Dennis' Mortgage Blog

Question of the week:  What should we know about mortgages to purchase investment properties, or purchase a new home and convert our current residence to an investment property?

Answer:  As you can imagine a significant portion of the mortgages that have gone through foreclosure in the current economic cycle were non-owner occupied ( Non-Occ) property owners, i.e. investors.  Because of the losses taken on their Non-Occ portfolios Fannie Mae, Freddie Mac and lenders have tightened up considerably on the underwriting guidelines for investors. 

Particularly more stringent is the underwriting for those converting their current primary residence to a rental property and purchasing a new primary residence.  While the new mortgage will be for an owner occupied residence, the nature of the transaction creates a situation where the borrower will become an investor in rental property putting that mortgage at greater risk.  To protect themselves and the overall market, underwriting guidelines across the industry will not consider any potential rent on the existing property for qualifying—if the rent was not listed on the previous year’s federal income tax return then the underwriters will not use it in most cases.  Some lenders and programs will allow for consideration of the rent on the current residence to offset the property’s expenses of principal, interest, taxes and insurance (PITI), however for this to occur the borrower must have at least 30% equity in the property and significant reserves following the purchase of the new home.  Example: John and Mary own home on Main Street and wish to keep the property and rent it and purchase a home on Elm Street.  The Main Street property can rent for $1000 per month and has a current PITI payment of $800, the property value is $400,000 and their mortgage is $200,000—they have 50% equity so a portion of the $1000 can be used for qualifying.  The PITI on the new Elm Street property will be $2500 per month.  If after purchasing Elm Street John and Mary will have 6 months of the total PITI for both properties ($3300 per month) they appear to be eligible—so if they have greater than 30% equity in Main Street (check) and almost $20,000 in the bank after closing they are eligible under the guidelines.  If they do not have 30% equity, say the value is $250,000 and they owe $200,000 on Main Street, then they must still have the six months PITI ($20,000) after closing and must qualify for the mortgage to purchase Elm Street without using any rental income from Main Street to qualify.  Note that many 30 year fixed rate programs or lenders will not approve a new mortgage in this scenario without significant equity in the current residence.  If this is scenario is one you are considering please call me to go through your specific situation.

More straightforward is someone keeping their existing primary residence and purchasing a property for investment.  The new purchase may be a condo, single family residence or multi-unit property up to four units.  In this scenario most lenders funding with Fannie Mae or Freddie Mac programs will not use any of the rental property being purchased to offset the PITI of the new purchase—the borrower must qualify with 100% of the current residence payment and the new purchase payment being counted as debt.  There are a few programs, not 30 year fixed rates, which will count a portion of the market rents as set on an appraisal for qualifying the new purchase mortgage.  Again contact me and we can go through the scenarios for you.

Regarding purchasing condominiums as investment property, this has become quite popular in some complexes throughout Southern California with the declining property values; in particular we have heard of many scenarios where investors are purchasing condo units with all cash.  Guidelines are generally much more rigid for most lenders on non-owner occupied loans for condos.  One major issue that the trend of purchasing condo units for investment is creating is decreased salability of those units and others in the complex in the future.  Before approving a mortgage in a condominium complex lenders look to see what percentage of the units are owner occupied and how many are rental units.  The higher the percentage of rentals the higher the risk for the lender.  By over-buying units in a complex for investment and skewing the percentage of rental units in a complex, investors are inhibiting the ability of future buyers to purchase the units they are buying, thereby deflating the value of their investment and the value of the other units in the complex.

There are many values, whether real or perceived, that are opportunities for those so inclined to purchase rental property.  In the current loan environment the opportunities are somewhat dampened by the increased financing difficulty for investment property.  If you have been considering such a transaction please call me to discuss your scenario and options.

I will keep this link on my “Question of the Week” section to assist new homeowners:

IRS Form 5405 for First Time Buyer Tax Credit for those eligible for the up to $8000 credit. Note credit only for those who close escrow before November 30, 2009 under current legislation.

Have a question for me?  Ask me!   

Last week I commented on the green staircase, every day the bond charts had big green steps tracking bond prices up (prices up, interest rates down), this week the green has been replaced by red and the steps lead down, down, down. As I write this just before noon on Friday mortgage backed securities are at their lowest prices since mid-June. 

The sell off began on Monday following some positive economic news out of China (they are facing a real estate bubble) and former Fed Chairman Alan Greenspan saying the end of the recession is nearing.  With the strong gains the prior week many investors took to opportunity to sell off in bonds, take profits and invest in stocks. The fall continued for the rest with job loss numbers being less negative than expectations. 

Today mortgage backed securities were in freefall early, pushed by unemployment number coming in at 9.4% instead of 9.6% and fewer jobs being shed by employers in July (247,000) which was lower than expectations (328,000) and about half the monthly average from November through April (645,000 jobs lost per month).  Such is the economic cycle we are in where a quarter million Americans losing their jobs in one month is considered good news. 

It is an interesting spin, or commentary, when job losses are considered good news.  However you cannot go from shedding 600,000 jobs a month to seeing no job loss, or increased hiring, until the rate of job loss per month slows down. So while the job loss number is bad news for 247,000 Americans, the fact that is was “only” 247,000 and not 300-600,000 is relatively good news.  The shrinking numbers of lost jobs indicates more and more companies have reached the end of their lay off cycles, or fewer companies are closing.  Which also is a signal that companies and the economy as a whole is contracting at a slower pace, which signals the end of the recession is getting nearer.  (Someone please mention that Dennis was writing back in January/February that the recession would most likely end in Fall of 2009).

Those who follow me on Twitter have watched the bond prices deteriorate and rates rise all week. These same followers have seen me calling for anyone in position to lock in the rate and terms of a mortgage application should have locked as soon as they had the chance, advice I also gave last Friday when rates were at their recent bottom.

Our industry has quite a bit of uncertainty, from rates bouncing up and down, regulations coming in that affect closings, to major companies closing—as one did this week with thousands of borrowers in the pipeline awaiting funding of their mortgages.  To hedge against the uncertainty borrowers and real estate professionals should be working with an experience mortgage professional who is has up to the minute information, provides constant communication on market conditions and has the ability to maneuver through the changing regulatory environment—call me to assist you and your clients with your mortgage needs.

Rates had a big week again, this time big negative.  Conforming rates have their biggest one week jump since early October when the Wall Street bailouts, excuse me TARP, occurred.  On the bright side, technically we could be in a position for a rally next week to pare losses—I would not be my mortgage payment on it though.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional  5.375%                           Up  0.5%

30 year conforming-jumbo 5.875%                   Up  0.5%

30 year FHA    5.375%                                    Up  0.375%

30 year FHA jumbo 5.75%                              Up  0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Playing with sprinklers, soaker hoses, drip thingy-mabobs and moving plants to take corrective action on area where landscape irrigation is doing some foundation damage.  Other than that looking forward to a great weekend, how about you? 

Have a great weekend,

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.

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