I called a conventional lender to get pre-approved for a loan for an investment property (in OH). The asking price for the property I had in mind was $70k with a 25% down payment of $17,500 which means the loan amount would be $52,500. The lender mentioned that there are federal "safe harbor guidelines" where the lender fees cannot exceed 5% of the loan amount "to protect the customer". Because of the low loan amount, in this case the lender fees would be higher than the 5% and therefore, they wouldn't be able to offer a conventional loan. The lender also said that the loan amount would have to be at least $100k in order for the lender fees to be under the required 5%.
I've never heard of these safe harbor requirements so I was taken a little by surprise. I would be able to buy a property under $100k, all cash but this forum has taught me to leverage the bank's money and use as little of your own money so that's what I was trying to do.
I'm looking for advice on what would you recommend in this case? If you've been in a similar scenario, what did you do?
Thank you in advance.
Good example of well-intended regulation with an unforeseen side effect.
Last year I purchased a property for $75K with 25% down and closing this month on a property at $86K with 25% down. The safe harbor regulation hasn't been an issue on either purchase.
We had the same challenges when trying to work with large national banks, but small local banks were able to process the loan for us no problem. Look for a bank that keeps their loans in-house and see if they will finance it for you.
@Andres M. Find a lender with lower fees. 5% of $52k is $2600, and that seems high for lender fees. There is a active discussion elsewhere regarding typical lender fees you might want to check out.
Find small bank to work on this loan scenario. You will be able to get financing for this loan.
Andres, I am currently going through the same challenge. I found a couple of larger banks that would do the loan, Ally Bank and Wells Fargo both said they would do the loan. In addition Pen Fed did as well. And as many have suggested, the local banks will as well but I haven't pursued any of the local ones in the Cincinnati area where we are looking.
Anyone have a recommendation for an investor friendly local bank to Cincinnati that offers good rates?
@Dan Schwartz I see a lot of huds in my work a day world... how lenders make up for safe harbor is junk fee's which they are not limited to.. most loans of this size will cost 4 to 5k to get funded... includes origination fee's and all the junk fees.
I have not seen one under 3,600.00 total fees on the hud.. paid by buyer ... a lender simply cannot stay in business if they are not making 4 to 5k per file... they would close up shop and stop doing those loans if they could not generate that amount of revenue per file.
Or perhaps it's a regulation that's working exactly as intended?
@Richard Olshove , Thanks. I'll check with Wells Fargo.
Thank you guys for the responses. I'll also check with local banks.
Sometime last year, the Consumer Financial Protection Bureau placed limits on the amount of fees borrowers could charge for a Qualified Mortgage. For loans between $20K and $60K, the maximum the lender can charge in fees is 5% of the loan amount. For loans between $60K and $100K, the lender's loan fees are capped at $3000. For loans above $100K, the lander's maximum fee is limited to 3% of the loan amount.
If the lender has a certain fixed cost for loan processing and underwriting that has to be covered by the loan fees, then the lender may not offer small loans where the maximum allowable fee does not cover the overhead.
Qualified mortgages can not have an interest only period, can not have negative amortization, can not have a balloon payment, and the lender has to ensure that the borrower has the ability to repay the loan. If a lender chooses to make a non-qualified loan, the lender is free to charge whatever it wants to.
If these rules are creating obstacles for you, you may want to consider using a commercial lender for your investment property purchases.