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Borrowers Getting Creative

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Posted On: 06/12/2013

Question:

I have friends whose equity in their home (purchased in 2011) is more than $l million, and they have an excellent credit rating. They would like to purchase an investment home but cannot find financing because of their current income. Their financing sources sound like they are ultra-conservative. Are there any creative lenders these days?

Answer:

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Let's see, two years ago your friends purchased a property. Values have generally increased in your area since then, and today your friends now have more than $1 million in equity. By any chance, has their income remained stable or even declined, thus explaining that their investing plans are on hold “because of their current income”? As well, are there any credit issues that might sour a loan application?

The big equity bulge seems attractive but may be discomforting to lenders. The reason? Many believe that prices could fall.

“Part of the tightening in mortgage credit standards is the result of lender fears about the economy and the trajectory of house prices,” Federal Reserve governor Elizabeth A. Duke said in a March 2013 speech. “Of respondents who reported tightening mortgage lending standards in the April 2012 Senior Loan Officer Opinion Survey on bank lending practices, more than 80 percent identified concerns about the economy or house prices as a factor in their decision.”

Translation: With a market downturn, some of that $1 million in equity could melt away, thus creating more risk for lenders.

What can your friends do?

First, they can look into refinancing their property with cash-out refinancing if their income and credit can support a bigger mortgage. The cash they take for the property can then be used for investment purposes.

Second, they can sell and re-invest in a property with two to four units. This would give them residential space as well as investment income to offset monthly mortgage costs.

For specifics, speak with local lenders and brokers.

© CTW Features

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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