What Loan Documents Say About Investment Properties
Contents
A close look at what loan documents say about investment properties and the role they play in the real estate market.
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Introduction
loan docs for investment properties usually require that the borrower provide more information than for a primary residence loan. The underwriter will want to see a current rent roll, a pro forma income and expenses, and often times, reserves. The borrower will also likely be required to put down a larger down payment – often 25% or more. Loan docs for investment properties usually have stricter terms and requirements than for primary residences.
The Purchase Agreement
The purchase agreement is the document that stipulates the final price of the property as well as any terms and conditions of the sale. For example, if the sellers have agreed to pay certain closing costs on behalf of the buyer, that would be stipulated in the purchase agreement. This document also outlines what type of loan the buyer will be obtaining to finance the purchase.
The Promissory Note
The promissory note is the key document in any loan transaction, and it outlines all of the agreements between the borrower and the lender. It includes information on the loan amount, interest rate, repayment terms, and any other special conditions of the loan. For investment property loans, the promissory note will also specify whether or not the property can be used as collateral for other loans.
The Mortgage or Deed of Trust
The mortgage or deed of trust is the document that secures the loan and gives the lender the right to foreclose if you don’t make your payments. It will list the loan amount, interest rate, repayment schedule, and any conditions that must be met.
The deed of trust will also list the property as collateral for the loan. This is important to remember if you’re considering using the property as collateral for another loan. The lender could foreclose if you don’t make your payments, even if you’re current on your other loan.
The mortgage or deed of trust may also contain a due-on-sale clause. This clause gives the lender the right to demand the full payment of the loan if you sell the property. The due-on-sale clause is important to remember if you’re considering selling the property before you’ve paid off the loan.
The Truth in Lending Act Disclosure Statement
The Truth in Lending Act Disclosure Statement is a form required by the Truth in Lending Act. This act was enacted to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The form must be provided to the borrower at or before consummation of the transaction.
The form includes important information such as:
– The APR
– The amount financed
– The total number of payments
– The finance charge
– The payments schedule
– A statement that the borrower has the right to prepay the loan in full or in part at any time without penalty
The Good Faith Estimate
The Good Faith Estimate (GFE) is one of the most important documents you will receive when you apply for a mortgage loan. The GFE form is a three-page document that provides you with critical information about your loan terms, estimated costs, and potential risks. It is important to review your GFE carefully and understand all of the fees and charges before you commit to a loan.
The GFE must be provided to you within 3 days of applying for a loan, and it must contain an estimate of all settlement costs. These costs may include:
-Loan origination fee
-Discount points
-Appraisal fee
-Credit report fee
-Title insurance
-Escrow deposit for taxes and insurance
-Homeowners insurance premium
-Mortgage insurance premium (if required)
-Settlement or closing agent fees
-Other miscellaneous fees
The Appraisal
The appraisal is one of the most important loan documents when it comes to investment properties. This document will state the value of the property and can impact the loan amount you are approved for. It is important to have a realistic idea of the value of the property before applying for a loan.
The Homeowners Protection Act
The Homeowners Protection Act (HPA) of 1998 requires lenders to cancel Private Mortgage Insurance (PMI) on home loans when the principal balance reaches 78% of the original value of the home.
For homes purchased after July 29, 1999, loans backed by the Federal Housing Administration (FHA), Veterans Affairs (VA), or any other federal program are also covered by the HPA.
Lenders must notify borrowers that they have the right to request cancellation of PMI once the loan balance reaches 80% of the original value of the home, as long as they are current on their loan payments.
The HPA gives borrowers the right to request a PMI cancellation once the loan balance reaches 80% of the original value of their home, as long as they are current on their loan payments. The HPA also requires lenders to automatically cancel PMI when the loan balance reaches 78% of original value, unless the borrower requests otherwise.
The Mortgage Insurance Premium
The Mortgage Insurance Premium (MIP) is insurance that protects the lender in the event that you default on your loan. The MIP is required for all FHA loans, and is usually an annual premium that is paid in monthly installments along with your mortgage payment. The amount of the premium varies based on the loan amount, the length of the loan, and the initial loan-to-value ratio (LTV), but typically ranges from 0.45% to 1.05% of the loan amount.
The Settlement Statement
The first document you’ll see is the settlement statement, or “HUD-1.” It itemizes all the costs involved in buying or refinancing a home.
The loan amount is listed as “loan funds” at the top right of the settlement statement. This is the amount you’re borrowing.
The next section breaks down all of the costs associated with the loan, including points, origination fees, appraisal fees, title insurance and escrow fees.
The final section of the HUD-1 shows how much money you’ll need to bring to closing. This includes your down payment and any prepaid interest or escrow funds required by the lender.
