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Real Estate Investing 101 Understanding the Different Types of

Real Estate Investing 101 Understanding the Different Types of Lenders

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:

Conforming
Alt-A
Non-Conforming or Sub prime
Hard Money

Each of these offers loans for residential investment properties ( 1-4 unit properties).

Conforming
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 todays 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. (Learn more about PMI at: http:www.andersonlendinggroup.comfaq_a16.html ) 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 24 months, debt-to-income ratio, employment history, amount of down payment, and the amount of liquid reserves.

Some examples of leading conforming lenders are Countrywide, Wachovia, Suntrust, and Flagstar. While these are national lenders, any local bank or savings and loan would fall into this category.

Alt-A
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 Aurora, GreenPoint, 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 500 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 a 2-year Arm, with the idea being the borrower will refinance or sell the property in 2 years. Also very common with these lenders is a mandatory 2 or 3 year pre-payment penalty.

Some examples of leading Sub prime lenders are LongBeach Mortgage(division of Washington Mutual), Fremont Investment and Loans, Meritage Mortgage (division of NetBank), and New Century Mortgage. Besides these, there are literally hundreds and hundreds of lenders that have emerged to fill certain various sub prime niches.

Hard Money
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 12% and 18%) 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 6-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 conformingAlt-ASubprime long-term loan.

A good national hard money lender is InvestWell — learn more about them at: www.pleaseclose.comandersonlending .

Wide Range of Products
Some of the various products that are available today include:

100% investor loan 1 loan or 8020
Credit scores begin at 660 only available from Alt-A lenders
95% investor loan 1 loan or 8015
Credit scores begin at 600 available from Alt-A and Subprime lenders
90% investor loan 1 loan or 8010
Credit scores begin at 620 for Conforming and Alt-A lenders and 560 for Subprime lenders
80% investor loan
Credit scores begin at 620 for Conforming and Alt-A lenders 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.

Author: Brian Anderson, Broker, Anderson Lending Group. You can contact Brian directly at: brian@andersonlendinggroup.com. Learn more about Anderson Lending Group and the wide variety of investor loans available by visiting: http:www.andersonlendinggroup.com . You can apply online and receive a pre-approval within hours.

PMI – Private Mortgage Insurance

Many a first-time homebuyer has grumbled about paying private mortgage insurance. This article discusses the particulars of private mortgage insurance, also known as “PMI.”

Private Mortgage Insurance

Unless they owners are insane, every business in the United States carries some form of insurance to protect against losses. The various lending institutions that issue home loans, equity lines and refinances to borrowers are no different. The insurance they carry is private mortgage insurance.

Private mortgage insurance protects a lending institution from losses if you default on your loan and a home goes into foreclosure. Essentially, the lending institution is going to be covered for any shortages between the cost of liquidating the home and the amount of the loan. This is of particular importance to a lender when the housing market pulls back from high valuations. In such a pull back, it is not uncommon to see the total mortgage balance exceed the value of the home. Obviously, this makes lenders uncomfortable.

PMI – Premiums

Most homeowners can wrap their minds around the need for private mortgage insurance. The grumbling starts, however, when they find out who has to pay for the insurance. Yep, the homeowner is on the hook. As the homeowner, you are paying for insurance that will protect the lender if you default. While this may not seem fair, keep in mind the lender is giving you a rather sizable chunk of money. If you are still grumbling, there is a way to avoid paying mortgage insurance.

20 Percent Down

If you take out a home loan, the 20 percent figure will come front and center in your mind. Why? 20 percent is a magic figure in the world of home loans and mortgages. If you make a down payment of 20 percent, you are not required to obtain or pay for private mortgage insurance. With PMI premiums running 1,000 or more a year, it makes sense to pay 20 percent as a down payment if at all possible.

What if you can’t scrape together 20 percent of the home value for the down payment? Well, you’re stuck paying PMI, but not forever. Once your equity in the home reaches 20 percent of the valuation, you can cancel the PMI. Keep a close on your equity as lending institutions are under no duty to tell you when the magic 20 percent figure is reached. Oddly, they almost never seem to remember!

