How To Finance Rental Properties.....
What is the best way of financing rental properties? Is it through personal second home loans or do I do an invevstment home mortgage? I have a great credit score and prefer to do a no doc or a low doc loan. Any suggestions?
Why do you prefer a no doc loan?
Are you self or unemployed?
Understand that no doc loans charge higher interest rates, which will reduce your rental cash flow.
On rentals, you want to maximize cash flow, not diminish it.
[addsig]
I am self employed. I was wondering if I should keep purchasing rental properties as my second home or should I do an investment loan? I understand that the lower the costs and interest rate the better the roi. My thing is if I am purchasing the rental properties as a second home, I can only purchase 2 a year per name. Any suggestions? Thanks.
I told my lender I was going to living in the property, then I rent it out right after closing, because people do changed mind, that's how I get my 3 rental properties at the lowest rate. in my last purchase, I had my tenant to pay me non-refundable deposit before even closing on the property, The lender have no idea.
Don't tell them it's going to be a rental.
Good Luck!
Isnt that falsification on a legal document?
I am doing the same now but unfortunately one can only purchase a second home every 6 monthes to avoid suspicion from the bank. I like to purchase more in a year....
i have purchased 4 homes in the past 2 years. I tell the lender that I am going to live in it and SELL my current home. Then I usually rent it instead of selling my current home and I move into my new home until the next deal comes to me. I have used 4 different lenders and all of my loans are all no doc since I am self employed with a mid 700 Fico.
Uh, to the person above me... you know that is illegal right?? YOu probably shouldn't be broadcasting your illegal business all over websites...don't you think thats asking for trouble. Probably not the smartest thing you've ever done... right next to committing mortgage fraud.
Devlon,
I noted that several persons posting were dancing with the fraud issues. Why is the person who is moving into his purchases and then moving on to the next one committing fraud? Several lenders have told me that the industry does not try to control the future plans of buyers.
Thanks for your feedback.
Also, what is your opinion of the best ways of financing rental properties? My experience has my fico scores dropping the more I invest. :-?
I wouldn't say its ethical to say your going to sell it...but i don't think it is fraud. He is moving into the new house, which is the main problem most people run into (want to rent the new house that they say they are going to occupy).
If the bank thought the mortgage from the old house was too much they wouldn't finance until he had his "selling house" under contract with someone...its probably not necessary to say it.
Its really interesting to me that this question is almost identical to the one locate here Buying A Invesment As A Owner Occupied and yet the answers are almost exactly opposite.
I do think there is some difference if you actually move into the house for some period before buying another and moving there and renting the first. But who wants to move 4 or 5 times a year?
Anyway the interest rate boost is a lot cheaper than the fine if you get caught. Loan fraud is serious business.
To CEInvests,
In answer to your question, it is illegal because she did it with intent to rent it out. Its not like she purchased it with the intent to live in it. She purchased as an investment property with INTENT to rent out. This is illegal because when you are buying as a primary residence, you sign a LEGAL DOCUMENT saying you will occupy the property within 30 days. When you do not occupy the property, the lender technically could go by the property and see if you live there. If you do not live there, they have every legal right to cart you off to jail. I would suggest to just get an invesment property loan! I mean 100% loans can be done for non owner occupied, believe me, I do them all the time. Wouldn't you rather pay a couple more dollars a month to not do things illegal than to sit in jail for a couple of months over a couple of dollars?? It is a no brainer....
I don’t see how there is anything illegal about buying a rental with the intention of renting it "IF" you actually move in. Does the law say that sleeping there for a night or 2 with your sleeping bag isn't technically moving in and "occupying" the property :-D ?
I asked my mortgage man at the bank about this, and he basically said that no one really cares once the loan is closed as long as they get payed. This seems like one of those gray areas like doing sub2's with the due on sale clause
I see.
I follow.
I understand.
*Intent*
I am glad I am finding here better information, good articles, better solutions, links, and hopefully better contacts to allow me to continue to learn and grow.
Thanks.
Its ilegal because its the "golden rule". they who have the gold, make the rules. 1. your right, it is a stupid rule or law. who cares as long as you pay on time?
2. I can name lots of stupid laws, but I still obey them.
3.true, the chances of getting caught are very slim, but there is still a chance.
