If you’re buying an investment property, it must have positive cash flow. I know that sounds obvious, but you’d be surprised. Some properties only work if they’re purchased for cash, others for as little as 20% down. We can show you that you’ll probably make more money buying 5 properties with 20% down (or 4 with 25% down) than one for cash.
Our goal is to find properties for you that are move-in ready (maybe they need a fridge, washer and dryer) and that’s about it. Just add a tenant and start making a profit (sometimes there’s already a tenant in place!)
Today, I want to discuss the upcoming changes to the world of lending. I’ll warn you right now, it’s not pretty. Many buyers have been focusing on declining prices and that’s certainly a factor when making a purchase. However, the government and lenders are instituting guidelines which will make closing on a mortgage more expensive, while reducing your buying power.
If you’re purchasing a home as your primary residence, you’re most likely getting an FHA loan, which only requires 3.5% down payment. Because you’re putting down less than 20%, you will have to pay mortgage insurance. Beginning April 18th, the monthly mortgage insurance premium is going up .25%.
Let’s say you’re buying a house for $163,000. Right now, the mortgage insurance premium is $118/month. With a .25% increase, the premium will go up to $151/month. That $33/month bump is going to decrease your spending power because the loan amount you can get approved for will go down.
Interest rates are also rising. In November, the interest rate was 4.17%. On a $170,000 home, the mortgage payment was $828.36. The rates now are around 5.05%, which puts the same house payment at $917.80. So buyers who are getting financing need to focus on today’s costs versus the price of the property as their primary motivation.
Is this the end of the bad news? Unfortunately, no. Fannie Mae just released their “Loan-Level Price Adjustment Matrix” and based upon credit score, loan purpose, occupancy, etc., they’re going to charge you more beginning on April 1st. These extra charges will increase your closing costs. Here’s a few examples:
– FHA or VA loan – 1/4 point
– 30 yr FHA loan with 3.5% down with credit score below 700 – 1 point
Using these numbers, the closing costs on a $125,000 mortgage will increase by $1,562.50. To reiterate, your buying power will decline once these rates go into effect. These changes really hurt people with less than perfect credit (almost everyone, but particularly first-time home buyers.)
There is also a big push for 15 year mortgages. If you get a 30 year mortgage, have a credit score of 679 and put down 15% – you will be charged an additional 2.75 points. On a $125,000 mortgage, that’s an additional $3,437.50! Folks, this begins on April 1st. One solution is to start improving your credit score now.