I have written many articles on how the national economic crisis continues because of the tightness of the credit markets and the failure of banks to make loans to qualified borrowers. However, I am encouraged to see that many local institutions are eager to provide funding for real estate acquisitions, construction and development. This is great news for the people looking to buy or sell their home, develop a tract of land or begin a construction project.
Local banks are a part of our community, understand the market and are committed to providing funds to foster growth and prosperity. Unlike their larger brethren, many local institutions avoided speculative investments, have strong balance sheets, few foreclosures and a willingness to make loans. These banks put their capital to work in the local economy, supporting jobs, businesses and homeowners.
What do real estate professionals need to know about the new loan landscape?
First, credit and mortgage programs have changed dramatically in the past year. Most of the “no document” programs have been eliminated, so borrowers will need to provide a number of supporting items to qualify for a mortgage (see list below). Of course, there are exceptions to these rules, use the list below as a guideline.
Local banks are providing loans to qualified borrowers with these terms:
– Loan amounts up to $417, 000 conform to FHA programs.
– Interest rates are presently 5.25% to 5.75%.
– A realistic appraised value of the property.
– Property loan to value (LTV) ratio of 80%, although there are programs that will go as high as 95% LTV.
– Some savings, cash or liquid investments.
– Proven source of income, two years tax returns.
– A good track record of handling debt.
– Cash flow sufficient to cover all debt.
– Property cost to income ratio of 31% – 34%.
– Total debt to income ratio of 41% or less.
– A good credit score, this means a credit score above 700. Many of the loan officers I have spoken with stated they would consider a lower FICO score of 640 depending upon borrower qualifications.
Debt to Income ratios and Loan to Value ratios are very important when it comes to winning a mortgage.
– Debt to Income ratio is the amount of debt service compared to income.
– Total debt to income ratio ranges from 39% – 41%.
– To find total debt to income ratio: add up all outstanding minimum payments for credit cards, auto loans, HELOC, etc., plus mortgage payments and divide that amount into your monthly income.
– Mortgage debt to income ratio ranges from 31% – 34%.
– Mortgage debt is principal, interest, taxes and insurance.
– Loan to Value is the mortgage amount compared to the property’s appraised value or purchase value which ever is lower.
The good news here is that banks are providing loans for real estate purchases, renovations and development. This lending activity will help stabilize the real estate market, drive sales and spur construction spending ultimately leading to an improved overall market.
There are trillions of dollars sitting on the sidelines waiting for an opportunity to be put to work. Investors can realize a very good return on their investment by taking advantage of lower real estate prices, historically low interest rates, tax breaks for home purchases and the willingness of local institutions to lend.