The Hidden Traps Of Mortgages For Real Estate Investors
Thought That Good Credit Is Enough? Think Again...
As a mortgage broker I deal with a lot of real estate investment business. The number of times that a loan could not be done because the investor was unaware of certain basic mortgage concepts is staggering. Most investors, even if they have done a few loans, think that good credit, 2 years self employment (or 2 years on a job) and 6 months of reserves are all they need to get a mortgage to buy that next investment property, refinance them out of a hard money loan, or get cash out of the equity in the property they just bought. There are much more to it than that. What follows is a list of gotchas that you need to avoid or be aware of as you start to buy residential investment real estate.
Gotcha #1 - Property Recently Listed On The MLS
Many investors will buy a property with equity, then list it for a while to see if they can get it sold. The reasoning is that should they not be able to sell it, they can refinance to get cash out, or refinance into a long term loan and put a tenant buyer in the property on a lease purchase. BAD MISTAKE. 99% of lenders will NOT refinance your property if it has been listed on the MLS in the last 6 months. The very few that do, will require the listing to be canceled, and a mandatory one year pre payment penalty assessed on the mortgage. In addition, the only financing available would be an Option ARM. Not a good thing to have for a long term loan.
Gotcha #2 - Title Seasoning For A Cash Out Refinance
Real estate is a lucrative business. Because of it, many criminals have gravitated to it and taken advantage of lenders. The net result is that lenders have tightened up their guidelines to avoid losing money on bad investor loans. A good investment strategy used to be: a. Buy a fixer upper, b. Fix it up, c. Do a cash out refinance based on the new increased value to get your capital back that you put into it and put tax free money in your pocket, or have money for carrying costs set aside while you wait for it to sell. 95% of lenders will only lend the money you paid to buy the property, plus the cost of documented improvements. This means no cash out for profit or other purposes for 12 months! The few lenders that will allow you to take cash out using the appraised value (instead of the purchase price), will have a stringent field review appraisal (or AVM) done to verify that the new value is accurate. You will typically have to pay for this second appraisal.
To protect yourself, take before and after pictures, have copies of contractor invoices handy, and make sure that the value you think the property will have is solid.
Gotcha #3 - Using A Stated Income Loan Because You Can Not Qualify on Full Doc
Stated income loans was designed and intended to be used by self employed people that can not adequately document their income. It was not created to over state your income. Eg. If you have a good CPA and you have a business, they take all the deductions allowed by the law so that you can show the least possible income to the IRS to reduce your tax bill. Now you can't use your tax returns to document your income because your AGI (Adjusted Gross Income) is too low to qualify for a loan. The stated income loan was created to state your actual income, but you don't have to prove that you actually make it in order to get around the above problem.
Many investors and loan officers have heard that the stated income loan is called a "liars loan". They interpret this as meaning that you can state what ever income you want in order to meet the required debt to income ratios, even if it is grossly more than you actually make. They then argue that as long as they make the payments on the loan and do not default, that there was no harm done. What they don't know, is that there is a reason why you sign a document called a 4506-T when you do a stated income loan. The lender will use this authorization to request your tax return from the IRS when they perform a random audit after the loan closed. Or if they perform an audit after the loan closed because they suspect that you purposely misled them about your income. If your tax returns do not show that you actually made the money you stated (income before deductions) you will get a very unwelcome call from certain authorities and have to come up with some mighty uncomfortable explanations.
If you have a situation where you don't have enough income to qualify, but know that you are going to get money to meet your obligations from another source (eg. sale of property, your dad/partner promised to help with the payments, you already have a tenant or buyer lined up etc...), then don't use a stated income loan because you would have to be untruthful about your income to qualify. Don't mislead anyone. Rather go with a No Ratio loan, where you do not state any income at all. No ratio means that no debt ratio is calculated to qualify for the loan because no income was disclosed or stated. You don't have to sign a 4506-T because the lender agreed that your income was not considered as a factor to qualify for the loan. Your rate will be a little higher, but it will keep you out of trouble.