PMI

Private mortgage insurance is expensive, but you can avoid it with a sizeable deposit. If you can’t come up with that chunk of change, try to keep in mind the beautiful home and investment the loan let you acquire.

Option ARM – The World’s Most Dangerous Mortgage

Home prices have reached record levels, and in many parts of the country, homes have become nearly unaffordable.Real estate has replaced the tech stocks of the late 1990’s as the hot investment, and everyone has sold their stocks and jumped into investment property.Real estate prices have increased at a far greater rate than salaries, and the lending industry has attempted to solve this problem by introducing a tremendous number of mortgage options for borrowers who barely capable of purchasing a home.Most of these loan types feature adjustable interest rates and minimum down payments. One of these, the option ARM, is the most dangerous type of loan ever introduced.Borrowers who are considering an option ARM should be aware that this loan could leave them with a loan that is worth far more than the home it’s used to buy and with a loan that he or she cannot afford to pay.The option ARM is not for the squeamish.

So what, exactly, is an option ARM?An option ARM is a mortgage with an adjustable interest rate that typically gives the borrower four different payment choices each month. The first choice is based on a 30-year amortization table; the second on a 15-year amortization table.These would correspond to payments for adjustable-rate 30 and 15 year mortgages, respectively.The third choice is an interest-only payment, which pays the interest that accrues during the month but pays nothing towards reducing the loan amount.The fourth choice, the one that makes this loan so dangerous, is called the “minimum payment.”The minimum payment is calculated upon the first month’s interest rate, which is usually a very low “teaser” rate that can be as low as 1-2%.Most borrowers with an option ARM opt to pay the minimum payment each month, and that’s where the trouble comes in.

The loan carries and adjustable interest rate, and this rate can adjust as often as every month.If the borrower is paying only the minimum payment, then he or she isn’t even paying enough to cover that month’s interest on the loan.What happens then?The unpaid interest that has accrued is added to the loan principal.The principal can actually grow larger, and as interest due is calculated on the loan principal, the interest due will increase, as well.Interest rates are currently near all-time lows and are sure to increase.A buyer who continues to make minimum payments on an option ARM will find that the principal on the loan is actually increasing over time!This is known as negative amortization.

In a negative amortization situation, only bad things can happen.The lender can require refinancing under certain conditions stated in the loan agreement.The buyer may find himself unable to pay the loan and may have to default.And the lender could find himself holding a note that is worth far more than the house that it represents.

The option ARM is a loan that is best suited to investors and homeowners who only intend to keep the home for a short time.It is not a good choice for anyone who may be using it to buy more home than he or she can afford.Unfortunately, that describes a lot of buyers who are taking out this type of loan.Anyone who is considering a home purchase should be very careful if this type of loan is offered, as it could leave you both bankrupt and homeless.

Online Mortgage Brokers – What You Might Not Know About

Online Mortgage Brokers – What You Might Not Know About Home Loans & The Internet

You may think that applying online for a mortgage is the same as applying with a broker in the ‘real world’, only more convenient.

While applying for a mortgage online is much more convenient, and sure to help you get a lower rate because of the amount of competition online, there is another benefit to using the internet when applying for a loan.

Sometimes when you meet a broker and heshe takes a look at your financial qualifications, they might say, we can get you this rate. And that’s it. That is your loan option with that broker. Most brokers have the mentality of wanting to process as many mortgage loans as quickly as possible, which is understandable. Well, one thing that you might want to know to help yourself out is that there are literally hundreds of different mortgage programs available. Most brokers and lenders will not explain to you the mortgage options you do have. They usually have a few favorite programs and will just use those over and over since they know them.

A great way to help yourself is to research loan programs online. One benefit of the interne is that there are many informative articles and information to help you understand the pro’s and cons of every kind of loan program, FHA loans, balloon mortgages, VA loans, graduated payment mortgages, Fannie Mae and Freddie Mac loans.