4. your guy at the bank says they dont care. but will he stand by you with that story if you do get caught?
I have thought very hard about "lying" or in this case"deceiving" or "not telling the whole truth" to get a better interest rate. I dont do it, not because I feel bad lying to the bank because I honestly think that banks are some of the greediest unethical people in the buisness(besides lawyers). I dont do it because I answer to a higher power and I believe that if I start practicing those methods then I am asking for trouble. but if you can sleep at night and dont believe in answering to a higher power then its your life and do what you like.
I don't think anyone is understanding what is going on... Here's a story. I pretend like I am going to buy a house and sell the house that I am living in. But in reality I have no intention of selling my house OR living in a new "primary residence." It has more to do than just intent. You cannot sign documents as an affidavit saying that you promise will live in the house and that your house is currently for sale... all of which are notarized... you can't just "change your mind." ... Especially on 4 or 5 properties like he said... is everybody not understanding that you are not allowed to falsify documents?? Meaning you are now allowed to sign documents that are not what you are actually doing??!! No wonder there is so much mortgage fraud my god...
The difference between Second Home and Investment Property is only 0.65% (on Average) for a loan $140k-333k (for lenders I deal with)
On 150,000 loan that is about 81 bucks extra. I think it is worth the peice of mind.
Most lenders only charge 0.500% higher.
GEEZ...
Is the moon turned sideways, did the world start spinning backwards, or is it just idiot posting day on TCI and someone forgot to mention it to me?
Buying investment properties as 2nd homes, primary homes, lying on Federal loan documents, etc and you people think that it is okay, or a "Gray" area? I'm really ashamed to see that society's moral compass has shifted so much that this many people can't seem to see this as a problem. These will be the same people screaming "foul" when they do get caught, and all their illegal activities, I sure, will be someone else's fault. They were innocent.
doll,
If you are currently purchasing rentals as 2nd homes, then STOP. It is illegal and unethical. Forget what the mortgage brokers tell you. Many will tell you anything to get you to close the deal with them. They won't, however, be willing to share the fines AND the jail time whenever you're caught. Loan fraud is serious. Get that in your head fast.
If you're credit is great and/or you've been self-employed for at least two years, then there are tons of legal investment loan programs with great interest rates and/or terms.
To vkdba, thechangingtable and others who believe that loan fraud is some sort of "gray" area. It isn't, and if your ethics are this jaded on this subject, I can only imagine how they are in the investing field as a whole. Please, do us all a favor. Either spend some time in an ethics class, or just get out of REI altogether. All your going to manage to do with those attitudes is make it harder for the honest, hardworking REI's to get financing (after you're busted for loan fraud, that is). You see, one bad apple can ruin a 100.
To HKS,
This is nothing like "doing sub2's with the due on sale clause." The DOS is not a law. It is a line within a contract. That contract clearly states the POSSIBLE penalities for violating it, namely that the lender can call the loan due IF they so choose to do so.
Committing loan fraud is a FEDERAL crime, punishable by heavy fines and long jail times.
In the former, the worst that can happen is that you'll have to do a quick refinance on the property (well, at least the ethical investors would. Others would probably just let it go back). In the latter, you get to spend thousands of dollars paying off fines, and more than likely 5-7 years in jail, all for a .5% point that will shave off $50/month from your payment.
To me, the choice seems obvious.
Roger
The extra cost in interest rate for an investor (NOO=non owner occupied) loan is really very minimal. It is better to pay the tad higher interest reat, and be able to do more deals and not worry about your integrity being called,...or worst yet, being called on the carpet for loan fraud, which is a felony offense.
I guess if somebody does get caught in loan fraud than we'll hear about it first here. If one was caught doing loan fraud I wonder if that will show up on your credit report for 7 years. If it does I'm sure that it will be real easy to get another loan from there on out! I would think that it would probably get posted on your credit report somehow. So that .5pts your saving now will probably cost you an extra 2 in the future. Doesn't make sense. I sure that there will be people that want to push the envelope all the time. It's not legal and if you choose to go that route than so be it.