Gotcha #4 - Accepting Cash, Money Orders or Cashiers Checks From Your Tenant For Rent Or Option Down Payments
If you plan to sell your property to your tenant, either on a lease purchase, or simply because your tenant wants to buy the property, then do not accept cash, money orders or cashiers checks. Lenders want to know that borrowers made their rent payments on time. Since you are a private landlord, most lenders will not accept your word (through a VOR or Verification Of Rent) that your tenant paid the rent on time, especially if the tenant is buying your home. The only documentation they will accept is canceled checks. This means that your tenant must pay you via check, so that they can request 12 months of cancelled checks from their bank to prove they made their rent payments on time. If you don't do this, especially if you sell on lease purchase, your deal is dead.
Gotcha #5 - Having Mortgages On More Than 8 Properties
Life as a real estate investor becomes a lot of harder once you own 8 properties or more. Most lenders do not want to take the risk of making another loan to you. If you try to do property number 9 or more, you will find that most brokers can not help you, or worse, they thought they could. Then 2 months and three lenders later your loan still did not close and you need money like you need air. This does not mean that you can not own more than 8 properties. You can. Just remember that the lenders available to you drastically reduces above 8. If you then have a special circumstance like needing a cash out refinance before 12 months of ownership, and you have more than 8 properties, then very few brokers will have enough lenders in their portfolio to find that one or two niche lenders that can make the loan to you. Make sure you work with a qualified broker that understands these limitations, and have enough lenders in their portfolio to still help you.
As a mortgage broker I deal with a lot of real estate investment business. The number of times that a loan could not be done because the investor was unaware of certain basic mortgage concepts is staggering. Most investors, even if they have done a few loans, think that good credit, 2 years self employment (or 2 years on a job) and 6 months of reserves are all they need to get a mortgage to buy that next investment property, refinance them out of a hard money loan, or get cash out of the equity in the property they just bought. There are much more to it than that. What follows is a list of gotchas that you need to avoid or be aware of as you start to buy residential investment real estate.
Gotcha #1 - Property Recently Listed On The MLS
Many investors will buy a property with equity, then list it for a while to see if they can get it sold. The reasoning is that should they not be able to sell it, they can refinance to get cash out, or refinance into a long term loan and put a tenant buyer in the property on a lease purchase. BAD MISTAKE. 99% of lenders will NOT refinance your property if it has been listed on the MLS in the last 6 months. The very few that do, will require the listing to be canceled, and a mandatory one year pre payment penalty assessed on the mortgage. In addition, the only financing available would be an Option ARM. Not a good thing to have for a long term loan.
Gotcha #2 - Title Seasoning For A Cash Out Refinance
Real estate is a lucrative business. Because of it, many criminals have gravitated to it and taken advantage of lenders. The net result is that lenders have tightened up their guidelines to avoid losing money on bad investor loans. A good investment strategy used to be: a. Buy a fixer upper, b. Fix it up, c. Do a cash out refinance based on the new increased value to get your capital back that you put into it and put tax free money in your pocket, or have money for carrying costs set aside while you wait for it to sell. 95% of lenders will only lend the money you paid to buy the property, plus the cost of documented improvements. This means no cash out for profit or other purposes for 12 months! The few lenders that will allow you to take cash out using the appraised value (instead of the purchase price), will have a stringent field review appraisal (or AVM) done to verify that the new value is accurate. You will typically have to pay for this second appraisal.
To protect yourself, take before and after pictures, have copies of contractor invoices handy, and make sure that the value you think the property will have is solid.
Gotcha #3 - Using A Stated Income Loan Because You Can Not Qualify on Full Doc
Stated income loans was designed and intended to be used by self employed people that can not adequately document their income. It was not created to over state your income. Eg. If you have a good CPA and you have a business, they take all the deductions allowed by the law so that you can show the least possible income to the IRS to reduce your tax bill. Now you can't use your tax returns to document your income because your AGI (Adjusted Gross Income) is too low to qualify for a loan. The stated income loan was created to state your actual income, but you don't have to prove that you actually make it in order to get around the above problem.
Many investors and loan officers have heard that the stated income loan is called a "liars loan". They interpret this as meaning that you can state what ever income you want in order to meet the required debt to income ratios, even if it is grossly more than you actually make. They then argue that as long as they make the payments on the loan and do not default, that there was no harm done. What they don't know, is that there is a reason why you sign a document called a 4506-T when you do a stated income loan. The lender will use this authorization to request your tax return from the IRS when they perform a random audit after the loan closed. Or if they perform an audit after the loan closed because they suspect that you purposely misled them about your income. If your tax returns do not show that you actually made the money you stated (income before deductions) you will get a very unwelcome call from certain authorities and have to come up with some mighty uncomfortable explanations.
