Are you an investor who has run into the “no more than 10 financed properties” problem when applying for traditional financing on your investment property? Or are you an investor who has been turned down for “excessive debt to income ratio” because too many of your cash flowing rental properties are leveraged? If so, there is at least one lender that is now offering a new loan product for this exact situation. It’s called the Investor Edge by United Wholesale Mortgage.
Personally, I’ve only run into this problem once as a loan officer. Granted, I live and work in a very high cost area, but there are parts of my state (California) — and I’m sure many parts of the country — where this is a problem. Most investors that I know who are at this threshold are quite experienced in investing and can creatively invest from that point forward.
But I know there are some of you out there who may benefit from the Investor Edge, so I’d like to explain some of the guidelines and how they are different from what you already know about traditional mortgage loans on investment property.
Here are the basic guidelines for this new loan and how it may apply to your situation as an investor.
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6 Basic New Loan Guidelines for Investor Edge
1. It offers purchases and refinances of residential non-owner occupied properties from 1-4 units.
The minimum loan amounts go from $75,000 for 1-unit properties, all the way up to a maximum loan amount $1,000,000 for 4-plexes. And various scenarios in between for 2-unit properties and 3-unit properties. Basically, any residential property can qualify.
2. The maximum loan-to-value ratio is up to 75%.
This is pretty standard for investment properties, whether you’re using the Investor Edge or a more traditional non-owner occupied loan. You’re most likely going to have to have skin in the game or equity (as it applies to refinances).
3. The minimum FICO (credit score) is 720.
Again, this is the standard for non-owner occupied investment property loans. Chances are, if you’re using financing to leverage your rentals, then this won’t be an issue.
4. There is no minimum or maximum number of properties financed.
For most lenders, they will currently finance up to five of your properties, and you can have no more than ten properties financed overall. This new guideline should open up some doors for many of you. You no longer have to worry about how many properties you have financed.
If you have 10, you can still get this loan. If you have 20, you can still get this loan as long as your property is cash flowing. Most of the lenders are still only financing up to five in-house, but they aren’t worried about the total number anymore. That’s a good thing as long as the deal makes sense.
5. The maximum property debt-to-income (DTI) ratio is 65% for 1 unit, but up to 80% for 4-plexes.
This guideline is the kicker as far as how this loan differs from other, more traditional investment property loans.
Normally, the DTI for a traditional mortgage loan is calculated against all of your debt and all of your income. That means that every single other mortgage payment you make (along with car payments, personal loan payments, credit card payments, etc.) and every single bit of income you make from your rentals or otherwise needs to be documented and factored into the debt to income ratio. Loan files look like giant books with the sheer amount of paperwork needed to complete these loans.
On the contrary, to calculate the DTI on the Investor Edge, you simply divide the monthly payment PITIA (principle, interest, taxes, insurance, and association fees) by the gross monthly rental income to determine the DTI.
DTI = Monthly Payment (PITIA) / Monthly Gross Rental Income
In other words, the better the property is cash flowing, the more likely you are to get approved with this product. This solves many of the excessive debt to income problems associated with investment property.
6. It requires disclosure of employment information only on the loan application.
This guideline goes along with #5 above, and it’s really cool for us as lenders/brokers. Since only the property income is used to calculate the DTI, you don’t need to disclose your personal income, just the income of the property. (Side note: you do have to disclose who your employer is whether that be as a wage earner or self-employed.) On a normal loan application, you would have to factor in your employment income into the DTI. This new guideline makes it so much easier to qualify with a lot less paper work. That saves time for everyone involved.
Lastly, I’ve already priced out some scenarios on the Investor Edge to see how this pricing looks compared to other, more traditional mortgage loans. It’s anywhere from 1.5-2.0% higher than normal non-owner occupied loans. But with the new DTI calculation for this product and the no maximum for number of properties financed, I think it is well worth the higher interest rate especially if you can make the numbers work with your cash flow.
Looking at this new loan product from the outside, I’m pretty sure this is one of those loans where the banks/lenders were thinking to themselves, “What the heck are we doing? Here is a group of people (investors) that are bringing us solid deals that cash flow and minimize our risk as much as possible, but we can’t do the deal because of outdated rules.” To be honest, they must have realized that when you have close to 10 financed properties, you probably know what you’re doing as an investor.
I’m really glad the lenders are starting to open up their credit and realizing that investors are solid business people who really help to drive the real estate market of this country. Everybody needs a place to live, and nothing beats a solid, passive income generating investment property.
Good luck and happy investing.
What questions do you have regarding this new loan product?
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