Loans for investment properties are getting more expensive!

Any time we price a loan it starts our with a base interest rate.  Then, depending on the different elements of the file (documentation type, loan-to-value, property type (# of units), credit score, etc) there are what we call "hits" to the interest rate.

 

So for an example.. We start with the base rate, then we may have a hit for the credit score (because it is too low.. under 720 these days :)  ), a hit because it is an investment property, and a hit because the loan amount is under 100k.  By the time you are done adding up all of the hits.. the rate has become bloated and often is a much different number than what you started with.

 

Well starting in December (although many lenders already have this rule in place), investment properties (sold to Fannie Mae) will become more expensive with the following adds to fee:

Loan to value 75% or less: 1.75% add to fee (minimum 620 credit score)

Loan to value 75.01 - 80%: 3.00% add to fee (minimum 680 credit score)

So what does that mean to the investor?  Expect to put more money down if you want a better rate!Because of California High Cost Rules you may be forced to put more money down anyways, especially on loans under 150k. I go into that on another post though.

They really are making our life more challenging .. to say it nicely.

I am not sure what those at the top are thinking sometimes. Investors are moving homes no one else wants, so we can get through this bank owned cycle and get on with our lives.  Why are they continuing to cut them off at the knee? Putting more money down, means they can buy less deals. 

I am all about common sense guidelines.. don't get me wrong! Instead of modifying guidelines to a more common sense approach, they have over corrected (in my opinion) and are just being unreasonable. When I say this it is not just this new guideline change that is getting me worked up!

Here is an example since I am ranting. 

Mr Smith (cleaver huh!) has worked at his job for over 20 years making around $250 annually.  He has 150k in the bank liquid and another 1.5 million in retirement set aside.  He has a portfolio of 10 rental homes all with mortgages.  Fannie and Freddie says Mr. Smith is not worthy of their support and tells him they will not give him the money for his 11th investment.

Now I am really off topic!  I guess my point is... why penalize someone who has the ability to make the payment.  My Smith has plenty of cash and could purchase outright if he wanted.  Mr Smith has had rentals for the last 15 years so he knows what he is doing in regards to managing the properties.  Just look at his tax returns... the money is all there!

Why be prejudice to Mr. Smith just because he is an investor and wants more property.

Why not make a rule that says Mr. Smith can not have more that 35% debt-to-income to make sure that he can pay the bill.  These "blanket" rules they are making are not helping our economy...

Wow!   Now I am ranting!  The good news is we can help Sacramento investors who have more than 4 financed properties, it will just cost them more and they will be forced to put more down.  There are very little lenders doing these loans right now.

To sum up this article...  Expect to pay more in interest rates.  Rates today are in the high 7's for investment loans with 20-25% down.  Also start saving your pennies... you will need more of them in 2009 if you want to play in the investment game!

The good news.. now that I am done with my rant...

This will pass...