Last week we were all taken aback when the Federal Government released the latest round of mortgage rules. It was not just one new rule but four new rules and it could certainly impact Real Estate Investors to name just segment.
By now we as professionals have all had time to process the changes, blog about it and even bitch about it! We need to take a step back, put things into perspective and focus our efforts on the consumers, who are our clients and potential clients.
As a mortgage broker, I focus on investors and many of the investors I work with, focus their efforts on pre-construction and rent to own to name just two methods. In light of the new mortgage rules, I wanted to discuss how they might impact real estate investors investing in these two particular areas of pre-construction and rent to own.
For pre-construction, many investors get into this stream of investing because of the appreciation that usually comes between the time of purchase and closing. As an investor, you buy usually at one of six buying events, which includes Friends & Family, Platinum Stage, VIP Stage, General Agents, Pre-Registration and Public Grand Opening. If you really want to make money in pre-construction you want to buy at first few stages as that is when you get in at the rock bottom prices available. If you buy at the Public Grand Opening or at the Resale phase, you basically have lost money on the buy.
So what happens when you assign the deal? You found a buyer for your unit and you think “great that’s gone, now on to the next one”! Well for one if your new buyer is not qualified for the purchase, you are still on the hook to close on that deal and get a mortgage. With the new rules, I see a lot of buyers in this space not qualifying even with less than 20% down. Depending on the special that was introduced by the builder or even if you only plan to put down 5% as a first-time home buyer, you may be in for a rude surprise come qualification time.
On the other hand, when you look at Rent To Own, I also see this as an area that could take a hit – specifically when it comes to qualifying Tenant Buyers. There are many companies, including mine that go through the proper qualification and base the numbers on a 5% rate with a 25 year amortization but is this enough for those that only request a 5% down-payment at the end of the day? Many lenders have pulled out of this space and thus it is getting harder and harder to qualify tenant buyers at the end of the 2-4 year term even with the right parameters in place.
So where’s the problem if we are already qualifying at higher than the current 4.64% rate? Well for those companies that still slide on the 5% side or are not using the 5%/25 year amortization for stress testing those tenant buyers, that will certainly pose an issue come time to qualify. So if you are a tenant buyer and are in a Rent to Own program, make sure you reach out to the company you are working with to ensure you are going to be ok come mortgage time!
The good news (received after video recorded) is that there has been an amendment to the rule changes. For those of you that have more than 20% down, you will not be subject to the new rule change and it’s business as usual for 5 year fixed terms.
Check out the video that accompanies this blog at https://www.youtube.com/watch?v=RiquP5TptG8