Financing Handcuffs Real Estate Investors

by 07 Oct 2012

First-time homebuyers aren’t the only ones struggling to get financing.  The small real estate investors with whom they compete for starter homes and distressed sales face limits imposed by lenders and federal regulators that are tougher than what owner-occupants have to deal with.

About one out of every five homes for sale is bought by investors, but the total would be significantly greater if investors could qualify for lower-interest loans and overcome restrictions placed on them by lenders.  Most investors (59.5 percent) finance more than half the cost of the properties they buy, according to a 2011 survey by Move, Inc.  Yet they do not qualify for the record-low mortgages rates available to owner-occupants, and must find commercial financing at significantly higher rates.  According to an August survey of investors co-sponsored by and Memphis Invest, lower interest rates would make 70 percent of investors more willing to invest in additional properties.

Most lenders put limits on the amount they will lend an investor, regardless of credit history, property values or track record.   The Invest survey found that nearly half of investors, 44 percent, would be willing to put down more than 20 to 50 percent on a business loan in order to be able to borrow more from a lender, and 32 percent of real estate investors would be willing to make a down payment of 50% of the purchase price if they could finance more properties.

A bulletin from the Office of the Comptroller of the Currency served notice on lenders that that the financing of single family rentals is to be managed with the same risk management policies and procedures used for commercial real estate loans, not residential mortgages.

Among the issues the OCC addressed was financing of multiple properties.  “Borrowers may finance multiple properties through one or more financial institutions but underwriting standards and the complexity of risk analysis should increase as the number of properties financed for a borrower and related parties increases. When a borrower finances multiple IORR (investor-owned) properties, a comprehensive global cash flow analysis of the borrower is generally necessary to properly underwrite and administer the credit relationship. In such cases, bank management should analyze and administer the relationship on a consolidated basis,” the OCC bulletin said.

However, not all investors agree that multiple investments increase risk.

“Federal lending policy makers have an opportunity to speed up the housing correction and increase neighborhood stabilization programs without having to commit any more tax payer funds.  The data shows very clearly that if they were to raise the limits that they have imposed on investor purchases with FNMA and Freddie Mac, while simultaneously raising the criteria to qualify for those raised limits, they could spur real estate investors to take action in larger numbers and much faster,” said Chris Clothier of Memphis Invest.


Should CFPB have more supervision over credit agencies?