home into a rental. The advantage of doing this is that as an owner/occupant you're eligible for some of the best financing in the world. Assuming that you can get a conforming loan, you may be able to get in for 5 percent down. In some cases, it can be nothing down. In rarer cases, lender can arrange to increase the loan amount to 103 to 107 percent in order to cover your closing costs. Is it any wonder that new investors most frequently start out by buying a property in which to live?

Do I really have to move in?

Keep in mind that we're talking about actually moving into the home and living there - occupying it. The great temptation for investors is to say they will live in the property in order to get the good financing and then not actually move in, renting the place out instead. This is simply lying, and if you do it, it could land you in real hot water. Almost all mortgages are in some way insured, guaranteed, or resold through government or quasi-government agencies. That means that if you lie and are caught, you will have to do a lot of explaining to the Treasury Department. Penalties could be anything from a demand to repay the full amount of the loan immediately to indictment on criminal charges. All of which is to say if you're going to put down that you intend to occupy the property, be sure you in fact do that. Later on, after you've lived there for a while, you can think about converting it to a rental.

 

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