Investment Property
Buy Investment Properties – Current Underwriting Guidelines
By
Apr 18, 2012, 18:01

Here are some rules of thumb that most lenders follow when considering Buyer’s Credit History and income. Lately, this chart has been a moving target and is subject to change at any moment. Check with your lender for updates.

Credit Scores

Typically range from 400-800. Varies from lender to lender, but for most confirming loans you need a credit score of at least 620. Less than 20% down needs 680. FHA/VA requires at least 620. The few non-confirming loans still out there typically require 30% down with a minimum credit score of 700 for self-employed and 650 for 3-2 employees.

History

Credit items usually are reported for 7 years. You may ask them to be removed after that time frame. Bankruptcies expire after 10 years.

Unpaid Collections

Unpaid collections, judgments and charge-offs must be paid prior to closing an A-paper conforming loan. There are some exceptions to this rule. If the debt was due to the death of a primary wage earner or if the bill was due to a medical expense, this may be acceptable to the lender. Or, if a borrower has negotiated an acceptable payment plan, and has made on-time payments for 6-12 months, the lender may not require the debt to be paid off.

Short Sale

Buyer can usually obtain a loan 2 years from the completion date.
Deed-in-lieu of Foreclosure

Buyer can usually obtain a loan 4 years form the date it is executed. From the 5th-7th year following the execution date, borrower may purchase a property secured by a principal residence, second home or investment property with the greater of 10% minimum down payment.

Foreclosure

Buyer can usually obtain a loan 4 years from the date it is executed. From the 5th-7th year following the execution date, the purchase of a principal residence only is permitted with a minimum 10% down and at least a 680 credit score. Second home or investment is 7 years.

Chapter 7 Bankruptcy

Borrower may be eligible 4 years after discharge or dismissal, provided they have re-established credit and have maintained perfect credit after the bankruptcy.

Chapter 13 Bankruptcy

Borrower may be eligible 2 years after discharge or 4 years from the dismissal date.

Multiple Bankruptcies

Borrower may be eligible 5 years from the most recent dismissal or discharge date for borrowers with more than one filing in the past 7 years.

Co-Borrower

Typically the good credit of a Co-Borrower does not offset the bad credit of a Borrower. A Co-Borrower may come in handy if you don’t’ have job seasoning.

Checking and Savings

The lender will require that any money taken out of your checking or savings for a down payment be seasoned for at least 90 days.

Down Payment

Conforming conventional loans start at a minimum of 5% down. Must have at least 20% down to avoid the monthly PMI. FHA loans now require a minimum of 3.5% down.

Revolving Credit

Revolving credit, such as department store loans, car loans and credit cards are factored into your total debt calculation. If the loan has less than 20 months remaining, the lender may not use it against you.

Debts Not Counted

Typically a lender will not use the cost of utilities, food, clothing, schooling, etc. against you. Property taxes and homeowners insurance are factored into your total debt calculation.

W-2 Income

Salary and hourly wages are calculated on a gross monthly basis prior to income tax deductions. Two years of W-2s and completed, signed tax returns are required. The lender will verify with your employer that you are still employed, typically at the beginning stage of the underwriting process and right before closing.

Commission Income

Commission income, bonus income and overtime income can only be used if received for the previous 2 years. Furthermore, the employer must verity that the income is likely to continue. An average figure of 24 months is used.

Alimony or Child Support Income

Lenders will require a divorce decree and a court printout to verify on-time payments. Additionally, proof that it was received during the previous 12 months and proof that it is going to continue for the next 36 months is required.

Social Security Income or other Retirement Income

Must show proof that it will continue for at least 3 years into the future.

Rental Income

Lender will use 75% of the monthly rent and then subtract ownership expenses. If you still have positive cash flow, then this can count as income and not a liability. Schedule E of your Tax Return is used to verify the figures. A copy of the current lease will also be required.

Second Job Income

If you have a second job or a part-time job, a lender will typically not consider it unless you can prove that it has been in place for 12-24 straight months.

Self-Employed or Business Owner

Very difficult! Lenders can be hesitant and will be extremely cautious in verifying and reviewing self-employed borrowers. At least 2 years previous tax returns for both personal and business taxes (and all schedules) will be reviewed.

As you can see, there are a lot of factors that go into evaluating whether a buyer is able to obtain a mortgage.

As the chart indicates, all these folks who have recently completed a short sale or foreclosure on their property will not be able to purchase a property for another 2-5 years, depending on their individual situation.

Also take into account that the minimum required time frame is not the only factor. Buyers’ credit scores take a huge hit after a missed mortgage payment and a foreclosure. Depending on the steps that they take afterward, they may not have it repaired for several years beyond the minimum time frame required for the underwriting process!

Furthermore, now that we need to have a larger down payment, it generally takes a buyer more time to save enough money, too!