Solutions

This page is meant to provide you with general information that can help you better understand multiple factors of the lending environment.  Understanding these well allows us to layer them and create advanced lending strategies.

Understanding the role of your credit score in residential lending--

A credit score can impact multiple areas of obtaining a loan.  How much it affects the loan is changing constantly. Both the availability and cost of a loan are directly impacted by the determinant FICO score. Understanding how credit is measured and how to improve it can save thousands of dollars in financing.

FICO directly relates to the availability of financing. If a credit score is 1 point too low it can lock us out of a loan.  I'll demonstrate the thresholds for different types of financing and down payments.

FHA loans require a minimum FICO score of 620 for most lenders and investors to be willing to do the loan, even though FHA (the institution) only requires a credit score of 530, or no FICO.  Lenders add these overlays in order to protect their risks.  There are a few lenders who lend with lower credit scores.  They can do so because they sell directly to GNMA.  In most cases, they will only do a loan like that with excellent income/expense ratios and the low score can only be due to medical collections.

Conventional loans have different tiers of credit requirements based on the purchase price and down payment.  620 is the lowest threshold.  However, if you are putting less than 20% down, the minimum credit score to obtain Private Mortgage Insurance increases to 720.  740 is really the ideal credit score as it provided the most flexible options and price adjustments.

The cost associated with a loan can spike with credit below 720.  If you compare 20% down at 740 FICO with 20% down at 695 FICO you will note a .75 increase in points charged by the lender.  That is an extra $3000 on a $400,000 loan!!

Understand FICO valuations-- I've included an attachement here that outlines what creates a FICO score.  Please click here for the attachment. 

Rapid Rescore-- Knowing how expensive an prohibitive lower credit can be, I have the ability to get a new FICO score within 5 business days.  If we could improve a FICO from 715 to 720 it would save the borrower $2,000 on a $400,000 loan.

Credits from sellers for closing costs--

A seller credit occurs as part of your negotiations to purchase a property.  Basically, a seller is providing a cash credit from their share of the proceeds in order to cover closing costs.  This is extremely beneficial for you as a borrower as it allows you to use your funds directly towards down payment.  For example, if you have $60,000 available to use towards a purchase $10,000 may go towards costs, leaving only $50,000 for down payment.  This is enough for 20% down on $250,000.  If you were to obtain a $10,000 credit from the seller for costs, you would be able to purchase $300,000 with 20% down ($60,000).

Surprisingly, the amount of cash required to close can relate back to if a borrower can qualify.  If a borrower depletes their funds entirely on a down payment and has no reserves, they are limited to a lower expense ratio.  However, if a credit is provided to cover expenses and leave the borrower with reserves, lenders will lend to as high as a 65% expense ratio.

Lender requirements of seller credits-- Lenders limit the amount that may be credited by interested parties as a percentage of the purchase price.  Interested parties are Realtors, loan originators, and sellers to name a few.  The total money they can contribute in escrow are 6.0% on FHA loans or 9.0% on conventional with 20% down.  With less than 20% down on conventional you are limited to 3.0%. Investor loans have a maximum of 2.0% credit.  Also, if a credit is too large (and within guidelines) it may be hard to use all of the funds and it gets wasted.  2.5%-4.0% is usually adequate depending on our goasl. A credit can be used towards ALL money needing to be paid in escrow EXCEPT down payment.  This means that we can have interest, taxes, impounds, HOA fees, etc paid by the seller--giving the borrower no money due for housing for a couple of months or more.

Investor Loans--everything you should know about obtaining a loan on residential rental property.

Rental property can be a very different type of transaction then your typical owner occupied transaction. It requires a good understanding of what you are getting into ahead of time. My goal is to provide much of the information that is relevant to you obtaining loans on residential (1-4 units) rental properties.

Qualifying-- Where commercial property is concerned with the overall value of the investment being acquired; residential lending is entirely focused on whether or not the borrower can service ALL of their obligations. In most cases, this is easier qualifying then commercial property. 

Downpayments for investment property are either 20-25% depending on the type of property.  In most cases I recommend 25% down as it gives us more qualifying options, lenders to work with, and makes the loan less expensive to obtain.

You don't need to go stated to purchase investment property. Every Stated Alternative solution is available here. In addition, 25% down allows us a unique opportunity to qualify using the proposed rental income of the property as documented by the appraiser.  This is very important because properties that cash flow reasonably DO NOT affect your expense ratio. As long as your documentable income can service your obligations, you qualify. 

In order to limit their exposure, lenders will not lend to borrowers who have too many financed residential properties.  There are two thresholds for these guidelines--4 financed and 10 financed.  A property that is land, apartments, or commercial does not count into these limitations.  Also, please note that there is NO limitation on how many properties you can have financed if our transaction is for your Principal Residence.  For up to 4 financed properties there are no additional "overlays."  Owners of between 5 and 10 financed properties are required to have 6 months reserves for EACH property and are limited to 25% down on 1 units or 30% down on 2-4 units.

Loan costs-- Investor loans are more expensive than loans for a primary residence. You can obtain the same rates as loans for owner occupied.  The difference is in the cost of the loan. The agencies (FNMA and FHLMC) charge a 1.75 increase in fees or points due to the higher risk they have seen on this type of loan.  For 2 unit properties they charge another 1.0 point. 3-4 units is another 1.5 point charge.  So, a 4 unit property can cost 3.25 points more than a primary residence transaction.  It is possible to absorb some of this by utilizing a rebate from the lender.  However, it is difficult to get more than 1 point rebate without a large increase in the interest rate. I recommend a seller credit for investors.  The largest credit that you can get is 2.0% of the purchase price.  This can help to cover 2.5 loan points (based on 25% down).  Combine the two strategies and much of the loan costs can be absorbed so as not to burden the buyer.