Competitors and exotic lenders may provide even lower cost loans and easier terms for qualifying to parlay your rental equity into a bigger portfolio.
By Jeff Lazerson | firstname.lastname@example.org | MortgageGrader.com | October 03, 2021
Geez. Make up your mind already.
In April, the Federal Housing Finance Agency (F & F’s regulator and conservator) essentially required Fannie Mae and Freddie Mac to put the kibosh on financing one to four unit rentals. Be it purchase or refinance. Investment property borrowers became persona non grata.
The ban-the-rental plan, announced last January, was the work of former FHFA Director Mark Calabria, along with former Treasury Secretary Steve Mnuchin (President Trump appointees).
As a result, most lenders were forced to significantly jack-up the consumer pricing — like lots of points or a higher rate. Worse, some took rental property financing entirely off the menu for loans sold to F & F.
Fast forward to Sept. 14. Acting FHFA Director Sandra Thompson (President Biden appointee) suspended the ban-the-rental plan. Now we’re back to “bring it.”
You now can take another bite of the apple if you missed out before. Whether buying is on your brain, knocking the interest rate down or pulling money out to expand your rental portfolio, now is the time.
For example, well-qualified borrowers with 25% down, or 25% equity in the case of a refinance, can still land a 30-year fixed rate at 3.375% without points on a $548,250 conforming loan. Taking cash out will add an additional 0.625 of a point.
Higher rates apply in Los Angeles and Orange counties for rental mortgage loans from $548,251 to $822,375 (a.k.a., a high-balance loan).
Fannie and Freddie require at least 20% down for any purchase transaction.
But there are alternatives to Fannie and Freddie as well.
What if you are the cash-flow king or queen? And you don’t care quite as much, or you don’t care at all about paying down the principal balance?
How about a 30-year adjustable-rate mortgage with an initial interest-only payment for the first five years at 2.875%?
You will need to put 30% down. The interest-only payment on $548,250 would be $1,314. That compares to a monthly payment of $2,424 for a fully amortizing 30-year fixed rate at 3.375% from Fannie and Freddie. That’s a big, bad savings of $1,110 per month. Cash-flow it is.
Debt service coverage ratio financing, or DSCR loans, are especially good for borrowers struggling to meet F & F’s full-income documentation standards for investment properties. Underwriting is largely focused on the rents of the subject property. Good credit and down payment standards apply (or equity in the case of a refinance).
As long as the monthly rent is at least one dollar more than the monthly house payment, including taxes and insurance, you should qualify. For example, rent must be $3,500 per month if the total house payment is $3,499.
Well-qualified borrowers can get these DSCR loans on rental properties at rates as low as 3.625% for a 30-year fixed. You can also get a 30-year fixed with interest-only payments for the first 10 years by paying an additional rate of about 0.125%. And you can qualify at the interest-only rate.
There is another investment financing instrument named no-ratio. This program doesn’t even consider whether the rents are more than the total house payment.
Fannie’s general rule is to limit investment property loans to a max of 10 financed properties. I know of one lender who allows borrowers to own up to 12 properties, with or without loans.
The DSCR lenders typically have no limit on the number of properties owned or financed.
If you don’t already own at least one property, it will be difficult if not impossible to find a mortgage lender willing to provide an investment property mortgage to you.
While I am getting very concerned about a home price bubble, I don’t see the demand for rental properties dropping. And rents aren’t likely to go down either.
Mortgage rates certainly are creeping up. This week, the Freddie Mac 30-year fixed topped 3% for the first time since June 24. But the price investment property managers pay for mortgages is still very cheap based upon historical standards.
If you are going to buy a rental, or more rentals than you already have, best you plan on buying and holding until after the upcoming market correction.
Hopefully, Fannie and Freddie will stick with the good old game plan of providing competitive pricing for property investors.
Freddie Mac rate news: The 30-year fixed rate averaged 3.01%, 13 troubling basis points higher than last week. The 15-year fixed rate averaged 2.28%, also 13 basis points higher than last week.
The Mortgage Bankers Association reported a 1.1% decrease in mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $38 less than this week’s payment of $2,314.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 2.375%, a 15-year conventional at 2.25%, a 30-year conventional at 2.875%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.5%, a 30-year conventional high-balance at 3.125% and a 30-year fixed jumbo at 3.25%.
Eye catcher loan of the week: A 30-year fixed rate at 3.125% without cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is www.mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011