If you have a situation where you don't have enough income to qualify, but know that you are going to get money to meet your obligations from another source (eg. sale of property, your dad/partner promised to help with the payments, you already have a tenant or buyer lined up etc...), then don't use a stated income loan because you would have to be untruthful about your income to qualify. Don't mislead anyone. Rather go with a No Ratio loan, where you do not state any income at all. No ratio means that no debt ratio is calculated to qualify for the loan because no income was disclosed or stated. You don't have to sign a 4506-T because the lender agreed that your income was not considered as a factor to qualify for the loan. Your rate will be a little higher, but it will keep you out of trouble.
Gotcha #4 - Accepting Cash, Money Orders or Cashiers Checks From Your Tenant For Rent Or Option Down Payments
If you plan to sell your property to your tenant, either on a lease purchase, or simply because your tenant wants to buy the property, then do not accept cash, money orders or cashiers checks. Lenders want to know that borrowers made their rent payments on time. Since you are a private landlord, most lenders will not accept your word (through a VOR or Verification Of Rent) that your tenant paid the rent on time, especially if the tenant is buying your home. The only documentation they will accept is canceled checks. This means that your tenant must pay you via check, so that they can request 12 months of cancelled checks from their bank to prove they made their rent payments on time. If you don't do this, especially if you sell on lease purchase, your deal is dead.
Gotcha #5 - Having Mortgages On More Than 8 Properties
Life as a real estate investor becomes a lot of harder once you own 8 properties or more. Most lenders do not want to take the risk of making another loan to you. If you try to do property number 9 or more, you will find that most brokers can not help you, or worse, they thought they could. Then 2 months and three lenders later your loan still did not close and you need money like you need air. This does not mean that you can not own more than 8 properties. You can. Just remember that the lenders available to you drastically reduces above 8. If you then have a special circumstance like needing a cash out refinance before 12 months of ownership, and you have more than 8 properties, then very few brokers will have enough lenders in their portfolio to find that one or two niche lenders that can make the loan to you. Make sure you work with a qualified broker that understands these limitations, and have enough lenders in their portfolio to still help you.
Thought That Good Credit Is Enough? Think Again...
As a mortgage broker I deal with a lot of real estate investment business. The number of times that a loan could not be done because the investor was unaware of certain basic mortgage concepts is staggering. Most investors, even if they have done a few loans, think that good credit, 2 years self employment (or 2 years on a job) and 6 months of reserves are all they need to get a mortgage to buy that next investment property, refinance them out of a hard money loan, or get cash out of the equity in the property they just bought. There are much more to it than that. What follows is a list of gotchas that you need to avoid or be aware of as you start to buy residential investment real estate.
Gotcha #1 - Property Recently Listed On The MLS
Many investors will buy a property with equity, then list it for a while to see if they can get it sold. The reasoning is that should they not be able to sell it, they can refinance to get cash out, or refinance into a long term loan and put a tenant buyer in the property on a lease purchase. BAD MISTAKE. 99% of lenders will NOT refinance your property if it has been listed on the MLS in the last 6 months. The very few that do, will require the listing to be canceled, and a mandatory one year pre payment penalty assessed on the mortgage. In addition, the only financing available would be an Option ARM. Not a good thing to have for a long term loan.
Gotcha #2 - Title Seasoning For A Cash Out Refinance
Real estate is a lucrative business. Because of it, many criminals have gravitated to it and taken advantage of lenders. The net result is that lenders have tightened up their guidelines to avoid losing money on bad investor loans. A good investment strategy used to be: a. Buy a fixer upper, b. Fix it up, c. Do a cash out refinance based on the new increased value to get your capital back that you put into it and put tax free money in your pocket, or have money for carrying costs set aside while you wait for it to sell. 95% of lenders will only lend the money you paid to buy the property, plus the cost of documented improvements. This means no cash out for profit or other purposes for 12 months! The few lenders that will allow you to take cash out using the appraised value (instead of the purchase price), will have a stringent field review appraisal (or AVM) done to verify that the new value is accurate. You will typically have to pay for this second appraisal.
To protect yourself, take before and after pictures, have copies of contractor invoices handy, and make sure that the value you think the property will have is solid.
