Last year close to 40% of my purchases were for investment homes, through out the year we have been structuring deals to maximize cash flow for the investor, I just thought I would share some facts about changes in the upcoming year and some advice on lowering the interest rate on Investment property mortgages.
Most large institutions buying loans these days will start risk based pricing if they haven't started this already, basically what this means is on a conventional loan the cost of the mortgage will go up if your credit scores are below 680. On investment properties we have always had a risk based price built into that rate as well, but the credit score will be an added risk and therefore could make financing more costly on investment properties in the future if credit scores are below 680.
Some suggestions for your investors that are looking to buy properties -
1) Keep the credit score as high as possible.
2) The more money you put down the better the interest rate, we can still do up to 90 percent purchase price on a rental however on 75% loan value (25 percent down) many times your interest rate can go down by .50 or more. Remember financing over 80 percent you usually will have to build Mortgage insurance into the payment effecting the properties return on investment.
3) Reserves are important - keeping money in the bank for reserves is extremely important and is something that underwriters look for on investment property loans. Many times the requirement would be 6 months worth of the loans payment or if more properties are owned 6 months worth of each properties payment that has a mortgage. This shows that should a tennant vacate the premisis and leave you hanging your cash flow will allow you to find another renter and not have issues making the mortgage payment. Recently a major investor announced that for investment properties they will now require the client to have 12 months reserves.
4) Watch the debt to income ratio - if you have held rental properties for more than 2 years the income from the property you are purchasing can many times be counted toward income with a signed lease agreement, if this is your first then you will not be able to count the rental income from the subject property in your calculation until after you show 2 years experience holding property and collecting rent.
5) If your clients are in it for the long haul have them ask their banker/lender about buying the rate down and see if that makes financial sense. Its an easy calculation to find out the savings between the payment at the different rates and usually if you can return the cost of the buy down within a couple years you might want to consider it. I had a client buy his rate down on his investment property loan recently to 6.125 and the cost to buy it down was about 300 bucks a savings he will get back in a very short time. Sometimes this makes sense sometimes it does not but it never hurts to find out the difference.
Hope these facsts help you and your clients as we having investors start to look at the bulk of inventory that happens to be on the market.
Darren Stewart
OakStar Bank
Comments(4)