Hello Folks,
Its a brilliant Thursday morning here in Washington DC. As you may know if you read our blog, we’re in the processes of making an offer on an investment apartment. So for the past few days we’ve been emailing and calling lenders to get the right financing lined up.
The process has made one thing clear: its not 2005 anymore.
There have been drastic changes in how lending is handled in real estate since the boom a few years ago. For example:
1) No documentation loans are now illegal. You can’t just say you have a job and money. Now you have to prove it.
2) Lenders are far more stringent in doing due diligence. We’ve been asked for our full tax returns, evidence of employment and copies of all bank account statements for the past two months. This doesn’t sound like a lot, but its actually some work to get it all together in an electronic format suitable for emailing.
3) Fannie Mae and Freddie Mac have tightened lending standards. Specifically my wife and I are looking at getting an investment property, which means there tougher requirements mandated by Fannie and Freddie in terms of the owner/investor ratio for condo lending. Specifically, Fannie and Freddie won’t purchase loans for resale unless the loans are secured against properties in buildings with less than 51% owners.
4) All lenders want a big down payment. Zero down for investment properties in DC is officially dead.
Folks, if you are in DC condo market, feel free to leave a comment. We’d love to hear from you.
Best,
James
For t
I just find it astounding that people bought houses without that information. (I bought my first house the end of May 2009. I needed all that information, and to me it seems reasonable that someone offering to lend me over $100,000 would want to know all of that!)
Do you guys typically buy rental property and hold it in your own name or did you set up a separate entity to hold the property? I realize that holding in a separate entity will help minimize personal liability but I also think that most banks may require some type of commercial line of credit if you want to own through an entity. Thoughts? Thanks in advance!
I bought a house in the USA in 2001 (30 year mortgage) and refinanced 18 months later (15 year mortgage) after interest rates dropped significantly. 2010 may not be 2005, but 2002 was not 2005 either, at least from my experience. Which is to say, although I needed only a 5% down-payment to get a conventional loan, I *did* have to provide all the same forms/ info. in 2001 and 2002 that you have to provide now. To wit, I needed two years of tax returns, 3 pay stubs, 3 most recent bank statements, etc.
About a year ago I bought my first apartment in Hong Kong and the paperwork requirement was, if anything, more strenuous (though not exactly the same forms were required).
One interesting point: in HK fixed-rate mortgages are extremely rare. My own interest rate is set at HK's prime interest rate minus 2.5, which is to say that currently I'm paying 2.5% interest. However, back in 2007 the prime rate crossed 8%, and if it were to go back that high, that would put me paying about 5.5%– OUCH! On the other hand, the interest is (of course) charged only on the outstanding principal, and so I've been able to use this year to pay off principal before rates go up again. I'm making every effort to pay it off in 8 years… and hopefully most of it will be paid before my rate crosses 4%. Fingers crossed…
It's scary to think that the lending process was ever different from this (which explains the financial implosion). If I were lending a large amount of money, I'd want to do even more to protect my asset – I'd probably call employers to confirm income, ask for a year's worth of bank statements, and whatever else I could think of that wasn't an unreasonable privacy violation.
I'd be interested in the spread you're seeing between interest rates on investment property vs. the going rate for owner occupied. Also…are lenders requiring PMI even with a large downpayment?