Gotcha #3 - Using A Stated Income Loan Because You Can Not Qualify on Full Doc
Stated income loans was designed and intended to be used by self employed people that can not adequately document their income. It was not created to over state your income. Eg. If you have a good CPA and you have a business, they take all the deductions allowed by the law so that you can show the least possible income to the IRS to reduce your tax bill. Now you can't use your tax returns to document your income because your AGI (Adjusted Gross Income) is too low to qualify for a loan. The stated income loan was created to state your actual income, but you don't have to prove that you actually make it in order to get around the above problem.
Many investors and loan officers have heard that the stated income loan is called a "liars loan". They interpret this as meaning that you can state what ever income you want in order to meet the required debt to income ratios, even if it is grossly more than you actually make. They then argue that as long as they make the payments on the loan and do not default, that there was no harm done. What they don't know, is that there is a reason why you sign a document called a 4506-T when you do a stated income loan. The lender will use this authorization to request your tax return from the IRS when they perform a random audit after the loan closed. Or if they perform an audit after the loan closed because they suspect that you purposely misled them about your income. If your tax returns do not show that you actually made the money you stated (income before deductions) you will get a very unwelcome call from certain authorities and have to come up with some mighty uncomfortable explanations.
If you have a situation where you don't have enough income to qualify, but know that you are going to get money to meet your obligations from another source (eg. sale of property, your dad/partner promised to help with the payments, you already have a tenant or buyer lined up etc...), then don't use a stated income loan because you would have to be untruthful about your income to qualify. Don't mislead anyone. Rather go with a No Ratio loan, where you do not state any income at all. No ratio means that no debt ratio is calculated to qualify for the loan because no income was disclosed or stated. You don't have to sign a 4506-T because the lender agreed that your income was not considered as a factor to qualify for the loan. Your rate will be a little higher, but it will keep you out of trouble.
Gotcha #4 - Accepting Cash, Money Orders or Cashiers Checks From Your Tenant For Rent Or Option Down Payments
If you plan to sell your property to your tenant, either on a lease purchase, or simply because your tenant wants to buy the property, then do not accept cash, money orders or cashiers checks. Lenders want to know that borrowers made their rent payments on time. Since you are a private landlord, most lenders will not accept your word (through a VOR or Verification Of Rent) that your tenant paid the rent on time, especially if the tenant is buying your home. The only documentation they will accept is canceled checks. This means that your tenant must pay you via check, so that they can request 12 months of cancelled checks from their bank to prove they made their rent payments on time. If you don't do this, especially if you sell on lease purchase, your deal is dead.
Gotcha #5 - Having Mortgages On More Than 8 Properties
Life as a real estate investor becomes a lot of harder once you own 8 properties or more. Most lenders do not want to take the risk of making another loan to you. If you try to do property number 9 or more, you will find that most brokers can not help you, or worse, they thought they could. Then 2 months and three lenders later your loan still did not close and you need money like you need air. This does not mean that you can not own more than 8 properties. You can. Just remember that the lenders available to you drastically reduces above 8. If you then have a special circumstance like needing a cash out refinance before 12 months of ownership, and you have more than 8 properties, then very few brokers will have enough lenders in their portfolio to find that one or two niche lenders that can make the loan to you. Make sure you work with a qualified broker that understands these limitations, and have enough lenders in their portfolio to still help you.
As a mortgage broker I deal with a lot of real estate investment business. The number of times that a loan could not be done because the investor was unaware of certain basic mortgage concepts is staggering. Most investors, even if they have done a few loans, think that good credit, 2 years self employment (or 2 years on a job) and 6 months of reserves are all they need to get a mortgage to buy that next investment property, refinance them out of a hard money loan, or get cash out of the equity in the property they just bought. There are much more to it than that. What follows is a list of gotchas that you need to avoid or be aware of as you start to buy residential investment real estate.
Gotcha #1 - Property Recently Listed On The MLS
Many investors will buy a property with equity, then list it for a while to see if they can get it sold. The reasoning is that should they not be able to sell it, they can refinance to get cash out, or refinance into a long term loan and put a tenant buyer in the property on a lease purchase. BAD MISTAKE. 99% of lenders will NOT refinance your property if it has been listed on the MLS in the last 6 months. The very few that do, will require the listing to be canceled, and a mandatory one year pre payment penalty assessed on the mortgage. In addition, the only financing available would be an Option ARM. Not a good thing to have for a long term loan.
