All Loan Programs Are Not Created Equal

Loan programs and guidelines are constantly changing. The fallout from the last recession taught us that, if nothing else. It seems like once you have them figured out, they can change on a dime. It is important to know that not all guidelines and programs are created equally. What works on a primary residence purchase will not fly for an investment property. The same is the case for commercial purchases and even lines of credit. Without some basic knowledge of these guidelines, you may spend months preparing for a purchase that you are not qualified for. Before you consider any type of purchase or refinance, you should know what is needed and what you can do. Here are some general loan guidelines regarding five different financing types:

1. FHA loan: If you are just entering the business, an FHA purchase can be a great option. FHA (Federal Housing Administration) offers reduced down payment and lower interest rates for borrowers buying a primary residence. New investors can use this mortgage type to buy a two-family house. They can live in one unit and rent the other while learning the business. FHA loans allow you to put down a minimum of three percent, with credit scores as low as 620. The downside is that the PMI (private mortgage insurance) is for the life of the loan, until you sell or refinance. Another drawback is that the property needs to pass strict guidelines. Any type of peeling paint, hand rails and many other smaller items need to be fixed before they will agree to finance. This option is only used for primary residence borrowers.

2. Conventional Investment loans: Many investors still utilize traditional lender financing to purchase their properties. This area of the market has undergone dramatic changes over the years. Last decade, when the housing market was at its peak, there were numerous stated income programs with little to no money down. Those programs are a thing of the past. Today, the typical conventional mortgage loan will require anywhere between a 20-30 percent down payment. Additionally, credit score minimums are much higher than they have been in the past. Most programs require at least a 700 score, with some as high as a 720. There may also be reserve requirements depending on the rest of the loan application. This money will need to be in an existing account for at least 60 days. If that wasn’t enough, the underwriting requirements are long and the process can be anywhere from 30-60 days. The positive is that interest rates are still low, and there may be multiple options to choose from.

3. Primary residence loans: There is a fairly big difference in a purchase used for an investment and one for a primary residence. Instead of a minimum 25 percent down payment, you may be able to get away with only five or 10 percent of the purchase price. The reserve requirements are not as demanding and interest rates are reduced. Additionally, the minimum credit score does not need to be nearly as high as an investment property. An investment loan is viewed as a much higher risk factor compared to primary residence loan. Many of these loans are underwritten online, so you will have a good idea of what you will need before the loan is sent to a lender.

4. Commercial/mixed use: Any property over four units is considered a commercial property. The guidelines change dramatically once you cross this threshold. For starters, the down payment requirements jump to at least 30 percent of the purchase price. The credit score minimums are very similar to an investment purchase, in that you will need at least a 700 score. The biggest difference with a commercial property is with how the property is valued. Commercial properties take into account how much rent is being generated. Rent rolls, utilities and other expenses are factored into the value and the approval. Closing costs are much higher on this type of property, and the average underwriting time is much longer as well.

5. Home equity line/loan: If you have equity in your property and are looking for a way to pull some cash out, a home equity line may work for you. Like all other loan programs in today’s market, having equity may not be enough. You need at least 20-25 percent equity and a strong credit score. The value will be given by an independent appraisal. What you think you know may not always be the case. The positive is that the loan process is much easier than any of the others mentioned. It is also the least expensive, as there are no attorney or other miscellaneous fees. In fact, many local lenders will offer home equity lines of credit without closing costs. With the current prime rate at historically low levels, this is often a better option than a refinancing.

The amount of due diligence that you put into a new property should be the same as you put into staying on top of loan programs. It is important to develop a relationship with a local lender or mortgage broker to stay on top of any changes. You may not think you will need or want a mortgage right now, but you never know what your business may have in store in the future. Having an idea of the guidelines and what they offer gives you some time to accumulate these items before you take action. You don’t need to be a mortgage expert, but you should have a basic understand of what you can and cannot do.