HKS,
I understand the theory behind, "changing your mind," however, you're not going to get me to say, 'that's different, it's okay then,' because it's not. Namely because the person who posted that never intended to live in the property in the first place, so he never "changed his mind."
In fact, most lenders have safety nets for that very kind of dealings. If you have listed the purchase as a primary home, most lenders want to see proof that old primary is actually listed as for sale or better still a purchase and sell contract on the home, before they will lend the money. Usually the way these loans get processed thru is because of crooked mortgage brokers/buyers forging the documents. Sometimes, this is done without the buyer's notice or consent. Unfortunately, if they come looking to prosecute, ignorance is not an excuse.
So, back to the answer to your question, HKS. In all seriousness, your scenerio is pretty far out. Most people truly intending to move, either move or they don't. They don't move in, and decide they like the old better and move back. In fact, in your situation, it would be much more likely that the previous home would become the rental, not the newer home.
Roger
Thanks for the reply and the info. I think I know understand that true mortgage/loan fraud involves the broker or loan officer; because an honest one would never forge or falisfy documents and would be up front with the borrower.
So are there any laws against financing house 1 as your primary residence, and then buying house #2 as your new primary residence and then renting house 1? I know there becomes a point where you wont be able to do any more conventional financing, but could you legally do this a few times to get going?
So are there any laws against financing house 1 as your primary residence, and then buying house #2 as your new primary residence and then renting house 1? I know there becomes a point where you wont be able to do any more conventional financing, but could you legally do this a few times to get going?
HKS, forget this idea, man. All it is going to do is get you in trouble. There is simply no reason to lie to about how you truly intend on using the property. Just to get a 1/2 % point off the interest rate sure isn't worth it.
To answer your question, yes there are laws. That is what this whole post has been about. Buying house 1 as a primary and then turning around and buying house 2, then renting 1 would still be committing fraud if you never really intended to live in house 1.
In the situation I posed in my previous post, where a seller is trying to sell their 1st house unsuccessfully after already buying another property and they choose to rent is different. It is different because the seller has already proven that the first house was intend a primary because they have generally lived in the property 3-7 years or better. By that time, it is very clear that they didn't lie on their loan application about primary residence. Now, if you want to live in each of your properties for 2-3 years before converting them to rentals, it would probably work, however, that's not a very rapid method in order to get started.
Roger
PS
Oh, and just to throw this out. Even if you have proven (via length of time living there) that the property was indeed a primary residence, the lender could still request that the loan be converted (or refinanced) into an investment loan program if or when you do convert it to a rental.
Mortgage fraud -- lying on loan documents to deceive lenders --
is a federal crime punishable by up to 30 years in prison and $1 million in fines.
The FBI has a Mortgage Fraud task force, I don't know about you but I don't want to talk to them.
This is some good reading http://realtytimes.com/rtcpages/20040226_occupancy.htm
Answers to the original question, “What is the best way of financing rental properties? Is it through personal second home loans or do I do an investment home mortgage?”, has lead this discussion into an ethics debate. Kudos to all those who have raised the ethics bar to its proper elevation. To take this issue from gray to black-and-white in each individual situation, read the mortgage that you put your signature on.
All of the Mortgages, new and refinanced, that I have signed on the homes which I lived in have an occupancy clause similar to the following:
Borrower shall occupy, establish, and use the Property as Borrower’s principal residence within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower’s principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing, which consent shall not be unreasonably withheld, or unless extenuating circumstances exist which are beyond Borrower’s control.
Read your mortgage’s occupancy clause. If it states as above and your family doesn’t mind uprooting and moving every 12-13 month’s more power to ya. If you refinanced today, spend the next year preparing to buy your next residence, knowing that you won't be able to move until you have fulfilled the occupancy requirement of your mortgage. And when you apply for the loan on your new house, tell the lenders that you intend to rent out your existing home. If your income supports your debt ratio you won’t have any problems getting approved. If it doesn’t, the lender will probably require that you have signed 12 month lease before closing in order to use the rental income in their justification calculations.
There’s my contribution. Now my question: the last two-three years everybody and their brother has refinanced at the lower rates. Why not buy properties where you can assume the current loan? No points. No origination or appraisal fees. I know that in most cases you will need written approval from the lender and that it is wise to verify whether the loan is an ARM or a fixed rate. Are there any other pitfalls or laws that keep investors from assuming residential mortgages? Do lenders tend to approve or disapprove investors request to assume their loans?
