Real Estate Investing 101 - Understanding the Different Types of Lenders

The changes in financing options available forThese lenders typically price their loans using a matrix
residential investment properties over the last 5 yearsthat evaluates credit score in relation to loan-to-value.
are staggering. Lenders have relaxed the credit andSub prime lenders will offer financing to borrowers with
income guidelines for qualification that formerlyas low as a 500 middle score, and even have
deterred many would-be investors from entering theprograms that cater to borrowers with excellent 700+
real estate. In addition, the down payment requirementscores. The sweet spot for most of these lenders is a
has been eliminated for borrowers who qualify. This580 or better middle, as they will provide 100%
article surveys the landscape for lenders offeringfinancing for owner-occupied properties at that score.
residential investment financing products.For investors using sub prime lenders begin to offer
Types of Lenders:products for borrowers with a 550 credit score.
The lender landscape can be broken into the followingThe important thing to understand about these loans is
broad categories:that they are priced much higher than a conforming or
Conformingeven Alt-A loan.
Alt-AThe most popular product with these lenders is a
Non-Conforming or Sub prime2-year Arm, with the idea being the borrower will
Hard Moneyrefinance or sell the property in 2 years. Also very
Each of these offers loans for residential investmentcommon with these lenders is a mandatory 2 or 3
properties ( 1-4 unit properties).year pre-payment penalty.
ConformingSome examples of leading Sub prime lenders are
Conforming lenders are the A-Paper mortgage banksLongBeach Mortgage(division of Washington Mutual),
that cater to borrowers with excellent credit historyFremont Investment and Loans, Meritage Mortgage
and the ability to document income. Conforming banks(division of NetBank), and New Century Mortgage.
offer loan products that can be considered “plainBesides these, there are literally hundreds and
vanilla” in today’s world of interest-onlyhundreds of lenders that have emerged to fill certain
ARMs and low down payment loans. In terms ofvarious sub prime niches.
investor loans, conforming lenders offer full doc andHard Money
stated loans up to a 90% LTV. A loan from aHard money lenders serve a very simple purpose
conforming lender with an LTV greater than 80% will– they allow the purchase of
incur private mortgage insurance, or PMI. (Learn more“fixer-upper” or rehab properties with no
about PMI at: [ ) Conforming lenders always require amoney down. These lenders offer programs that none
minimum of a 620 credit score, and use aof the
computerized underwriting process to determineHard money lenders are typically private individuals or
approval. Besides credit score, other important factorssmall companies that make very high interest rate
for approval include: payment history for mortgage andloans (between 12% and 18%) based on the after
revolving accounts over the last 24 months,repaired value of a property. They will lend the money
debt-to-income ratio, employment history, amount ofto both acquire and fix-up the property, up to a LTV of
down payment, and the amount of liquid reserves.65% or 70%. The loan term for most hard money
Some examples of leading conforming lenders arelenders is 6-mos.
Countrywide, Wachovia, Suntrust, and Flagstar. WhileThese lenders are a great, albeit expensive, way to
these are national lenders, any local bank or savingspurchase rehab properties. After doing the renovation,
and loan would fall into this category.one can refinance out of the hard money loan with a
Alt-Aconforming/Alt-A/Subprime long-term loan.
Alternative “A” credit lenders, or Alt-A,A good national hard money lender is InvestWell ---
offer aggressive loan financing products catering tolearn more about them at: [ .
borrowers with credit scores from 660 and up. WhileWide Range of Products
these lenders offer programs to borrowers withSome of the various products that are available today
scores down to 620, the aggressive programs areinclude:
typically not available to borrowers below a 660 middle100% investor loan – 1 loan or 80/20
score. Alt-A banks have driven the creation ofCredit scores begin at 660 – only available from
innovative loan products over the last few years.Alt-A lenders
These programs include the many interest-only95% investor loan – 1 loan or 80/15
products, the Option Arm loan, loans requiring as littleCredit scores begin at 600 – available from Alt-A
as 5% and now – no down payment, as well asand Subprime lenders
standard fixed-rate and arm products. The big90% investor loan – 1 loan or 80/10
difference with these lenders is the relaxedCredit scores begin at 620 for Conforming and Alt-A
debt-to-income ratios available, the reduced incomelenders and 560 for Subprime lenders
documentations (stated income, no income / no asset,80% investor loan
and no doc), and the ability to add interest-only to mostCredit scores begin at 620 for Conforming and Alt-A
products. Alt-A lenders have popularized the use oflenders and 560 for Subprime lenders
80-10 and 80-15 loans for investors to avoid PMI.All of the above can be found in either a fixed or
Some examples of leading Alt-A lenders are Aurora,ARM, and can usually have an interest-only option
GreenPoint, SunTrust, First Horizon, and IndyMac.added to help maximize cash-flow. While any loan with
Besides these, there are literally hundreds anda LTV above 80% will typically incur PMI, you can
hundreds of lenders that have emerged to fill certainavoid this unnecessary expense by
niches.“piggy-backing” a first and second
Non-conforming / Sub primemortgage together – eg. 80% first and a 15%
Non-conforming or sub prime lenders fill a growingsecond.
niche – borrowers with past credit problems.The above is a real brief introduction to the residential
These lenders offer fixed and adjustable loanmortgage landscape, and should help orient new
programs for borrowers with bankruptcies,investors to the available lenders and products
foreclosures, judgments, tax liens, charge-offs, andavailable.
many other credit blemishes.