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Can you get a bank loan if all you have nothing in your name, and you are a salary/wage earner? Lets say this is for a house.
I have a cousin who is recently married, and he nor his wife really make that much money, and I dont think they owned anything, yet they were able to buy a home in a decent area of NJ, so you can imagine how much that costs. Come to think of it, my parents did the same thing. They worked menial jobs but bought a house with a loan from the bank in like the early 80s.
Can it really be that easy to get a bank loan? I dont think my cousin nor his wife could really put down that much down payment either. I mean, with what salary and pay has been for the last fifteen years, I cannot see anyone putting down a down payment on these real estate prices unless you work for an I-bank.
Keep in mind when you 'buy' a house, the bank with mortgage, 'owns' the house till you pay it off. Banks want to see you can make the payments for the house with all your other costs.
Is this true for all types of loans then? Obviously for a business will be harder to demonstrate you have the ability to pay, and I am not sure what you use for collateral
But what if loan is for an investment property that has no vacancies. You can prove the rental income is sufficient enough to pay the principal plus interest even after factoring in the fixed and variable expenses fairly easily. Of course there is always the chance you have vacancies in the future, and cant fill them and lose money, but that would be like two homeowners losing their job and not being able to find another. In this economy, I would imagine the chance of losing your job is great.
So if it is that easy to prove income is sufficient for an investment property, why havent more people jumped on this? Is there not enough available properties for sale at a price (for which principal and interest will be determined) sufficient enough for that property's rental income to cover?
Rental properties are a whole different thing than primary residences. With primary residences people will usually do whatever they can to keep paying the loan, even if they lose their jobs becuase they have to live somewhere. A rental property is a business - if it's losing too much money or you can't afford the operating costs you shut it down (i.e. walk away) which leaves the bank holding the bag. Also, there are many government programs to help people by homes with small downpayments, which take some of the risk off of the bank such as FHA and VA. So they are more willing to accept a low down payment on a primary house. These don't exist for rental properties so there is more risk to the bank so they require a much bigger downpayment and are less flexible with loans for investment properties.
Just because there is a good rental history doesn't mean the bank is going to give you a loan just based on that. They know that there can be periods of time a house is vacant, or worse you could have tenants who stop paying the rent and it takes a while to evict them and they trash the place. Plus, houses need upkeep so they want to make sure you have the cash to cover a new roof or whatever might come up on a rental property. For example, a bank I dealt with would only assume 75% of the rent stated in the lease was available to cover the mortgage, becuase they knew I'd have other expenses with the rental property and wanted to make sure they would still get paid if the house was vacant for a few months.
Once you factor in the downpayment requirements, cash reserves, and the bank's conservative assumptions about rental cash flow it is not that easy to get a loan for a rental property, and if you do get one, the return may not be all that great once you factor in all the cash you have tied up and all the ongoing maintenance, management, and other expenses that come with being a landlord. For this reason, many of the buyers of rental property today are using all cash.
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The down payment on a non-owner-occupied rental property will have to be more than on a house, and the interest rate higher. With multiple units the price will also be much higher, and ongoing maintenance costs will be a lot more, plus in most cases there will be the cost of paying someone to manage it. Lenders will assume less than 100% vacancy and want to make sure the buyer has enough income from other sources to cover the ongoing expenses in addition to the mortgage, so it's definitely not easy to get a loan on investment property. Anything affordable is going to be snapped up with cash from foreign investors.
Buying a rental property or a house to rent with all cash is going to be hard unless you have lots of partners, and they will be hard to find in this economy.
But what is stopping a homeowner from renting his house once he becomes the mortgagor?
Lets say we are talking about small apartment buildings. This would generate more rental income than a house. I understand everything you are saying in your second paragraph, but again, you should be able to prove with numbers that your building is able to cover all the expenses.
What else can a bank want? And I think rental income is more secure than say the salary of an independant lawyer, or psychiatrist, or architect, or a brick and mortar store manager
Last edited by NJ Brazen_3133; 03-03-2013 at 01:46 PM..