Gotcha #2 - Title Seasoning For A Cash Out Refinance
Real estate is a lucrative business. Because of it, many criminals have gravitated to it and taken advantage of lenders. The net result is that lenders have tightened up their guidelines to avoid losing money on bad investor loans. A good investment strategy used to be: a. Buy a fixer upper, b. Fix it up, c. Do a cash out refinance based on the new increased value to get your capital back that you put into it and put tax free money in your pocket, or have money for carrying costs set aside while you wait for it to sell. 95% of lenders will only lend the money you paid to buy the property, plus the cost of documented improvements. This means no cash out for profit or other purposes for 12 months! The few lenders that will allow you to take cash out using the appraised value (instead of the purchase price), will have a stringent field review appraisal (or AVM) done to verify that the new value is accurate. You will typically have to pay for this second appraisal.
To protect yourself, take before and after pictures, have copies of contractor invoices handy, and make sure that the value you think the property will have is solid.
Gotcha #3 - Using A Stated Income Loan Because You Can Not Qualify on Full Doc
Stated income loans was designed and intended to be used by self employed people that can not adequately document their income. It was not created to over state your income. Eg. If you have a good CPA and you have a business, they take all the deductions allowed by the law so that you can show the least possible income to the IRS to reduce your tax bill. Now you can't use your tax returns to document your income because your AGI (Adjusted Gross Income) is too low to qualify for a loan. The stated income loan was created to state your actual income, but you don't have to prove that you actually make it in order to get around the above problem.
Many investors and loan officers have heard that the stated income loan is called a "liars loan". They interpret this as meaning that you can state what ever income you want in order to meet the required debt to income ratios, even if it is grossly more than you actually make. They then argue that as long as they make the payments on the loan and do not default, that there was no harm done. What they don't know, is that there is a reason why you sign a document called a 4506-T when you do a stated income loan. The lender will use this authorization to request your tax return from the IRS when they perform a random audit after the loan closed. Or if they perform an audit after the loan closed because they suspect that you purposely misled them about your income. If your tax returns do not show that you actually made the money you stated (income before deductions) you will get a very unwelcome call from certain authorities and have to come up with some mighty uncomfortable explanations.
If you have a situation where you don't have enough income to qualify, but know that you are going to get money to meet your obligations from another source (eg. sale of property, your dad/partner promised to help with the payments, you already have a tenant or buyer lined up etc...), then don't use a stated income loan because you would have to be untruthful about your income to qualify. Don't mislead anyone. Rather go with a No Ratio loan, where you do not state any income at all. No ratio means that no debt ratio is calculated to qualify for the loan because no income was disclosed or stated. You don't have to sign a 4506-T because the lender agreed that your income was not considered as a factor to qualify for the loan. Your rate will be a little higher, but it will keep you out of trouble.
Gotcha #4 - Accepting Cash, Money Orders or Cashiers Checks From Your Tenant For Rent Or Option Down Payments
If you plan to sell your property to your tenant, either on a lease purchase, or simply because your tenant wants to buy the property, then do not accept cash, money orders or cashiers checks. Lenders want to know that borrowers made their rent payments on time. Since you are a private landlord, most lenders will not accept your word (through a VOR or Verification Of Rent) that your tenant paid the rent on time, especially if the tenant is buying your home. The only documentation they will accept is canceled checks. This means that your tenant must pay you via check, so that they can request 12 months of cancelled checks from their bank to prove they made their rent payments on time. If you don't do this, especially if you sell on lease purchase, your deal is dead.
Gotcha #5 - Having Mortgages On More Than 8 Properties
Life as a real estate investor becomes a lot of harder once you own 8 properties or more. Most lenders do not want to take the risk of making another loan to you. If you try to do property number 9 or more, you will find that most brokers can not help you, or worse, they thought they could. Then 2 months and three lenders later your loan still did not close and you need money like you need air. This does not mean that you can not own more than 8 properties. You can. Just remember that the lenders available to you drastically reduces above 8. If you then have a special circumstance like needing a cash out refinance before 12 months of ownership, and you have more than 8 properties, then very few brokers will have enough lenders in their portfolio to find that one or two niche lenders that can make the loan to you. Make sure you work with a qualified broker that understands these limitations, and have enough lenders in their portfolio to still help you.
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