Investor Financing in this Crazy Real Estate Market

Here is an overview of the general guidelines and recommendations for investors buying residential and commercial property during this volatile market.

General Guidelines:

With 25% of the foreclosures coming investor-owned properties, it's understandable why investor loans are one of the most hated on Wall Street. However, Wall Street is still buying these loans for the right borrowers and the rates on available programs are still reasonable for the smaller real estate investor. Here are some of categories of loans that are still available for residential purchases and refinance.

1. Stated Income and Stated Assets (SISA) Loan: This loan does not require documentation (bank statements or tax returns) to support income and asset numbers. With a credit score above 720, you may still qualify for this type of loan as an investor with as little as 10% down. The loan amount must be below $417,000. Rates for a 30 year fixed loan are going to be in the low 7% range without paying points. ARM rates are in the low 6% range, however, most lenders are requiring discount and origination points to purchase these loans.

2. Full Documentation Loan: These loans provide the most favorable rates, terms and allow a lower credit score. The minimum down payment is still 10%. You must show tax records, liquid asset records and income statements (P&L if business owner) to qualify.

3. Hard Money Loan: These loans became popular during the bull market for fix and flip investors. In slower times, these are expensive loans and upfront costs and pre-payment penalties make them unfavorable for buy and hold strategies. Rates are in the 11-14% range and typically cost 3-5% in loan fees. Investors still look to these loans for quick transactions that have large short-term upside. Limited documentation is required and they can be closed in a few days. 35-45% is required for down payment.

4. Foreign Nationals: This is hot category because of the weak US dollar. Foreign investors can buy property at an immediate discount when they use Euros or the Canadian Dollar. 20% down payment and income documentation is required. Rates are in the 8% range.

Note: As a general rule, interest only loans are no longer available for investment properties so calculate cash-flow assuming fully amortizing loan terms.

Recommendations:

Short Sales: If you are looking at a short-sale, don't automatically assume that conventional loans aren't an option. I've closed several short sale loans in less than a week. With preparation, a conventional loan can take only a few days more to close than a hard money loan.

Conforming Loan Sizes: Stick with "Conforming" size loans and select properties that are smaller and will still sell or rent in a slower market. A conforming loan is less than $417,000 and a "Jumbo" loan is greater than $417,000.

REO Properties: For first time investors, REO (bank owned foreclosures) properties are a great way to buy wholesale. You have time for due diligence, inspections and closing a conventional mortgage.

Paying Points: Cash is king, so I don't recommend paying points to discount interest rates unless it's necessary to qualify for the loan or if you plan to hold the property more than 5 years.

Commercial Properties: If you have 20-30% for a down payment, an average credit score and would like to consider a larger investment, multi-family apartment buildings and trailer parks are a great opportunity. Stated income and stated asset loans are still available for investors with FICOs in the low 600s. Lenders care more about whether the property cash-flows than the borrower's ability to repay the loan. This is good for both the lender and the investor.

I hope you found this general information useful in guiding your investment decisions.