The Mortgage Porter

Calling All Seattle Flippers

If you have flipped 10-12 house in the Seattle area, A & E's "Flip This House" is looking for YOU!   Read all about it here.

A tip of the hat to ARDELL.

Financing an Investment Property

Update 7/31/2008: Fannie Mae guidelines have been updated for investment properties since this post was written.

This post is originally from Rain City Guide.  I thought I would share it with you while I'm on a blogging vacation.  To read the original post with comments, click here.

Obtaining a mortgage for a non-owner occupied propery is much different than buying one you will reside in.  For starters, qualifying is tougher and mortgage interest rates are higher as it’s a riskier transaction for the lender.   Here are some quick tips to help get you started if you’re considering buying an investment property.

Plan on using at least 20% for your down payment plus closing costs.   With a 25 or 30% down payment, you will receive a slightly better interest rate.   Just to give you an idea, here is a sample of some current rates based on a single family dwelling with a sales price of $450,000 for a 30 year fixed mortgage and a minimum 720 credit score:

Owner Occupied with minimum 20% down:  5.75% priced with 1% origination/discount point (APR 5.904%)

Non-Owner Occupied (NOO) with 20% down: 6.375% with 1% point (APR 6.537%)

NOO with 25% down: 6.250% with 1% point (APR 6.413%)

NOO with 30% down: 6.125% with 1% point (APR 6.289%)

Of course, you can always pay more in points to have a lower rate.   This is just to provide you with an apples to apples comparison.

There are two camps for qualifying for an investment property:  those who are proven at managing rentals and those who are buying a rental for the first time or who have less than 2 years history.  If you have less than a 2 year history, then it’s likely that you will not be able to use rent credit from the proposed purchase.  Lenders allow 75%  of the rent to be used for qualifying purposes.   Proving you’re a financially successful landlord to the underwriter will take your last two year’s complete tax returns including the Schedule E’s.   If you can qualify for the full PITI payment on the investment property along with your current PITI payment on your residence, then the underwriter may only require a regular appraisal.  Otherwise, count on the appraisal costing almost twice as much as a typical appraisal for conventional financing.   Fannie and Freddie also require a minimum of 6 months reserves (cash assets after closing) for NOO borrowers. 

Odds and Ends

• FHA can be a great way for first time buyers to get into the investor market when they’re buying a 2-4 unit home.  The buyer must occupy in one of the units and the mortgage will be treated as an “owner occupied” transaction.   You will have upfront and monthly mortgage insurance and can buy with as little as 3% down payment.
• Second homes are sometimes treated as investment properties.  This is really up to the underwriter.  Typically if the home is located within 50 miles of the borrowers residence or if it does not make sense as a second or vacation home, the underwriter may determine that it’s an investment which means tougher underwriting and the NOO rate.
• Fannie Mae programs exist that help family members buy properties that don’t meet the second home requirements without treating it as an investment purchase (Family Opportunity Mortgage).

As always, I highly recommend that you meet with your local Mortgage Professional as soon as possible if you’re even just considering obtain a mortgage for any reason (investment property, residencial purchase or refi, vacation home, etc.).

A Question Regarding Mortgage Rates for Investment Property

One of my clients contacted me with this question:

"We're in the early stages of thinking about buying a rental house.  If we were to buy a house for $260,000, how  much would we have to put down and what would the payments be like for a 30 year mortgage?"

Mortgage interest rates for investment properties are priced based on loan to value (how much money the investor is putting into the property) and the lowest mid-credit score of the borrower(s).   The price breaks are based at 70, 75 and 80% loan to value (LTV).   Based on a sales price of $260,000; here is what current rates would look like using a 30 year fixed rate mortgage and a mid-credit score of 720.

Non Owner Occupied with 20% Down -- Loan amount of $208,000 with a rate of 6.875% (APR 7.074%).  Principal and Interest (P&I) = $1366.41 plus taxes and insurance (on all payments shown).

Non Owner Occupied with 25% Down -- Loan amount of $195,000 with a rate of 6.750% (APR 6.952%). P&I = $1264.77.

Non Owner Occupied (NOO) with 30 % Down -- Loan amount of $182,000 with a rate of  6.625% (APR 6.830%).  P&I = $1165.37.

Another option to consider may be a 30 Year Fixed Rate with the 10 Year Interest Only payments.  You must qualify at the fully amortized rate and after 10 years, assuming you still have retained the mortgage, the mortgage balance at that time will be amortized for 20 years.  If you never pay additional towards your principal during the first 10 years, your mortgage balance will be the same as when the mortgage was originated.  Here are rates based on the same scenario above with the interest only feature.

