Underwriting for Mortgage Options For Real Estate Investment
Mortgage Underwriting requirements for investment properties can be a real headache. You had better be prepared to show your cash reserves are adequate to ensure you meet your lender’s mortgage underwriting requirements, not to mention having a near-perfect credit score.
One of our recent borrowers conveyed their experience in getting a rental property financed. We saw their story as a useful way to describe how investors and banks interact, as well as how the banking industry treats investors.
I recently found a rental property that was selling for $385,000. The property was in excellent condition and had a stable renter in place with positive cash flow. I had a little over $100,000 to put down on the purchase, so I felt I was in an excellent position to get a loan.
I had completed all of my paperwork and had everything done related to the property. The inspector said the property was in great shape, and everything was rolling along exceptionally. I felt like this acquisition process was going to be smooth.
I had been working with a local Mortgage Broker, who had worked with me to put together the required paperwork. Once everything was complete, they submitted the loan package to their mortgage underwriter. The broker felt quite confident the loan would go through without too much hassle. After about a week, my mortgage broker called with some devastating news. Their mortgage underwriting department decided that, as a borrower, I was too much of a risk and that they could not fund my mortgage.
This turn of events was unexpected. The timing was horrible as the clock was ticking on my contract. Now here I was at square one, and I needed a new lender fast, or I risked losing my earnest money.
The Investment Mortgage Underwriting “No’s” Had Just Begun
I gave my loan package, with all of the property information to over 20 different banks and brokers. I found it shocking that none of them could ensure an on-time closing. Lucky for me, I found one company, Abbey Mortgage (a private lender), that made my deal happen. I got them the paperwork, and I was finally able to close on the property within 10-days.
After having had to jump through the hoops banks put me through, I promised myself I would never make this same mistake. I had put a piece of my investment strategy in place that I had not thought of, short-term lending with fast, painless mortgage approval. My new private lender (my secret weapon) could ensure my deals happened until I could secure longer-term financing.
In the meantime, I educated myself on my options for longer-term finance options. After all, Abbey Mortgage will carry my mortgage for a few years if I want. However, their expertise is bridging the gap to get my deals funded until I can get longer-term financing. They do not want to tie their money up for a decade; they want to turn it over as quick as possible. They get paid their fees for providing you fast cash. They charge fees that are funded by loan proceeds, which are substantial, but reasonable enough that it makes sense versus the risk of losing deals.
As a real estate investor, I needed to understand this relationship, and frankly, it changed my outlook and strategy. I felt as though I had a new liberated investing strategy no longer tied to a bank’s lengthy mortgage underwriting process. I could jump on a good deal and fund it in two weeks or even less now that I have a relationship with my private lender. If you have a bank that will loan you money without the hassle, you are doing better than me. However, since I started using Abbey Mortgage, I have purchased dozens of properties within the last couple of years. I can promise that my success story would have never happened had I relied on standard bank mortgage underwriting.
Things to know before you apply for a regular Bank loan
Understand Traditional Bank Mortgage Underwriting
Before I made my next rental purchase, I did extensive research on mortgage financing. Looking back on my first failed transactions, If someone shared these lesser-known aspects of rental property loans, it would have saved me much grief. We all know that getting a mortgage is never cheap or free of headaches. However, getting a loan for an investment property can be even trickier.
Know the Current Limits
Fannie Mae, as of the time of this writing, allows investors to have a maximum of ten loans. If you work with a lender that will go up to the limit, they may help you with a plan to help you take advantage of the ten loan limit. Despite the allowance of ten loans by Fannie Mae, many lenders have ratcheted back their mortgage underwriter to loan on up to four loans to limit their risk. Knowing this, you have to research lenders to find the ones that have mortgage guidelines that will go up to the ten loan limit.
Investor-Friendly Mortgage Underwriter
When you purchase a rental property, your long-term strategy needs to develop a robust and reliable team of lenders. Early on in my real estate investing career, I made a plethora of mistakes. One of those was using a company with mortgage underwriter that had no interest in or experience with real estate investment loan requirements.
