Geez. Make up your mind in advance.
In January, the Federal Housing Finance Agency (F&F’s regulator and custodian) essentially required Fannie Mae and Freddie Mac to put the kibosh on 1-4-unit rental financing. Be it a purchase or a refinance. Investment property borrower individuals became non grata.
The sanctions-rental plan was the work of former FHFA director Mark Calabria, along with former Treasury Secretary Steve Mnuchin (appointed by President Trump).
As a result, most lenders were forced to significantly increase consumer pricing — such as lots of points or higher rates. Worse, some took rental property financing off the menu entirely for loans sold to F&F.
Fast forward to September 14th. Acting FHFA director Sandra Thompson (president Biden appointed) suspended the ban-fare plan. Now we are back to “bring it”.
If you missed it before, now you can have another bite of apple. Whether buying is on your mind, lowering the interest rate or withdrawing money 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 get a 30-year fixed rate at 3.375% without points on a $548,250 conforming loan. An additional 0.625 of one digit will be added for cash withdrawal.
Higher rates apply in Los Angeles and Orange counties for rental mortgage loans from $548,251 to $822,375 (aka, a high-balance loan).
Fannie & Freddy’s requires at least a 20% discount for any purchase transaction.
But there are also alternatives to Fanny and Freddy.
What if you are the king or queen of cash flow? And you don’t care very much, or you don’t care at all about paying off the principal?
How about a 30-year adjustable-rate mortgage with an initial interest-only payment for the first five years at 2.875%?
You have to put 30% down. The interest only payment on $548,250 would be $1,314. This compares to a monthly payment of $2,424 for the fully amortized 30-year fixed rate at 3.375% from Fannie and Freddy’s. That’s a big, bad savings of $1,110 per month. This is cash-flow.
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 largely focuses on the rental 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 home payment, including taxes and insurance, you should qualify. For example, if the total home payment is $3,499, the rent should be $3,500 per month.
Well-qualified borrowers can avail these DSCR loans on rental properties for a fixed tenure of 30 years at the rate of 3.625%. You can set 30-years with interest-only payments for the first 10 years by paying an additional rate of approximately 0.125%. And you can only qualify at the interest rate.
There is another investment financing instrument called no-ratio. The program also does not consider whether the rent exceeds the total house payment.
Fannie’s general rule is to limit investment property loans to a maximum of 10 financed properties. I know of one lender that allows borrowers to own up to 12 properties, with or without a loan.
DSCR lenders generally have no limit on the number of assets owned or financed.
If you don’t already have at least one property, it will be difficult if not impossible to find a mortgage lender willing to offer you an investment property mortgage.
While I’m very concerned about a home price bubble, I don’t see a drop in demand for rental properties. And the rent is not likely to come down either.
Mortgage rates are definitely rising. This week, Freddie Mac’s 30-year-old is up 3% for the first time since June 24. But by historical standards the value investment property managers pay for mortgages is still very cheap.
If you are going to buy a rental, or are going to buy more rentals than you already have, it is best that you plan to buy and hold it 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 the previous week. The 15-year fixed rate averaged 2.28%, which is 13 basis points higher than the previous week.
The Mortgage Bankers Association reported a 1.1% decrease in mortgage application volume compared to the previous week.
ground level: Let’s say a borrower receives an average 30-year fixed rate on a loan corresponding to $548,250, last year’s payment was $38 less than this week’s payment of $2,314.
I’m looking for: Locally, well-qualified borrowers can obtain the following fixed-rate mortgages without points: a 30-year FHA at 2.375 percent, a 15-year traditional at 2.25%, a 30-year traditional at 2.875 %, a 15-year traditional high-balance ($548,251 to $822,375) at 2.5%, a 30-year traditional high-balance at 3.125% and a 30-year fixed jumbo at 3.25%.
Eye Catching Loan of the Week: A 30 year fixed rate at 3.125% at no cost.
Jeff Lazerson is a mortgage broker. He can be contacted at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.