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Mortgage – Modern Drawbacks Of Old Fashion Financing
It was at one of those real estate investor networking sessions when someone mentioned the word “mortgage” and was met with a thundering crowd response of laughs. And it was so hilarious that the event organiser had tears in his eyes. I couldn’t tell if anyone was rolling on the floor as my seat was not elevated enough to have an eagle eye view of the hall.
Yes it was funny. But does a mortgage really due such ridicule when it is the oldest form of real estate financing known to man?
The conventional way for people to buy or invest in properties is to finance it via a bank or lender. This is turn is usually channelled via a mortgage broker or real estate agent. Credit analyst will then go through the financials of the borrower for the approver to endorse a loan or not.
Creative financing avenues have been around long before 2008. And with the market implosion which occurred that year, eligibility and requirements for mortgages have changed the landscape for borrowers.
This is why creative financing is the way forward for hard core investors.
These days, you probably won’t get an attractive mortgage unless you have good credit, reasonable income comparable to the property price, a low monthly liabilities statement, and a low debt-to-income ratio.
And if you are still pinning your hopes on an old-fashioned mortgage to close a deal, you are aiming too far.
There’s nothing wrong with getting a mortgage to finance a transaction. If you can still get one at a fair interest rate, why not? The problem is that the environment is no longer as conducive to investors as it was before the economy collapse.
These are some of the modern drawbacks of mortgages for investors.
A “perfect” house
Even though banks are already known to approve mortgages on condition that things get fixed or repairs, it wasn’t as rampant as what it is today.
These days, lenders are so tight on credit that you might actually have to make a house sparkling from the outside just to push your loan to the final loan approver.
The property you are buying is expected to be in “move in” condition. Any else can be justified reason for a lender to flex their credit muscles. They might demand that you get a pest infestation fixed, foundation aligned, sewage repaired, etc, before releasing your funds. This is just more added pressure when you are swinging your arms all over the place to meet a closing deadline.
Even worst. Would you commit to such large expenses when your intention was to flip it?
Difficult to obtain
The days of easy money is over. Yet people on Wall Street keep harping on about the monetary stimulus the Federal Reserve is pumping into the economy. If that is so, where is the money?
It’s so difficult for real estate investors to obtain mortgages these days for rental property. In the past, when the bubble was brewing, anyone could get a loan as long as they could sign a contract.
Now the response you get from banks is so predictable that you might as well don’t waste your time.
Good thing there is such a concept as owner financing.
If you have been actively involved in buying and selling houses, you would understand the critical element of speed when it comes to getting things done. In fact, very often, it is this speed that makes a deal go from average to great.
Extended delays can give sellers time to rethink their decisions and weight up other options. Having more time allows buyers to look at competing listings before buying into yours. And in worse scenarios, a desperate seller you have identified might not have the luxury of time and decide to sell to someone else because you didn’t have a mortgage ready.
Because of the credit tightening lenders are practising these days, it take a longer time for loans to be approved through the proper channels. On top of that, at every state of loan assessment, they could demand more and more documentation to verify your declarations.
This delay is really not healthy at all for investors in a rush.
Such delays in getting financing sorted out eliminates the advantage of any speed you might have in dealings.
When you are getting financing through Fannie Mae or Freddie Mac, there will be a limit to the number of loans you have at any point in time. This means that if you are already highly leveraged, your loan application would be thrown out the window without ever getting to the table of the next analyst.
This is a good way for restricting novice investors from over-leveraging themselves.
But when you are a veteran investor with a number of property assets in your portfolio, you could easily meet that limit. This is even when your decisions have always been prudently calculative. It is like someone babysitting your financially even when you are assuming all the risks yourself.
No rehab loans
It is safe to say that the needs of a regular homeowner are very different from an investor.
A profit-driven investor is all about leverage. So it makes perfect sense that you want the remodelling plans to be part of the mortgage as well. You can dream on.
This is not going to happen in the modern lending market.
You could in all honesty, get a loan for rehabs. But they will not be combined into one mortgage. It would probably be granted via a separate renovation loan. And because such a loan is unsecured, the interest rates can be 10 times that of a typical mortgage.
Are you hungry enough to stomach that?
Creative finance is the way to go for investors
The points mentioned above are the main disadvantages to investors when looking towards conventional mortgages to fund their real estating activities.
If you just look at them and think about the needs of an investor, it is easy to see why a mortgage has become something to ridicule in the world on flippers and investors. Because it simply does not bring enough to the table.
The resistance of many towards creative financing is due to the lack of knowledge. It’s not risky as long as you understand the game and what you are getting into. And you will be able to comprehend how the many financing alternatives work if you commit yourself to learning them.
Who knows? You might find them simpler to understand than a mortgage.