Living Well Blog - Hilton Head, SC

Today’s unique environment of low real estate prices and historically low interest rates make purchasing investment real estate attractive.    

Despite changes in lending guidelines, it’s still possible and affordable to finance a non-owner occupied property. But lenders these days only make loans to investors who plan to hold the property for the long term, rather than “flipping.” Lenders also are making loans only on properties that can generate revenue rather than those strictly held for appreciation.    

During the real estate boom, many inexperience real estate investors purchased properties solely for their potential appreciation in value.  Lenders also got caught up in this irrational exuberance and allowed these investors to highly leverage their real estate positions. In other words, you could borrow a very high percentage of the price of the real estate investment. This allowed investors to purchase more property, creating more demand and more value appreciation through this demand. Then came the real estate downturn, and lenders have become more cautious.    

First, let’s look at what’s possible in the current financing environment. Because many lenders have curtailed their in-house lending on investment properties, the primary source of mortgages for investments is through loans that are eligible for sale to either Fannie Mae or Freddie Mac. These government-sponsored agencies still allow non-owner occupied financing at very competitive rates; however, the loan must fit their guidelines.     

There are three steps to qualifying for a government-agency backed loan. First, the borrower must demonstrate solid credit, sufficient income to carry the new debt, and adequate assets in reserves. Second, the property must be appraised to assess its value as well as its potential for rental revenue.     

Finally, if the property is a condominium, the homeowners’ association will need to fit Fannie Mae and Freddie Mac guidelines. This involves reviewing the overall financial well-being of the association, and making sure that it is a purely residential complex. If the complex is experiencing financial issues or if it appears to be more commercial than residential, Fannie Mae and Freddie Mac may not purchase loans made on units in the complex.    

The good news is that when the borrower and the property are eligible for a government-agency backed loan, rates and terms are very favorable. The borrower will need a minimum 20 percent down payment; even lower rates are available to those who make a 25 percent down payment.    

Unfortunately, there are several property types and transactions that will not fit Fannie Mae and Freddie Mac non-owner occupied guidelines. These include unimproved lots, construction transactions on investment properties, and condominiums that are do not meet the agenices’ guidelines discussed above. 

I’m not advocating avoiding these types of properties or investments altogether, but want potential purchasers to understand the challenges in securing financing for them. Instead of a typical mortgage loan, investors may look to alternative financing sources, including equity in other real estate or asset based lending. This will require more planning and flexibility on the part of the successful investor.    
As always, it is important to work closely with your Realtor and mortgage lender. There are great opportunities that can be had in today’s market. If you need more information, please contact a member of the Mortgage Lenders Association of Great Hilton Head Island.    

Ric Spiehs is a mortgage lender at SunTrust Mortgage on Hilton Head Island and executive vice president of the Mortgage Lenders Association of Great Hilton Head Island.