NOO with 20% Down -- Loan amount of $208,000 with a rate of 7.250% (APR 7.439%). Interest only payment of $1248.00.

NOO with 25% Down -- Loan amount of $195,000 with a rate of 7.000% (APR 7.188%).  Interest only payment of $1137.50.

NOO with 30% Down --Loan amount of $182,000 with a rate of 6.875% (APR 7.066%). Interest only payment of $1042.71.

I've written more about about financing investment properties here.

Do you have a mortgage question for me?  Send me an email, I'm happy to help and your question may help others.

Is it a Primary Residence, a Second Home or Investment Property?

Every so often, someone will be interested in financing for a home they will not be living in 100% of the time...they want the best rate which is "owner occupied".   It's crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud.  Bottom line, the property and situation needs to make sense to the underwriter.   Here are some basic definitions:

Principal/Primary Residence.   When a property is classified as "owner occupied" it receives a better interest rate than an investment property.   It's very straight forward:

• The owner lives in the property for a majority of the year.
• The property is in a location that make sense in relation to their employment and contains characteristics that suits the needs of their immediate family.
• The borrower acknowledges (on several loan documents) they intend to occupy the property.   Note: "intend" does not mean, "oops...I financed this believing I would live here and now I've decided to buy another property near by that I'll occupy".   Typically the lender wants the buyer to occupy the property within 30 days of closing.

Second Home.  A second or vacation home must be a reasonable distance away from a principal residence.  Typically lenders like to see a minimum of 50 miles for distance from the borrowers home.  The owner must occupy the property for some portion of the year and the property must be suitable for year round occupancy. Second home definitions can vary from lender to lender.  Some will insist that a second home be in a resort area.  It's generally a little tougher to qualify for a second home--borrowers are often qualifying with mortgage payments on two properties: their primary and the proposed second mortgage.

Investment Property.  This is a property that the borrower does not occupy.  It can also be a "second home" or vacation home that is too close to a primary residence or that the underwriter does feel strong enough that it is indeed a vacation home.  As there is a higher risk to banks with investment properties, the interest rate reflects the risk (the higher the loan-to-value, the higher the rate).   

Recently, I was working with a woman who currently owns a one bedroom/one bathroom condo.  A larger two bedroom unit became available and she decided she wanted to purchase that and to rent out her one bedroom.   Where this could be potentially classified as an "investment property" since the units are obviously closer than 50 miles to each other, it makes sense to the underwriter that she is moving to a larger unit.   As long as the buyer moves into the two bedroom within 30 days of closing, she qualifies for owner occupied on her two bedroom.  If she were to refinance her one bedroom, it would be considered "non-owner occupied".

Another common scenario is if a parent is helping their adult child (or other family member) buy a home.  If that home is located too closely to the parents home and they are buying it without their child being a co-signer, it may also be treated as an investment property.  However if the property is for housing the child while in college or if the child is disabled, the borrower may qualify for an "owner occupied mortgage" rate with the Family Opportunity Mortgage.    The Family Opportunity Mortgage does make exceptions with occupancy for family members who are buying homes for:

• Elderly Parents
• College-bound Child
• Disabled Adult Child

Lenders will do post closing investigations to make sure that borrowers are actually residing in the property.  If they find that the borrower is not, they may call the Note (mortgage) due...and that may be just the beginning of that person's troubles.    Mortgage fraud is a very serious issue and falsely stating that one intends to occupy a property tops the list.   Knowingly providing false information on a loan application is a federal crime.

From Fannie Mae and Freddie Mac's Uniform Deed of Trust:

Borrower shall occupy, establish, and use the Property as Borrower’s principal residence within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower’s principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing, which consent shall not be unreasonably withheld, or unless extenuating circumstances exist which are beyond Borrower’s control.... 

Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of Borrower or with Borrower’s knowledge or consent gave materially false, misleading, or inaccurate information or statements to Lender (or failed to provide Lender with material information) in connection with the Loan.  Material representations include, but are not limited to, representations concerning Borrower’s occupancy of the Property as Borrower’s principal residence.

In defense of most borrowers, sometimes it may seem unclear as to what type of occupancy a property qualifies for. Borrowers simply need to be upfront with their Loan Originator with the use and intentions of the property to make sure they do not commit mortgage fraud, even if it is not intentional.

