Why are mortgage loans easier to come by for real estate investors than they are for the average home buyer? Perhaps even more importantly, how can each begin to receive more money for a respective loan?
From the announcement of new FICO credit scores, which have been heralded by the National Association of Realtors (NAR) as the path to increased homeownership, to rumors of stated income loans and 100% financing, it is hoped that access to home loans is becoming easier for home buyers. However, there are also outrageous stories of banking heads like Ben Bernanke being denied refinances, even though they make high six figure paychecks, or more.
It’s clear that mortgages are still tougher to come by than they used to be. In some ways, this is a great thing for the U.S. housing market. It is ensuring that the current recovery is sustainable and is backed up with lots of cash and equity. However, new data from NAR showing the percentage of cash purchases in the market are diving shows both a need for more access to financing and that some are finding it.
So how can more hopeful home buyers find the cash and credit they need to buy homes now while prices and rates are low? Why are lenders so much more lenient, and effectively throwing cash at real estate investors?
Finding the Money You Need to Buy a Home
It’s really hard to save your way to buying a home today. In spite best efforts to stash as much of your paycheck as you can, even making substantial lifestyle sacrifices, inflation always seems to work harder. You save $10,000, the home you had your eye on goes up $100,000.
There is money for mortgages out there. A lot of it. Banks do want to make loans, but they also want to cover their behinds. Home buyers need to recognize that getting a mortgage loan, and closing on a great one can take work. It can require getting a lot of paper together, finding the right match in a lender, making a ton of phone calls and sending dozens of emails. However, the rewards of doing it are so great that it is well worth the effort. Think about it as if you spend an extra 10 hours securing a great home loan, and that pays off through even just $100,000 in home equity and savings on housing costs over the lifetime you own your home; you effectively made $10,000 an hour!
Of course, besides the difficulty, there are many other reasons individuals don’t want to go to local main street banks. They no longer want to give them the business. Fortunately, there are plenty of other options. Local private banks, and credit unions might be more attractive alternatives for many.
Peer-to-peer lending websites are also creating new ways of simultaneously providing financing for buying houses, and enabling private individuals to build up their communities while earning great returns.
Realtor surveys have also uncovered that one of the greatest misconceptions in the market today is how much is required for a down payment. Many might be able to borrow more than they think. Others will find substantial down payment, closing costs, and home improvement assistance and grants from local government and nonprofits.
Why Mortgage Lenders are Loving Investment Property Loans
In contrast to the lending landscape for regular home buyers, it appears that mortgage lenders are literally trying to force their money on real estate investors today. They are making so much noise online, it is as if they are almost desperate for investors to take their money and put it to work for them. You might even want to check your pockets to make sure you weren’t “reverse-pickpocketed.”
So why the huge desire to loan to real estate investors, and not home buyers wanting to live in properties?
For starters, it is far easier for those with the capital to operate in the investor environment. These ‘business’ and ‘commercial’ mortgage lenders that don’t make loans for people to live in houses are free of all the nightmare liability and regulations that have been created. They just don’t want to, or are afraid of making home loans to regular home buyers. It’s just too risky from a regulatory and legal stand point.
Secondly, these investment property mortgage lenders are extremely bullish on the performance and outlook for income producing properties and rising equity. They know that if they make loans on rental properties, they will win huge, even if the investors don’t pay. They’ll be left with lots of equity and ongoing income above the loan payments.
It’s also less likely these borrowers will default when the collateral is producing income and is so critical to their ongoing income and wealth.
Moreover, consider how much easier it is to loan in bulk. New blanket mortgage lenders are able to boost spreads by approving a single loan for a large number of properties. This creates more profits for all sides of the equation.
Beyond buy to rent loans for portfolios of single-family homes and multifamily apartments, there is also transactional funding, hard money loans, private money lenders, working capital loans, and JVs to offer leverage for investing in real estate today.
