5 Mortgage Underwriting Quirks That Could Kill Your Next Deal
The US real estate market is expected to hit new records this year. Yet, choosing the wrong deals and buyers could turn your best year ever into a financial nightmare.
There is plenty of capital for real estate wholesalers to use transactional funding to flip deals fast for big profits. Though end buyers relying on financing could run into challenges in trying to close due to quirks they may not anticipate in mortgage underwriting guidelines.
Even some of the most progressive new private money lenders, and investment property lenders have a lot of rules which can be directly at odds with what investors are being told are good deals this year.
Here are five to watch out for when contracting with an end buy that needs financing.
Square Footage
Unless you’ve run into it before you may not be aware that lenders often have minimum and even maximum square footage they will lend on.
This often rules out tiny homes and small condo units. As do their minimum loan amounts.
Some even have a cap on how big a home can be, and how many bedrooms it has. They prefer average sized ‘bread and butter’ deals that are easier and faster to liquidate.
Mixed Use Properties
There may be more mixed use properties being built, as well as many opportunities to buy now abandoned office and retail space, and convert it into mixed use.
It sounds like a great plan, and they can be great properties. Unfortunately many lenders don’t want to touch them. Especially when you are trying to finance a property which includes residential too.
These properties are much harder to finance, with big down payment requirements.
Acreage
Even though hundreds of thousands, if not millions of US households are heading to the suburbs, small towns and rural areas, many lenders are less interested in funding those properties. Some specifically prefer urban infill.
You may run into lot size caps as small as one acre.
Declining Vs. Improving Markets
Lenders guidelines are typically very specific about lending in improving and appreciating housing markets with strong supply and demand balance.
While many of the deepest discounts for wholesalers may be found in distressed markets, a declining market can be a nightmare for financing, with a drawn out process, repeat appraisals and more.
While most of the country is expected to keep growing this year, don’t be surprised if we see a dip in some once prime NY, CA, and IL markets.
Forbearance & Skipping Payments In The Pandemic
Many borrowers were offered the ability to skip payments on credit cards, car loans and house payments during the pandemic lockdowns. Some banks even automatically threw their borrowers into forbearance plans without them asking.
These plans were offered on the premise that they wouldn’t negatively impact credit and credit scores. Yet, some lenders are revising their mortgage underwriting guidelines to bar applicants with missed payments or that have been in forbearance plans, and consider them a loan default. Make sure your end buyers are aware of this before inking a contract.
