Real Estate Investing 101 Understanding the Different Types of Lenders
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Real Estate Investing 101: Understanding the Different Types of Lenders
Overview
In the past five years, financing options for residential investment properties have transformed dramatically. Lenders have relaxed credit and income guidelines, making it easier for investors to enter the market. Additionally, borrowers who qualify no longer need a down payment. This guide explores various lenders offering residential investment financing.
Types of Lenders
Lenders can be grouped into the following categories:
1. Conforming
2. Alt-A (Alternative A)
3. Non-Conforming/Subprime
4. Hard Money
These lenders provide loans for residential investment properties (1-4 unit properties).
Conforming Lenders
Conforming lenders, often referred to as A-Paper mortgage banks, cater to borrowers with excellent credit and documented income. They offer traditional loan products, such as full documentation and stated loans up to 90% loan-to-value (LTV). Loans with an LTV over 80% require private mortgage insurance (PMI).
Important factors for approval include credit score (minimum 620), payment history, debt-to-income ratio, employment history, down payment amount, and liquid reserves.
Examples: Countrywide, Wachovia, SunTrust, Flagstar, and local banks.
Alt-A Lenders
Alt-A lenders offer creative financing options for borrowers with credit scores starting at 660. These lenders have developed innovative products such as interest-only loans and Option ARM loans. Alt-A lenders provide flexibility with relaxed debt-to-income ratios, reduced income documentation, and no down payment options.
Examples: Aurora, GreenPoint, SunTrust, First Horizon, IndyMac.
Non-Conforming/Subprime Lenders
Subprime lenders serve borrowers with past credit issues, offering loans for those with bankruptcies, foreclosures, and other credit blemishes. They use a matrix to evaluate credit scores against LTVs, providing options for credit scores as low as 500. However, these loans come with higher interest rates.
Examples: LongBeach Mortgage, Fremont Investment, Meritage Mortgage, New Century Mortgage.
Hard Money Lenders
Hard money lenders facilitate the purchase of fixer-upper properties with no money down. These loans have high interest rates (12%-18%) and are based on the property's after-repair value. Loan terms are often short, around six months, making them suitable for quick property flips.
Example: InvestWell.
Available Loan Products
There are various loan products available, such as:
- 100% Investor Loan: Offered by Alt-A lenders, requires a credit score of 660.
- 95% Investor Loan: Available to those with credit scores from 600, offered by Alt-A and Subprime lenders.
- 90% Investor Loan: Requires a minimum score of 620 for Conforming and Alt-A, 560 for Subprime lenders.
- 80% Investor Loan: Same as above.
These loans can be fixed or adjustable-rate mortgages (ARM) and may include interest-only options to maximize cash flow. PMI can be avoided by combining a first and second mortgage (e.g., 80% first and 15% second).
Conclusion
This brief introduction highlights the residential mortgage landscape, assisting new investors in navigating the available lenders and products.
Author: Brian Anderson, Broker, Anderson Lending Group.
Contact: brian@andersonlendinggroup.com
Learn more at [Anderson Lending Group](http://www.andersonlendinggroup.com). Apply online for quick pre-approval.
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