Regards,
David C
....Yes, lets keep this going since the original question is a good one....
I assumed a qualifying fha NOO in 1991 and it has served me well.
I have a cofi loan on my primary that is supposed to be assumable per docs and I want to put that fact into my listing(to sell). However, I am told that it is up to the 'investor' of that loan.
My attempts to assume loans in the last few years have fallen on deaf ears.
David,
Most loans out there aren't assumable anymore. I came across a FHA 1last week that was, but it stated that I must live in it. Those are few and far between.
Original Question
The best way to do it is get a loan. Shop around to a least 6 brokers, see who has the best deal and who is going to get you the best rate. Don't let them pull credit. Tell them what your score is and what your doing. Some charge more points than others. Bargain with them.
There are several points here that still need to be addressed. One is that it is not a stupid "law" re: investment property financing is diffierent. We live in an economic situation that dictates that lending is risk-based. Period. Investment properties are a riskier proposition for the lender than second homes. "Second homes" are riskier loans than primary residences. Just like making a fraudulent insurance claim, obtaining a mortgage loan under false pretenses costs ALL of us money. The rates are higher and the LTV lower simply because they involve higher risk to the lender. The lender knows they are going to have more defaults, therefore they have to "charge more" to cover their losses before the fact. Do you want your renters lying to you to skip rent or lower rent? How many do it? Do you care?
It is an economic reality that lending is based on weighted risks: credit, assets,income, type property, intent. Any banker /lender that tells you otherwise isn't really the one who is lending the money or taking the risk. (I am specifically talking about general lending practices, not on a case-by-case situation with your personal banker who knows you.)
Next, if you don't think you won't get caught, you should attend the next Mortgage Broker or Banker Tradeshow and go to a workshop on fraud and see what happens when you are caught. All it would take is one phone call from one person who would like to see you fail. Both state and federal (FBI) entities have strict laws pertaining to these scenarios. Just because you don't think you are on the radar scope doesn't mean you aren't taking a huge risk. Trust me, it is not worth it. As mentioned in an earlier post, there is financing out there for all scenarios including 100% stated income investment property purchase. The checks and balances are there for a reason. Trying to "get something for nothing" or subvert the system for your own personal gain is not something that fellow investors should tolerate. I am a mortgage broker, and I will do everything I can to facilitate a buyer into a property, but I am growing weary of persons justifying their illegal and unethical actions by stating that the rules are unfair, just to advance their own personal financial agenda. Whether you follow a higher power or not, our country is what it is because there are systems in place to protect us all. You cannot pick and choose what system or procedure applies only to you.
Ahem, Brother
"nuff said, turn out the lights, the party's over.
Roger
Wow, Now I am a mortgage broker and I will tell you that I would personally never work a loan for someone that I would expect would do this. Why? Because the key word is "intent"-which is fine-situations happen, etc but it's hard to justify in front of a judge-other other law person that you intend on living on a place while you are buying more than one. Yes, you have a better chance of "getting away": with it doing a no doc loan (no tax returns) but, I wouldn't want to be the one they make an example of. One thing I would guess they would have you show proof of is utility bills, your tax return-not showing you listing it as an income producing place, etc. People always try to beat the system and, with rates being as good as they are, why take a chance? If you got away with it so far, congratulations but, as the other post said, their are 100% investmentloans out there now with pretty low rates. Mortgage fraud seems like a pretty petty event to everyone considering the murders, etc. that go on but, there are people doing jail time for just that reason. make sure it's worth the risk before you jump in and do it and, like the other post said, don't be bragging on a web site. You just never know who reads these posts.
If you find a broker/lender ths\at is willing to sign the paperwork and lie with you for a paycheck, I'd run as I don't think they'd have the morals to trust but, do what you want just don't deceit a good broker and take them down with you. Tell them your intentions and if they want to help and risk their career, go ahead. Like stockbrokers and landlords, our industry is guilty until proven innocent in the eyes of a judge. give them a chance to say "no thank you" before risking their livelihood. I';m amazed so many people actually came forward with these responses? Wow, scary! Good Luck with whatever path you take.
