The Horse Is Already Out Of The Barn
These days mortgage lenders have tightened the screws, battened down the hatches or however you might want to put it. The fact is that getting a mortgage for any property, including and especially investment property, is more difficult than it has been in a long time. Back in the Bubble years, 2003-2007, lenders crowded the market with “product.” This so-called product included many versions of no-money down loans, interest-only loans or adjustable loans, all with varying schemes for interest rates. Qualifying was a breeze. Even the self-employed, who typically inflate their expenses to moderate their taxable income, got mortgages based almost solely on credit reports with income self-reported, the famous “liar” loans. Of course, creative lenders figured out how to get loans to borrowers with no credit or poor credit or even terrible credit. Those were the days.
We are now reaping the whirlwind in the form of foreclosures, toxic debt, short sales, and home values spiraling ever downward. Nevertheless, the new guidelines, instigated in the aftermath of the Bubble, do strike me as shutting the barn door after the horse has fled. Today, many excellent buyers are not able to get financing or not able to get their desired financing for a variety of weird reasons. Some underwriters appear, to me at least, to have lost their minds. For instance, I had one short sale where the underwriter of the loan for the buyer wanted financial information from the seller. What? Others have told me equally harrowing stories. So, what to do?
We’re back to 1950s type of financing, 20% [or more] down with excellent credit. So, let’s go back to the 1950s for some other tried and true financing methods. One of the very best is seller financing.
More than half the homes in America are owned outright with no mortgage. Surprised? Sometimes these owners have to sell for any of a myriad of personal reasons-retirement, sickness, divorce, death of a spouse, job loss, job change. Some of these owners will sell and have a pile of cash they don’t really know what to do with since, as mentioned in previous posts, traditional CDs are close to zero and the stock market has lost its luster for many. Sellers in this position can and should offer seller-financing to help sell their homes quickly and for top dollar. Seller-financing is a terrific buyer incentive.
Seller-financing is not complicated. The seller qualifies the buyer by checking his credit and income just like any lender. Escrows and agents can help draw up the actual contract and the buyer and seller can agree on terms. The seller can charge more than normal market rates because the buyer is saving all the normal closing costs associated with a mortgage, usually running to 2% or more of the mortgage. The escrow will set up a service to check the taxes and insurance are paid every year. The seller will have the same protection as any mortgagor, the right to foreclosure should the borrower fail to make payments.
The result, though, is a win-win for both buyer and seller. Seller gets a nice return every month, secured by the property itself. That’s better than the stock market and more secure. The buyer gets a no-red-tape loan and an actual person to whom he sends payments. For those buyers and sellers able to take advantage of this type of financing, it’s a godsend.
Another traditional way to purchase property is by assuming a loan from the seller. For instance, if the purchase price is $300,000, the seller may already have a $200,000 loan on the property. If it’s assumable, the buyer can take over payments and give the seller the rest in cash, $100,000, saving himself closing costs and more red tape. Many times investment property is sold this way, including large apartment complexes.
The down side to this method comes from the original lenders. Today, many loans are not assumable. Those that are assumable often require both an assumption fee and qualification process with the lender. Despite these drawbacks, the process is still far easier and cheaper than acquiring another loan. Plus, the qualification process is not as stringent. The buyer with cash may well be able to strike a great deal, saving himself thousands of dollars in closing costs and lender’s fees while simultaneously avoiding most of the complications engendered by the new guidelines.