Declined Again? Don’t Give Up!
It’s been two weeks since your lender told you: “Your loan approval is coming any day now”. Guess what – you have a problem!
Yet you were told your credit score is acceptable, your debt-to-income ratio is comfortably below 43%, and your savings will satisfy the down payment, reserve and closing cost requirements…
Well, unfortunately it didn’t register with your lending officer that you are renting the home you are buying, and that in lieu of rent you are paying for utilities and capital improvements (plus you paid cash for almost all of your housing expenses, and do not have much of a checking account paper trail). And, by the way, the landlord is in default with her lender who is about to foreclose on the home you want to purchase! [Yes, this is a real example]
Without proper explanation, the ultimate buyer of your loan (Fannie Mae) would most definitely conclude that you do not have an arm’s length or independent relationship with your landlord. More importantly, this loan will require too much effort for most lenders, especially if you do not have an established working relationship with them.
By: (i) properly and clearly documenting your receipts, (ii) demonstrating the legality and reasonability of your tenancy, (iii) evidencing proof of your residency, and (iv) ensuring you have an adequate letter of explanation acknowledged by yourself and your landlord, you should be able to get the loan – and avoid having to move your family elsewhere.
Here’s the Point: Lenders are always looking to increase their market share – not by compromising their principles, but by prudently underwriting a well-presented and well-documented loan request.
Flippers Beware!
Let’s say you buy a residential investment property for $150,000 using cash. You fully expect to get a renter, but first need to make some improvements to the property. So, being as smart as you are, you postpone financing the property because you should undoubtedly be able to get higher loan proceeds after you enhance value to $200,000 – right?
Most lenders will not advance more than 75% of the original purchase price for the “Cash-Out Refinancing” of investment properties – until at least 12 months after the purchase. This means that you cannot get a loan based on value during that time frame, unless you obtain the loan from a “portfolio” lender (a lender who can maintain the loan on their own books without either selling it to FNMA or having it guaranteed by FHA). Nothing wrong with getting a portfolio loan, but they are oftentimes more expensive.
The government enforced this idea in order to prevent the flipping of homes. Before the housing crisis, investors were bidding up the price of homes via quick cash closings, only to turn around and either quickly selling for a higher price or financing virtually 100% of the price right after closing (there were several lending programs that made it easy for them to do so). Thus, the government wanted to prevent NON-owner occupant borrowers from continuing the same flipping practices – mainly in order to avoid purchasing or guaranteeing a loan secured by properties with inflated values.
Here’s the Point: Lenders take precautions to not lend against values that could be inflated. Within the first 12 months from a residential cash purchase, non-owner occupied investors/borrowers are generally restricted to a 75% LTV cash-out refi ratio based on the LOWER of original purchase price and value.
The Art of Investing (Part 2)
Art Espinoza recently asked me to return to his radio show entitled “The Art of Investing”. Art is a respected financial advisor and wealth manager with offices in Vero Beach, Florida and Brookfield, Wisconsin, and his show airs every Saturday at 9:30 am on WAXE 107.9FM and 1370AM, or on iHeart Radio.
Here’s the Point: Listen to the following audio clip in which we debate a variety of topics including real estate trends in Vero Beach and in Florida, current demand for mortgages, liquidity in the financial markets, and the direction of interest rates:
Recently Overheard at Dinner Parties…
“I got caught in the housing crisis, so I’m not going to buy now unless it is a steal”
[Reality: They can’t afford to buy anything, and most of the low hanging fruit is gone anyway]
“I’m downsizing because I don’t need the space”
[Reality: Their income is not close to what it was, and their association fees are killing them]
“I’m nervous because interest rates have been so volatile”
[Reality: They lost most of their equity in 2008-09 and are scared to death of borrowing – even though rates remain at historical lows]
“As soon as we sell our home, we will finance the purchase of a retirement home in Florida”
[Reality: They will use their net proceeds to pay cash for the Florida condo]
Lately, when attending seminars, dinner functions, charity fundraisers, and other networking events, I hear a lot of people in real estate finance say: “It’s crazy busy right now”. But those are the people I don’t know that well. They stumble a little when I ask about the number of real estate loans they have closed and funded. Unless they are focused on helping people who require portfolio loans due to prior events that have detrimentally affected their credit (and there is a lot of this business right now), volumes on conventional financings are way down and banks are shedding staff as a result.
Here’s the Point: It is encouraging that people are much more cautious now when it comes to real estate investing – even if their pride has been hurt in the past. Continued low interest rates in a market that is presently more stable provides a great opportunity to strengthen your credit and build liquidity.
The Art of Investing
I recently had the pleasure of ap
pearing on a radio show entitled “The Art of Investing”, hosted by Art Espinoza. Having known Art for quite some time in the Vero Beach community along the Treasure Coast of Florida, he asked me to discuss what’s happening in the real estate market, who the primary borrowers of real estate capital are, where I see interest rates going, and a variety of other related topics.
Art has been a respected financial advisor and wealth manager for 28 years, and has offices in Vero Beach, Florida and Brookfield, Wisconsin. His show, “The Art of Investing”, is broadcast every Saturday morning at 9:30 am on WAXE 107.9FM and 1370AM, or on iHeart Radio: http://www.iheart.com/live/WAXE-1079-FM-1370-AM-4788/
Art kindly asked me to make regular appearances on his program, and I look forward to sharing real estate industry dialogue and exchanging topical ideas with listeners in the future.
Here’s the Point: Click HERE to listen to our discussion of what’s currently happening in the Florida economy with respect to commercial and residential real estate activity and interest rates.
Residential Real Estate Values Up 10-15% – Do You Know Why?
The majority of today’s home buyers are large, highly liquid, private and publicly traded investment firms. The New York Times, pursuant to statistics provided by CoreLogic and Campbell HousingPulse (as supported by Fitch Ratings and industry leaders), confirms that these predominantly Wall Street investors have been successful in Arizona and California. It’s no secret that their latest target is Florida.
Blackstone Group has bought over 26,000 homes in nine states. Colony Capital is spending $250 million every month and now owns over 10,000 properties. It’s brilliant – swoop into markets where the financial crisis was hit the hardest, quietly stake claims to many homes (or in some cases entire neighborhoods), create an artificial price surge, and then capitalize.
I wonder what will happen to home prices when these companies start to sell en masse…
Lately I have been receiving inquiries from people wanting to move back into adjustable rate mortgages (ARM’s). Home flipping is back for people who are focused on the short term: They are buying quickly, riding the price surge wave, financing their purchases via acquisition ARMs, and then hoping to sell in the near term by following Wall Street’s lead.
Well that all sounds interesting . . . if taking risk by timing the market is what you enjoy (and having to unpredictably uproot to another home at any given time).
P.S. With long-term fixed rates still very low (and still only about 1% above ARM rates), I continue to advise my clients to lock-in for the long term.