Lights on!
!! No More Fraud talk, tho, cuz really, I know I get it. And honestly, I appreciate it. !! BUT NO MORE.
Can we carry on with some assumption ideas, tho? I know its different than 'before' , but still ... anything working?
ceinvests,
Yes, I know of investors who buy a property, move in, fix it up while they are living there, and then resell it. However, there are key differences in doing that and buying property as a "2nd home" or a primary with the "intent" to live there.
First, the investor is actually moving into the property, and not just a short-term "just for show" move. It comes complete with furniture, address change, and the rest of the family.
Second, the investor actually lives in the property for the minimum required amount of time that the contract stipulates (see above post). In fact, nowadays, investors doing this usually stay a minimum of 2 years because of the tax break for selling the home (tax free income).
Roger
I couldn't have said it better myself. If I wanted to lie, cheat, and steal there are way better ways of doing it than real estate. ""What profiteth a man if he gains the whole world and loses his soul?" I
Quote:
On 2004-10-19 13:49, dlitedan wrote:
Its ilegal because its the "golden rule". they who have the gold, make the rules. 1. your right, it is a stupid rule or law. who cares as long as you pay on time?
2. I can name lots of stupid laws, but I still obey them.
3.true, the chances of getting caught are very slim, but there is still a chance.
4. your guy at the bank says they dont care. but will he stand by you with that story if you do get caught?
I have thought very hard about "lying" or in this case"deceiving" or "not telling the whole truth" to get a better interest rate. I dont do it, not because I feel bad lying to the bank because I honestly think that banks are some of the greediest unethical people in the buisness(besides lawyers). I dont do it because I answer to a higher power and I believe that if I start practicing those methods then I am asking for trouble. but if you can sleep at night and dont believe in answering to a higher power then its your life and do what you like.
Thanks for all your input! I did not realize one can obtain an investment loan with less then 20% down and no doc. All the financial institutions I have spoken with wants either 20-30% down for an investment loan. If anyone knows of a reputable nationwide mortgager, please let me know. Thanks again for all your input!
hugoboss08,
hopefully your post will be deleted for " being an idiot" but until it does, I think a response is in order just to clarify for anybody else reading.
First, if you have a FICO of 750 or over, it's hardly worth lying on your application to get a 1/2 % better rate as you will be at the lowest possible rate anyway. Also, it will NOT have a prepayment penalty, and adjustable is up to the customer.
Second, So is it ethical? NO, it is NOT ethical to lie on your loan application. Will a bank actually check? No way Yeah, I'm sure that is exactly what everyone in jial for mortgage fraud thought as well. You must not have even taken the time to read this post completely or you would have noticed the post about federal mortgage fraud investigators. Do they check? You bet they do. The broker will never send business over to that bank No, he probably won't. If you're lucky, he'll get to be your cell mate instead of Bruno, the pretty-man's best friend.
Third, PLAY THE GAME Before you start spouting that crap, maybe you ought to learn some of the rules. Number 1, THIS IS NOT A GAME. REI is a business and should be treated as such. Number 2, LYING ON YOUR LOAN APP IS FRAUD. This is a crime. More importantly, this is a federal crime. "Play the game" if you want, but don't encourage others to follow you in illegal activities.
doll,
Stop speaking to financial institutions (and especially national lenders) and start speaking to local banks, or better still, a good, preferrably referred, mortgage broker that specializes in investor type loans. You will simply be amazed at how easy, and legal, it is to get good quality investor loans.
Roger
Devlon, what kind of interest rate are you getting on 100% finance loan? I've looked into them and the interest rate usually comes close to or exceeds the cap rate on the property.
Devlon, what kind of interest rate are you getting on 100% finance loan? I've looked into them and the interest rate usually comes close to or exceeds the cap rate on the property.
It will vary... PM me as I will need more detail to the transaction.
I work for a major lender.Senior Loan officer And yes intent to rent and stating a 2nd or primary is illegal. A small percentage of our loans are audited by fannie mae. Its not a good idea . I know everyone wants the lowest rates but there are laws and regulations. I normally dont call back people who are lying to me.