New Lending Standards?

Question

Hello,  although we have about 600k to invest we are retired and the only income we have right now is a $1500 a month pension, we have good credit. Someone sent me a link to an article on November 20th, 2011 that said- ."In a significant change in lending standards, underwriters are now counting rental income toward income qualification. This means you only need a down payment and a 700 FICO score to buy an income property so long as its cashflow positive"
 I would think that this would be a real game changer for a lot of people but have not heard much about this from other sources. Are you familiar with this new change? Since we only have a pension this change would allow us to get loans correct? Whereas before you needed to show income from other sources in order to buy a cashflow property. If too many people started doing this I wonder if this would cause downward pressure on rents. Lol, Do you think we could have a rent bubble?

Greg B. · Answer

A blanket statement like this is simply not true. I have gotten several loans over the last few years and a couple of refi's and I do not walk on water. I am open to the a person having a business model that is successful without banks. I am also trying to help a person that may want to deal with a bank.

What works for one may or may not work for another. Good luck to all.

What works for one may or may not work for another.  Good luck to all.

Ben Walhood · Answer

Tyler,
The only loan product that I've come across that will allow you to count the future income of the rental property you're buying is the VA Vendee Financing Program.  Unfortunately, if you're not a vet, then you can only use this program on a property being sold by the VA.  In my area (Chicago) there are very few of these properties.
Barring that option, you could simply buy with cash and refi once you have a tenant and a 12-month lease (pulling out 75% of your equity).  I've used this technique recently and it worked well.  I was even able to get an interest-only refi, so my cashflow on the property is improved.  This option isn't right for everyone's strategy, but it is working well for me.
Good luck!

Ryan Wright · Answer

Tyler

Great conversation. I have always been able to use rental  income when qualifying for new loan as long as we had rental agreement. To prove the income. If you are referring to the income from the property that you are going to be buying I think you are going to haeq a difficult time getting a conforming lender to allow that income Even if  Fannie or Freddy will allow it ( I am not sure that they will allow income from the property you are buying. That is currnely not rented to count towards your qualification) I don't deal with traditional lending. I am only familure with private hard money asset based lending.

What you did not tell us is what your goals are. Ae you trying to fix and flip, a you wanting to build rentals single family, Multi commercial?

There are more ways to finance properties other than getting a lonan from a. Bank.you can purchasse homes subject to the existing financing, you can get a private loan, you can find a partner.

Something else you may want to consider with 600k is to be a lender to people that find properties, if they don't pay you end up with the house to sell or rent. You may be albe to make a good turn that way as well. You can do that passively by having someone find the loans for you and uderwrite them a full service hard money company actively meaning you do all the work of finding and qualifying yourself.  I Amy be getting off on a tangent here.

The question is WHAT. Do you want, do you sant to flip homes and deal w it contriutcions, do you ant to be a landlord, do you want to lend money. Issue your goal is to make money the question is what way is best for you, your liefstyle. Do you what a job or do you want something passive.

Most of all congratulations on the saving nest egg, not  many in the US have the discipline to do that.

Andy Collins · Answer

for a conforming loan they will apply 75% of the income from the property toward the payment, after 2 years of having the property on your schedule E, they will go by the actual cash flow from the property.

I do a hard money loan, then after a tenant has moved in, refinance to a confirming loan, using 75% of the lease amount toward the PITI of that property,,,,I'm sure there is a way, with that much cash, that you can do it without the expense of a hard money loan,,talk to a mortgage broker that deals primarily with investors and they will find a way to make it work,,,

andy

Rob Gillespie · Answer

Tyler,
I will keep it simple. Stay out of banks!!! it is a waste of time. Unless you can basically walk on water, you will not get a loan. With that much liquid cash, you can invest 25% of that and get a killer income to live on.

I have not been to a bank, other to put money in, for more than 12 years, and I do tons of deals.

A friend of mine has a manufacturing company that does about 50 million per year in sales. He is extremely liquid and has basically no debt. He said he was going to buy another house and wanted to finance it because money was so cheap. After being asked for so much freaking documentation, he got irritated and just wrote a check. ( I hate to tell him I told ya so, but I did)

Either way, I am sure BP will provide you with the advice you need to get ya goin!

Joel Owens · Answer

Tyler you first need to DEFINE what you will be buying.Residential and commercial lenders are way different animals.

If you want to buy an apartment building you can get awesome cash returns for your investment in Georgia or other states.Here the price paid per door for rent generated is much greater than appreciation only drive states such as Cali.

Not saying people do not invest there but you get investors from other countries and other states such as New York.Cali etc. where there investment dollar doesn't go far for weak returns.

I cringe when I watch the show "income property" on HGTV and someone bought an 800,000 house and are only getting 3,000 a month in rent.

I think stuff like that is nuts.

Steve L. · Answer

Have you calculated what your monthly nut is?  Do you have any experience landlording or in real estate as a business?

Say you need 4,000 a month to live on, you are burning through 2,500 right now.  I would find a conservative investment that could make up that difference right away.  Working with a company that does hard money lending might be a good idea.

If you earned 10% that would require $300,000 of your cash.  From there you have $300,000 to play with.

Now, as for getting a loan on an investment property, buying a 50,000 property, will cost you far more then 10,000 (probably 5,000 in closing costs) and most lenders will not do a 35,000 - 40,000 loan.

You are going to need to talk to some specific lenders too and see if they will be okay with DTI ratios.  I am having my doubts.

One option would be to buy the properties free and clear and refinance them once you show some income to back it up, but most lenders will want to see 2 years or landlording experience first.

Greg B. · Answer

The lending standards are going to vary according to the lender.  If it is a conforming loan it will probably be sold and serviced by another lender.  A conforming loan is generally 20% down and good credit.

A non-conforming loan may be less down or not so good credit score.  It could also mean the property is not a standard property for lending, hard to get comps.  A local, community bank may offer a non-conforming loan to you and keep it in house.  The banks refer to these as portfolio loans.  Their loan standards are decided by themselves.

That may be why you are getting mixed messages.

I have found that it will be more beneficial to you to establish relations with several local banks.  After a few deals the trust gets built up and loans become even more available.  Good luck.

Tyler M · Answer

We kind of wanted to first get a loan for a property that is about 50k IF the bank is willing to make more loans to us.  But if they will only make one loan (because we only have a small pension as income right now) I think it would be better to apply for a larger loan and look at purchasing a multi family property.  That way we will be able to leverage a greater percent of our 600k.   Whereas with a 50k loan we will have only used a 10k down payment and still have 590k left- it just seems like a poor use of (possibly) limited leverage.  I have done a lot of searching on line for this info but have found contradicting statements.

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