Once I started doing my research online and reading through the mortgage company websites online, I was amazed to discover that there are mortgage loans online that I would have liked to had when I first bought my house, but I didn’t even know they existed and they were never offered to me by my broker. I would have saved myself a lot of money had I done my research online first.

To view our list of recommended mortgage lenders online, visit this page: http:www.abcloanguide.commortgageloans.shtml.

Offset Mortgages. A dream for well off homeowners.

Offset mortgages represent one of the biggest mortgage innovations seen in recent years. Six years ago there was hardly an offset mortgage to be seen. Now they and the current account mortgage, to which they are closely related, account for £10 out of every £100 of new lending.
What’s more, one of the UK ’s large lenders believes that 25% of existing mortgage holders would be better off with an offset mortgage. So if you’re in the market for a mortgage you need to know what they’re all about. Otherwise you could be missing out.
Firstly, how does an offset mortgage work?
The basic idea is that besides borrowing money from the mortgage lender, you also run savings or deposit accounts with them. Then you are charged interest not simply on what you have borrowed but on what you have borrowed less the balance in your savings and deposit accounts. So, if you had an offset mortgage of £100,000 and had £20,000 in their savings account you would only be charged interest on the difference, £80,000. In these circumstances, no interest is paid on your savings the interest is offset.
It doesn’t sound like a ground breaking idea where’s the benefit?
Quite simple. Whilst the full benefit of your savings is reflected in a lower interest charge on your mortgage account, legally you have not received any interest. If you have not received interest you can’t be charged tax on the interest. Step away Mr Taxman!
This means that offset mortgages are especially attractive for higher rate taxpayers who would otherwise pay-away 40% of the interest they receive in tax.
Consider some figures. If you had a £100,000 mortgage paying a competitive rate of 4.69% plus £20,000 on deposit, how would the figures work out? Well over a typical 25 year mortgage, without offset you would pay £85,351 in interest but with offset you would pay just £41,998 that’s a saving of £43,353. What’s more you would repay the mortgage five years and eight months early. That’s because the monthly repayments are based on the full mortgage debt before offsetting is taken into account so borrowers are effectively overpaying their debt each month.
And doesn’t Mr Taxman look sorry! In theory, a standard tax payer saved £9,538 in tax and a higher rate taxpayer a whopping £17,341 in tax.
Flexibility can also be a major advantage. You can typically pay off capital without penalty, underpay and take payment holidays so long as you’ve made sufficient overpayments throughout the years.
Too good to be true where’s the catch?
Historically borrowers have had to pay a higher interest rate for the benefit of an offset mortgage. But the good news is that with banks and building societies fighting for a bigger share of the offset market, offset interest rates are falling.
This means that you need to look carefully to ensure that the apparent tax savings you could make are not eliminated by the slightly higher interest charge. Quite honestly this is not an easy calculation so it’s best left to your professional mortgage adviser.
But as a guide, a standard taxpayer needs around £20,000 in savings behind a £100,000 mortgage to make the offset deal better value than a traditional mortgage. For a higher rate taxpayer the savings requirement drops to around £10,000. (These figures are based on a typical 4.69% fixed offset rate, compared with a typical 4.49% rate for a tracker.) These figures will change as interest rates vary and, in all probability, as the cost differential between an offset and a traditional mortgage closes.
Not all Offset Mortgages are the same!
As you would expect, with the offset lenders fighting for your business lots have added bell and whistles to the basic concept. Free property valuations and free legal work are relatively common. Then some banks will include your current account in the offset calculation, some lenders enable two nominated savings accounts to be offset, some will even agree an additional borrowing facility with a cheque book that can be used at any time.
On the interest rate front you’re bound to be offered a low starting rate fixed for six or twelve months. You might also be offered a tracker which is below the Bank of England base rate for six months and which only rises above after six months or a tracker which exactly tracks base rate plus a tiny premium for a few years. There are lots of variations.
The interest rate can also depend on what percentage of the house valuation you want to borrow. For example, one lender is currently offering 5.6% if you are borrowing less than 50% rising to 6.45% for up to 99%.