The down payment on a non-owner-occupied rental property will have to be more than on a house, and the interest rate higher. With multiple units the price will also be much higher, and ongoing maintenance costs will be a lot more, plus in most cases there will be the cost of paying someone to manage it. Lenders will assume less than 100% vacancy and want to make sure the buyer has enough income from other sources to cover the ongoing expenses in addition to the mortgage, so it's definitely not easy to get a loan on investment property. Anything affordable is going to be snapped up with cash from foreign investors.
So lenders 100% want cash flow from other sources outside the primary property?
I know brokers who have become owner/managers of investment properties. Their outside cash flow comes from their RE brokerage. Now that is not exactly the most stable, and secure line of work. There is a high turnover in the realtor business.
So lenders 100% want cash flow from other sources outside the primary property?
I know brokers who have become owner/managers of investment properties. Their outside cash flow comes from their RE brokerage. Now that is not exactly the most stable, and secure line of work. There is a high turnover in the realtor business.
When it comes to getting a loan, there is no definitive formula to getting approved. You can make 10k a month, and apply for a loan that you end up paying back 500 a month and still get denied if you have a 450 credit score. I used to work at a bank doing loans, so I've seen it many times.
When applying for a mortgage they look into your credit profile even more so than an auto loan. If the bank feels that you will be able to pay back the mortgage, then they will grant the loan. If they don't, then they will deny it.
Also, this what your interest rate helps. If you are an A+ borrower you will get the lowest advertised rate. If you have some dinks on your credit report or anything that might make them hesitant on lending the money, the interest rate goes up. Instead of paying back 4% you're now paying back 8% interest.
Also, when you're getting a mortgage or an auto loan, the car/house is collateral. If you default, they repo/foreclose the house/car and sell it for what they can get to try and get back some of the money.
Also, if the people you know got these mortgages prior to 2008, that really explains a lot. It was a heck of a lot easier back then to get a mortgage. If you had a pulse, that was just about enough to be approved for a mortgage.
For an investment property, like others have said, the requirements are going to be more stringent. You don't have any government programs to help with low down payments. I'm pretty sure you can't use PMI on an investment property either if you don't have a large enough down payment. Also, you should never rely on your rental to pay on the mortgage for that residence. There is no guarantee that you will be able to make enough off the property less all the fees/maintenance to pay the mortgage.
When it comes to getting a loan, there is no definitive formula to getting approved. You can make 10k a month, and apply for a loan that you end up paying back 500 a month and still get denied if you have a 450 credit score. I used to work at a bank doing loans, so I've seen it many times.
When applying for a mortgage they look into your credit profile even more so than an auto loan. If the bank feels that you will be able to pay back the mortgage, then they will grant the loan. If they don't, then they will deny it.
Also, this what your interest rate helps. If you are an A+ borrower you will get the lowest advertised rate. If you have some dinks on your credit report or anything that might make them hesitant on lending the money, the interest rate goes up. Instead of paying back 4% you're now paying back 8% interest.
Also, when you're getting a mortgage or an auto loan, the car/house is collateral. If you default, they repo/foreclose the house/car and sell it for what they can get to try and get back some of the money.
Also, if the people you know got these mortgages prior to 2008, that really explains a lot. It was a heck of a lot easier back then to get a mortgage. If you had a pulse, that was just about enough to be approved for a mortgage.
For an investment property, like others have said, the requirements are going to be more stringent. You don't have any government programs to help with low down payments. I'm pretty sure you can't use PMI on an investment property either if you don't have a large enough down payment. Also, you should never rely on your rental to pay on the mortgage for that residence. There is no guarantee that you will be able to make enough off the property less all the fees/maintenance to pay the mortgage.
My cousin bought his new home after 2008. And trust me, he does not make a lot, nor does his wife. And his wife works in a small law firm. How do you get to be an A+ borrower?
Also dont most landlords rely on their rental income to pay the loan? I work in property management, and we pay the loans using the checks from the corporations that own the buildings.
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