According to National Realty Investment Advisors, investment in real estate is truly thriving—despite some significant changes to mortgage regulations, many of which remain poorly understood by property investors. Certainly, the reasons for real estate’s rise are numerous. As a MarketWatch report makes clear, interest rates are still hovering near all-time lows, and property values are improving almost across the board—despite being off from reaching 2007 highs. The article notes that 76 percent of consumers remain wary of equities, while Design & Trend reports that millionaires see real estate as the number one investment of 2014—all pointing to property investment as almost a “no-brainer”.
What all of this suggests is that real estate investment is going to continue to climb in 2014, but before investing, it is important for the investor to understand how new mortgage lending rules could impact their portfolio. “The new regulations, which went into effect on the first day of January, will have a direct impact on many investors’ plans,” comments Rey Grabato, Managing Member of National Realty Investment Advisors.
What the New Regulations Say
The article from MarketWatch summarizes these changes to mortgage regulations. “Credit requirements have tightened, in some cases dramatically, and lenders are now also looking at the number of leveraged properties an investor owns — not just the equity of those homes — before lending any more cash for any purpose,” the article states.
Mr. Grabato of National Realty Investment Advisors adds: “These regulations were not meant to complicate or stymie investment activity, and they should not have a negative impact—they just require a strict adherence to proper tax and asset documentation. Fortunately, the regulations still allow that new properties just put in service can have their rents counted to offset mortgages.”
New Mortgage Regulations at a Glance
In fact, the new mortgage regulations in question were actually developed to keep consumers safe. They were drawn up by the Consumer Financial Protection Bureau, created through the enactment of the Dodd-Frank Act. Many of these new regulations are designed to protect homeowners from past abuses made by lenders and mortgage services—while others are designed to ensure that borrowers will not have trouble making their payments, and that they will not end up with more debt than they can handle. Dan Hirshout of NRIA adds: “The days of bank liars’ loans and no documentation loans have really already been over for 5 years. This combined with the independent arms length ‘blind’ round robin appraisal process means buyers are legit and sales values are true. These past five years of write-offs and strong credit rules like these have given us the safest realty investment market in US history.”
The new mortgage regulations are significant, but that is not necessarily to say that they are all-encompassing. In fact, just the opposite is true. “The new rules don’t affect the vast majority of people seeking a new mortgage or who want to refinance an existing one,” notes MarketWatch. “According to the CFPB, only 12.8 percent of mortgages originated in 2012 don’t meet the new standard.”
Specifically, these new rules strictly define a “qualified” mortgage as up to 30 years amortization with a borrower’s maximum debt-to-income ratio at 43 percent or lower, with no negative amortization or interest-only payments allowed.
New Rules and What They Mean for Real Estate Investors
What do the new rules specifically mean for investors? Art Scutaro, Senior Project Manager at National Realty, explains, “The big thing for investors to note—whether they are seeking to rehabilitate a property for rental income or for re-sale—is that the inherent equity in the property must be there along with your full documentation to buy it.
MarketWatch explains further, “If you want to invest in real estate, either to improve and quickly resell (flip) or to generate rental income, you must also know that Federal Housing Administration loans, which require modest down payments, now have lower maximums than before. The top loan amounts vary from state to state, and even within states; in some places, like Florida, the top FHA loan amount plummeted from $417,000 to $285,000 for a jumbo mortgage. So if you have your sights set on a high-end flip or a multi-unit rental property, be prepared to pony up a lot more cash up front if your in such a revised state.”
”Fortunately,” says Adam Levine, Assistant Project Manager & Sales Support Rep at National Realty Investment Advisors, “ that low limit and reductions do not apply to our city, Philadelphia – which also offers investors 10 years of no property tax.”
National Realty also notes that, for more modestly priced properties, the best rates for investment properties tend to require higher down payments than are typical for primary residences—often 25 percent down as opposed to 20 percent down, for a standard mortgage. “Still” says Grabato, “We have many 100 percent financing techniques for the right quality of investment property applicant.”
There are other ways in which real estate investors may find some of their efforts complicated by new regulations. Those who own several properties and want to use the equity in them to buy other properties—or to refinance existing ones—may be turned down. “Lenders are setting arbitrary thresholds for the number of mortgages a person can hold,” the MarketWatch article notes. “In some cases, that number is four.” Notwithstanding, Linda Bennett, Refinance Manager states: “NRIA has sources for up to 20 mortgages per qualified applicant.”
In some instances, home equity lines of credit are also being canceled, at the lender’s discretion; MarketWatch advises investors to “read the fine print.”
A New Era for Investors
All of these new stipulations may seem unwelcome for real estate investors—but these are not setbacks so much as causes for recalibration. Market Watch says that real estate investors can still profit from their investments so long as they adapt; the article advises investors to make investment decisions with the expectation of a long-term hold; to build a financial model around liquidity; and to grow portfolios by buying properties with the greatest return from asset appreciation.
“Investors are encouraged to think about how these new regulations will impact their overall, long-term strategy, and feel free to join us for a one on one strategic investment planning session to navigate these curves gracefully” affirms Rey Grabato, of National Realty Investment Advisors.
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