I’ve been doing some research lately on available foreclosure financing and have uncovered some surprising facts. The overwhelming consensus in the news is that the credit markets are so tight, you can’t get a loan. But in digging, I found that statement to be extremely exaggerated. In fact, I found “5 Myths” on real estate financing that are simply not true.
Myth #1: Homes Aren’t Selling
The National Association of Realtors reports that existing home sales have increased 4% to 4.42 million in November and are 12.2% above November 2010. So, homes are selling. And total housing inventory is falling, down 5.8% in November, which represents 7 month supply at the current sales pace. With levels above a 6 month supply (considered a balanced market) we are still in a sellers market, but there is not the “over supply” on the market as many have stated. However, there are ample number of homes not on the market, held by banks, or in some stage of the foreclosure process, which I expect to see hit the market later this year. That is good news… more great deals for us to buy.
Myth #2: Buyers are All Cash
All-cash sales in November accounted for 28% of all purchases, down slightly from 31% in November 2010. Of course investors make up the bulk of cash transactions, but 72% of 4.42m transactions obtained financing. 3,180,000 is a lot of people who somehow found money in today’s mortgage system.
There is no question that mortgage bankers are making loans — and big profits when they do. Profits per mortgage in the second quarter reached $575, up from $346 per loan in the first quarter, according to the Mortgage Bankers Association. Of course, if mortgage bankers don’t make loans they don’t collect that $575 per successful borrower, reason enough to encourage all possible applications.
Myth #3: Qualifying for a Home Loan is Impossible
There’s no doubt that the mortgage application process has changed in the past year. But if we compare today’s underwriting standards with the over exuberant period from 2002 through 2006 then yes, loan applications have gotten harder. However, if we compare today’s process with loan requirements in the 1990s; underwriting standards for Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) loans; or the loan requirements typically set out by community banks, credit unions or small S&Ls then no, lender demands have been fairly consistent. Bottom Line: Lending is back to the good-old-days of fat loan files and lots of verifications.
How our current system works — Wall Street Reform has given lenders a choice. They can originate option ARMs and allow borrowers to apply for financing with a no-doc loan application — but only if they’re willing to set aside 5% of the loan amount in a reserve and expose themselves to the possibility of borrower lawsuits. Or, they can make loans without the reserve requirements or liability if they simply originate mortgages within the safe harbor created by the new rules.
Loans within the safe harbor are called “QRMs” or qualified residential mortgages. QRMs include FHA, VA and conventional financing — in other words, sane and safe mortgages. The “new” loan standards required under Wall Street Reform are hardly impossible:
*The lender must show that the borrower has an ability to repay the loan based on current income.
*The lender must verify borrower income claims with tax returns, W-2s, etc.
*The lender must verify the borrower’s employment.
None of this is new to anyone who has applied for a VA or FHA loan. Or, for that matter, borrowers who have insisted on using a fully documented loan application. You maybe wondering why would anyone want to use a full-docs loan application when you could get a stated-income loan (SIL) with a lot less paperwork and hassle? The answer is money. A stated-income loan today might require an interest rate that’s 4% higher than a fully-documented mortgage application. That’s a huge additional cost over the life of the loan.
Myth #4: Typical Borrowers Can No Longer Qualify for a Conventional Loan
DBRS, a provider of credit rating opinions for financial institutions and other large-scale entities, has produced an interesting chart that compares prime mortgage underwriting standards for 2007 and 2011. Their report shows plainly that credit score requirements have increased, while maximum loan amounts have declined. The basic prime loan credit score has gone from 620 to a range of 680 to 720. But so what — the typical FHA borrower has a 699 credit score and FHA loans are not prime financing.
As to maximum loan amounts, they’ve dropped from $2 million in 2007 to $1 million today. This just doesn’t impact a lot of people. The typical buyer paid $174,800 for an existing home in November.
Not only is financing readily available, there’s a very good reason to finance and refinance today: Money is incredibly cheap.
Freddie Mac reports that loan rates for both fixed and adjustable financing have slipped to levels unseen during the past 50 years. Plus, the Federal Housing Finance Agency — the government body that oversees Fannie Mae and Freddie Mac — says at the end of the second quarter that home prices were 18.8% lower than in April 2007.
Myth #5: Financing is Not Available for Foreclosure Properties
Financing a foreclosure purchase at the trustee sales or sheriff sales is not available. Winning bidders are required to pay the full amount in cash — often on the spot in the form of cashier’s checks – or from a hard money lender on the spot for your purchases. But this is the only example of “all cash” required. When you buy bank-owned properties (REO) or pre-foreclosure properties, you absolutely can finance those purchases. REO’s with conventional financing and pre-foreclosures with taking over the existing loans “subject to”.
Fannie Mae and Freddie Mac may have restricted their investor loans in the past few years, it doesn’t mean financing is not an option for investors.
There is always a challenge in your real estate business. Just a few years ago we were fighting for our discount, in multiple offer situation, driven mostly by loose lending standards. Today you can find significant discounts and profits, but you must prepare your financial house first.
Financing options are still available for all different types of investors: newbies with little cash or credit, average investors with some cash and credit, and seasoned investors looking to expand their portfolio beyond the 10-property limit set by Fannie Mae.
Investors today will need to be a good bit more creative than three years ago. But it is certainly worth it if the end result is significantly greater discounts. Especially in today’s rental market where I am seeing 10-20% cash on cash returns in my first year… not counting equity appreciation as I hold to build wealth.
Find out more about how to find the money and build your rental cash cow empire in our Brand New Professional Investors Webinar “Eliminate the Ups and Downs of Real Estate: Launch Your Foreclosure Rental Cash Flow Empire“, Special Live Event: Wednesday, January 25, 2012 6:00pm PST. More Here or call 800-310-7730 x2.
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