Because of this, I spent considerable time explaining my strategy and ensuring they worked toward my objectives.
I got lousy advice after lousy advice to the point that it ended up costing me a couple of deals and tens of thousands of dollars. Had I started on the right foot with a knowledgeable lending partner, I would have easily avoided the troubles I experienced.
If I had to give advice, If you are in Colorado, I would say to start with Abbey Mortgage and work your way out. They have plenty of knowledge about long term lenders- after all, they want you to have good lending sources so they can get you out of their short terms loans as fast as possible. The owner, Robert Kearney, is a brilliant investor with decades of experience, and he is very willing to share his expertise to help you avoid the pitfalls. He is probably one of the best-kept secrets in Colorado real estate investing. He not only has contacts in the mortgage industry for longer-term financing, but he also knows real estate agents that specialize in this market. Please, please take my advice because if I knew him from the beginning, he would have gotten me to the right lenders from the get-go.
Having said all of this, you will work with different brokers and banks for different deals, and there is nothing wrong with that. If you are building your portfolio of rental properties, you need to know whom to call and have established relationships as much as possible.
Questions to Ask Before Picking a Lender
- Do you work with active real estate investors?
- How properties can you loans on to one specific investor?
- Do you own rental properties yourself?
- Is your mortgage underwriter department knowledgeable about investment loans?
It is also a good practice to educate yourself, browse online, talk to other investors, and ask Robert if you are in Colorado.
Mortgage Underwriters Becomes Stricter with More Loans
As I have mentioned, Fannie Mae allows you to take out up to 10 loans on investment properties. It may not be well known, but they also have two different qualification guidelines for an investor’s credit. These are general guidelines, and each lender may vary slightly.
- Loans 1-4 – Credit score above 630
- Loans 5-10 – Credit score above 720
Do you Have Plenty of Cash
Most mortgage underwriters guidelines will require a size-able down payment, making that the number one thing a lender, including Abbey Mortgage, will need to see. However, it would be best if you are prepared to have at least six months of cash reserves per loan you have open. Here is how this breaks down. Let’s say you own your primary residence, and you plan to acquire a rental. Most lenders will require six months of mortgage payments as cash in the bank to cover both your primary home and the rental property you plan to buy.
Your lender can help you once you know the rental purchase price and loan details for your prospective rental property. It is wise to have your lender tell you your estimated monthly payment so you can ensure you can cover.
More Loans, More Money Upfront
Just like there are two sets of mortgage underwriter guidelines for your credit, there are also multiple sets of mortgage guidelines regarding down payments.
- 1-4 single-family home loans will require 20 percent down.
- 5-10 single family home loans will require 25 percent down.
- Multi-family properties will likely require 25 percent down. As a side note, some lenders will require up to 30 percent down after your fourth loan.
The Basics of any Mortgage Approval Process Will Require Paperwork
Most lenders require two solid years of W-2 income. They want stability, therefore they would like to see that you have been at your current job or at least in the same profession for two years or more.
The mortgage underwriter will then use your income information to calculate your annual income. It will work something like this; if you earned $100,000 during the current year and $80,000 last year, mortgage underwriter would calculate your annual income to be $90,000.
Self-employed borrowers will need at least two years of tax returns, profit and loss statements, and probably a proof of the validity of your tax returns. They will calculate annual income in the same way once they have all of your information.
When I initially began purchasing rental properties, I did it as a means of diversifying and vaulting my wealth strategy. I bought three houses over the course of six months and noticed that my rental profits far exceeded my IRA’s or 401k. This clear result gave me the courage to withdraw my money from financial markets, allowing me to reinvest in my rental portfolio. This form of investing is probably not for everyone. However, for me, it was a no-brainer for anyone that is looking to build wealth.
Ultimately, if you are looking to break into the real estate investing game, you should first contact Robert Kearney or another private lender if you are not in Colorado and kick off your real estate investing career.