MGIC declares Pierce County a "Restricted Market"

Mortgage Guaranty Insurance Corporation, a private mortgage insurance company, has included Pierce County as a "restricted market" limiting the loan to value to 95% for what they will insure effective March 3, 2008.

Private mortgage insurance is used when a borrower has less than 20% down and are not using a second mortgage to bridge the gap between the down payment and 80% loan to value.   MGIC is just one of the big players in the private mortgage insurance industry.

From MGIC's site:

MGIC has designated a number of Core-Based Statistical Areas (CBSA) as "Restricted Markets." A CBSA is the official term for a functional region based around an urban center of at least 10,000 people, based on standards published by the Office of Management and Budget. Loans secured by properties in these areas must follow MGIC's Restricted Markets underwriting guidelines.

In determining whether to place a market on the restricted markets list, MGIC uses both external and internal information sources including OFHEO Home Price Indices, National Association of Realtors change in median home prices, Moody’s Ecomony.com home price projections and MGIC’s own proprietary business mix and performance data.

Here are other MGIC guidelines for restricted markets:

• LTVs of 90.01%-95% require a minimum credit score of 680.
• LTVs of 90% or less require a minimum credit score of 620.
• The maximum LTV for condominiums is 90%

MGIC will not insure the following in a restricted market:

• LTVs greater than 95%
• Investment properties
• Cash out refinances

It's important to note that MGIC is not the only private mortgage insurance company.   Other pmi companies are also restricting their guidelines.   Effective March 1, 2008, PMI Mortgage Insurance Company will no longer insure mortgages with a loan to value of 97.01% or higher anywhere.   

These changes will also impact LMPI (lender paid mortgage insurance) programs where the private mortgage insurance is financed into the rate as well as Fannie Flex programs depending on where your lender is able to obtain private mortgage insurance.   As of this moment, 1:40 p.m. on February 15, I still have Flex 100 with LPMI.   

The mortgage industry continues to tighten their guidelines as well.  In fact, earlier this week, Washington Mutual declared most zip codes (including Seattle, Bellevue) in Washington state as "soft" reducing the amount they will lend by 5% of the total allowed loan to value.

This is a great case for using FHA mortgages if the current loan limit works for your mortgage needs.

If you are buying a home in Pierce County and are planning on putting less than 10% down, please contact your Mortgage Professional.

Update 5:37 pm 2/15/2007:  You may want to read Kenneth R Harney's article on MGIC. 

Are you occupying or not occupying? THAT is the question.

Telling a lender you're going to occupy (live in) a property and then not doing so is a form of fraud.  I'm amazed at how people what steps people will take in order to shave a little bit off of their interest rate (NOO is roughly 0.5% higher in rate for a 20% down fixed conforming product).

Here are basic lender guidelines for what is considered "owner occupied":

• You must live in the home for a majority of the year.   Typically, a borrower is agreeing to live in the property for a minimum of 12 months following obtaining a mortgage.
• The home needs to be located within reasonable distance to your work.
• The home should make sense with your family (is it large enough for your dependents).
• You do not have a rental agreement on your "owner occupied" home.
• You can only have one "primary residence".

Second or vacation homes have these guidelines:

• Typically located in a "vacation" area and available for year round occupancy.
• Should be approx. 50 miles away from current residence.
• The property cannot have "time-share" interest and cannot be rented.
• You can only have one financed "second home".

If your property does not meet the guidelines above, it may very well be considered an investment property (non-owner occupied) in the eyes of an underwriter.   Recently new guidelines became available that accommodate borrowers helping family members, such as The Family Opportunity Mortgage.

Many of the guidelines are up to underwriter discretion and plain old common sense.  If you are buying a home as "owner occupied", the lender is anticipating that you will live in the property. 

If you have other intentions, it's important that you openly discuss them with your Mortgage Professional so that you don't unintentionally commit lender fraud.

The FBI states on their press release from December 2005:

Mortgage Fraud is one of the fastest growing white collar crimes in the United States. Mortgage Fraud is defined as a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan....The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value, or there are down payment problems. The borrower wants the property and intends to repay the loan. Sometimes industry professionals are involved in coaching the borrower so that they qualify. Fraud for Property/Housing accounts for 20 percent of all fraud

When you're obtaining a conforming mortgage, at application and again at closing, you sign affidavits stating that you intend to occupy (or not to occupy) the property that is being mortgaged.    It is much better for you to be upfront and ask your Mortgage Professional if your situation meets the guidelines of an owner occupied property than to have the lender call your Note due, or worse...how about a little jail time?