Investment mortgages are a bigger risk to lenders than mortgages on owner-occupied properties. For two reasons: there’s no mortgage insurance possible and people fight harder to save their home than they do to save an investment property.
Investment on 1-4 unit properties can be conforming (i.e., they fit the guidelines of Fannie Mae or Freddie Mac) or non-conforming, for purchases, rate-in-term refinancing and cash-out refinancing.
Since the QM (qualified mortgage) and ATR (ability-to-repay) rules do not apply, they can be full-doc (everything is documented) or not (people can get one based on the cash-flow of the property or based on their bank statement deposits for the previous 12 or 24 months (or even 2), or the income and assets can be stated, no verifying happens.
Because they are riskier, the interest rates are higher than the interest rates for owner-occupied properties. If the income and assets are not fully documented, the interest is even higher.
Owning a house is not cheap. To increase the number of homeowners, the Government has created programs that make it less risky for lenders to lend to people with, how shall we say, blemishes on their credit reports, imperfect work histories or not all that much money, people in areas that lenders would not lend otherwise, people who have served the country more than others.
|Government Loan Insurers and Guarantors|
|FHA Loans||VA Loans||USDA Loans|
The FHA (Federal Housing Administration), part of HUD (The Department of Urban Development) has been helping people buy or refinance houses since 1934. It’s been doing that by insuring peoples mortgage loans, which allows lenders to give people better deals.
That means that people who’d cannot qualify for a loan under conventional programs can qualify. It also means that people who can qualify under conventional programs get better interest rates. All of that with low down payments and closing costs.
FHA does not give loans directly. It does, however, insure loans for anyone and everyone, not just first-time home buyers or people with bad credit or no credit, people with other types of issues.
(Of course, an FHA-insured loan is not a great option for everyone: people with large down payments, great income-to-debt ratios, great credit scores and history can get better deals under conventional mortgage programs. Though FHA loans have lower interest rates, they come with upfront mortgage insurance, currently at 1.75% of the loan amount and monthly insurance premiums, currently they last for the life of the loan.)
The loans can be used only to buy or refinance an existing 1-4 unit property (including mixed-use properties, assuming certain criteria are met) or buy vacant land and build a 1-4 unit property as long as at least one of the borrowers will use as primary residence. Each year, the FHA publishes loan limits. The limits vary by county and property type.
The minimum down payment required is 3.5%; you can get fixed-rate loans or ARM’s.
There are several FHA loan programs:
203(b) loans. These are the basic / standard FHA loans, the kind most people think of when they think FHA loans
203(k) loans. These are loans for buying or refinancing a property that needs work, from small updates / repairs all the way to razing the property to the foundation and building a new one in its place. The only requirement is that the original foundation structure remains in place.
HECM’s (Home Equity Conversion Mortgages). These are reverse mortgages, meant for people 62 and older. Their advantage is that, while borrowers use the property as their main residence, they do not have to repay the loan.
Borrowers have to have enough income to take care of the home and pay property taxes and hazards insurance. But they do not have to qualify for the loan.
Guaranteed by the United States Department of Veterans Affairs (the VA, VA loans exist to help a variety of current and former members of the Army, Navy, National Guard and, under certain circumstances, spouses of current and former members of the military branches of the USA.
The qualifying criteria are not as strict as those of conventional loans, loans can be as high as 100% of the value of the home (so, no down-payment loans), and there’s no private mortgage insurance.
VA loans can be used to buy or refinance an existing 1-4 unit property or to buy buy vacant land and build a 1-4 unit property on it as long as at least one of the borrowers is going to be living in that property.
Since the VA does not lend directly, borrowers not only have to meet VA’s minimum requirements but those of lenders too. Though some lender’s minimum requirements are the same as VA’s, many add one or more overlays. (such as: the borrower must have at least 2 credit scores, or if the credit score is under 600, gifts are not allowed for the down payment).
The lending guidelines for these mortgages are set by the United States Department of Agriculture.
They offer low rates, affordable payments and 100% financing. But they are available only in specific areas (rural and some suburban). And only to people who earn 115% or less of the median income in their area (the income of all family members is taken into account, even that of your ungrateful, eternally morose teenagers).
Despite the word ‘agriculture’ involved, these are are loans for houses (including new manufactured homes), townhouses, condos, 2-4 unit buildings and not for working farms… The value of the land can be no more than 30% of the value of the property.
You can find out if the property you want a USDA mortgage against is in the ‘right’ area, click on this link: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp.
These loans are attractive to lenders because the U.S. government guarantees them. Because the U.S. government guarantees them, there’s a guarantee fee (1% of the loan amount as of 10/2016) and an annual fee (0.35% of the loan amount). Which offsets the lower interest rates (without, however, making this type of loan a bad loan – 0.35% of $100,000 is $29/month).
So, the upfront costs and monthly fees of USDA loans are lower than those of FHA.
The are less risky than other government loans because only fixed-rate, 15 and 30-year amortization is allowed.
Conventional mortgages are the traditional kind of loans, the kind that existed before the Government created any loan program to help people who could not qualify for a mortgage.
They come in two flavors: conforming and non conforming.
The conforming ones fit the guidelines of Fannie Mae and Freddie Mac, two quasi-governmental institutions.
Since they are not backed by a governmental agency, they place a lot of risk on the lenders. Therefore, lenders reserve them for people with good credit scores and no income / employment issues for 1-4 unit properties that are either primary residences, second homes or investments.
They are all the other non-government backed loans secured by a 1-4 unit property. They are riskier than the conventional conforming ones. The risk can be due to the property (non-warrantable condos), loan amount (jumbos) or the borrower (credit issues, inability / unwillingness to fully document income / employment, like bank-statement qualifying loans).