100% No Doc Investor Financing - Are Lenders Like Me Nuts?

100% No Doc Investor Financing – Have Lenders like Me Lost Their Freaking Minds?

 

 August 21, 2005 – Weston, Florida

 

I guess you could say that I’m somewhat experienced with investor financing.  But my experience did not prepare me in any way for the onslaught of super aggressive, high loan-to-value, no documentation investor property programs that have been introduced recently!   I can’t believe what’s out there?

 

I mean, I though the program that I used to close on my Port St. Lucie home was pretty strong – stated income, investor property, 90% financing.  Start rate – 2%.  But these new programs, including 100% financing for investor properties – no doc! – have me worried about my industry.

 

Incidentally, for those of you who read my blog on my acquisition of the Port St. Lucie investment property, I now have a tenant in there.  He’s paid me first and last month’s rent and a security deposit.  All this before I made my first mortgage payment. 

 

I looked at his credit report and checked his references.  I’m slightly cash-flow positive on the property between my ridiculously low mortgage payments, taxes and insurance and I have approximately 67% equity in the property.  So far, so good.  I’m still planning on holding this place for a year and one day, then selling for a nice profit with favorable long term tax consequences.  (Although with prices going up almost daily, it's becoming increasingly more tempting to sell now!) Maybe I’ll roll the profits into another property via a 1031 Exchange.

 

Back from my digression – I’m dumbfounded at these new, risky programs that I’m able to offer.  I have investors to whom I sell my mortgage paper that I think are flat out nuts – but that’s good for you, me and the rest of the Florida real estate investment world!

 

Think about it – they’re offering 100% financing on investor property with no, I mean zero, documentation:  no income, no assets, no source of income disclosed!  This means, effectively, that these programs say – go ahead, if you’re credit is decent, go buy an investment property.  I don’t care how much you make.  I don’t even care where you work, or if you even have a job!  And don’t bother showing me whether you have any money in the bank, either.

 

Keep in mind that investor property presents more risk to a lender than owner-occupied property.  Why?  If something bad happens in a borrower’s life – decrease in income, sickness, etc., the first mortgage payments to go are those for the investment property.  Most people will scratch and claw to keep their homes while letting everything else go first.  That’s why investor property carries more risk, and features higher rates, than mortgages on primary residences.

 

That’s a nice segue to a discussion on rates if I say so myself.  Of course rates for these products are not pretty, compared to what’s currently available for less risky borrowers. But in many instances, it makes sense to pay the higher rates instead of tying up cash that you’d rather not use. 

 

I just ran an analysis for an investor who was contemplating putting down 10% on a $350,000 property, or $35,000.  She needs this money for six months, because she will commence building on the property then via a construction loan.  I showed her that it would cost her an extra $6,000 in interest payments over a six month period to obtain 100% financing.  In other words, it costs $6,000 to get $35,000!  A no-brainer.

 

One thing that bothers me as a mortgage professional – how do these investors of mine make any money?  Are these products a loss leader for them, or is there something that I’m overlooking?  I’m really scratching my head.

 

But if I’m in investor, who cares?  The money is out there for you!  Take advantage of these 100% no doc investor programs while they last!  In a future blog, I’ll cover some of the pros and cons about 100% financing.