Underwater Real Estate Investor Loans

by Danny in GA, Kimberly in Long Beach, Jeff in Minneapolis, Banyan in CA

Ask Kate how to refinance underwater real estate investor loans: Danny's HARP 2.0 banker says he has too many investment properties. Kimberly considers moving back into her investment property before a HARP refinance. Jeff questions whether refinancing costs can be rolled into a rental property mortgage. Banyan asks about fixed rate HAMP Tier 2 loan modifications for underwater rental properties.


Question 1: HARP 2 Maximum Investment Properties

By Danny from Saint Marys, Georgia

Kate: I recently got turned down on HARP 2 refinance by a bank that services the loan for Wells Fargo because I have too many investment properties.

Refinancing Underwater Rental Property

The loan is not Freddie Mac but it's in a Wells Fargo investor pool. The subject loan was written in 2006 for 15 years. Payment is $1700 PITI. The tenant pays $1100. Balance owed is $116,000.

I was told the loan denial wasn't because it's in the investor pool but because I have too many investment loans. Last count on loans is 15.

Any hope? I think the banker didn't want all the paperwork.

Funny thing is, I successfully refinanced 3 loans under HARP 1. I am simultaneously in the midst of Wells Fargo serviced Freddie Mac HARP 2 and all looks well. I have good credit.

***zz-portrait-left.shtml*** Ask Kate answers: HARP 2 Maximum Investment Properties

Hi Danny,

Yep, I agree something smells fishy.

First of all, let me clear up a couple of common rental property misconceptions for the sake of everyone reading this.

1. An investment rental property that was once a primary residence is eligible for HARP 2, assuming typical program guidelines are met.

2. The same goes for a former rental that is now owner-occupied.

Now I'm going to quote Freddie Mac on the number of rental properties owned by one investor so you can show your lender:
"Freddie Mac is no longer requiring that the number of investment property and second homes mortgages comply with the requirements related to the number of financed properties in Sections 22.22.1, Investment Property Mortgages, and 22.22, Second Home Mortgages, respectively."
If you suspect your mortgage originator is rejecting your application based of the amount of paperwork required for real estate investor loans, call a supervisor. Or change lenders.

HARP 2 allows borrowers to shop and choose from participating lenders.

But you should know to be eligible for the HARP 2 refinance program, the loan must be backed by Fannie Mae or Freddie Mac. Want to cut out the middle man? Go here to see for yourself if Freddie Mac or Fannie Mae backs your mortgage.

Best wishes,


Question 2: Investor Loan or Occupy before Refinancing

By Kimberly from Long Beach, California

Hi Kate,

We own an investment property which is now $100K upside down. At one time, it was over $100K right side...go figure! This is a Fannie Mae property with the mortgage held by Bank of America, previously Countrywide.

My question is, would it be best to move back into my rental property so I can refinance under HARP 2.0, or can I refinance it as a rental?

I borrowed money at the tune of $70K, initially borrowed to invest in other properties before the ceiling on the economy came down and it was instead used to survive a fledgling start-up business...real estate...go figure!

Which is a better option, move in and refinance as a homeowner, or can I leave my tenants in place and refinance it. Thanks Kate!!!

***zz-portrait-left.shtml*** Ask Kate answers: Investor Loan or Occupy before Refinancing

Hi Kimberly,

In keeping with general guidelines, you could do either.

Use HARP 2 to refinance your rental property Or you could move in and refinance it as your principal residence.

But keep in mind that mortgage closing costs and interest rates are higher for rental properties. Plus guidelines are stricter.

If the lender says you could qualify for either, compare monthly house payments and closing costs, keeping in mind the expense of moving back into the home and breaking the rental agreement.

Read about Michael, a San Francisco real estate investor who says his leg got caught in the bear trap when the market collapsed: Gluttonous HARP 2 Mortgage Closing Costs.

Best wishes,


Question 3: Refinancing Rental Property and Closing Costs

By Jeff from Minneapolis

Kate, Is it possible to roll closing costs into the mortgage on an investment property? Thanks so much, Jeff

***zz-portrait-left.shtml*** Ask Kate answers: Refinancing Rental Property and Closing Costs

Hi Jeff,

In general, yes. But not always.

It is possible to roll in closing costs on a non-owner occupied refinance if there is enough equity, or the lender does not require equity, as with the HARP 2 plan.

But for mortgage programs based on loan-to-value, remember that rolling in closing costs increases the ratio.
Loan-to-value is the ratio of the amount borrowed to appraised value. LTV a common sticking point in mortgage approvals.
For example, let's assume your loan pay-off is $150,000. The recurring and non-recurring closing costs equal $5000. Your loan-to-value cannot exceed 95%.

So you need to borrow $155,000 to avoid bringing cash to the table. But your appraised value is only $160,000.

Since your loan program's maximum LTV is 95%, rolling in the closing costs wouldn't work. ($155,000/$160,000 = 97%).

Keep in mind, some programs for non-owner-occupied properties won't allow financed closing costs, regardless of LTV.

Didn't get mortgage approval? If you can't understand why your loan was turned down, go here for help: How to Cure Mortgage Approval Hiccups.

Best wishes,


Question 4: Investment Property Hamp Tier 2 Loan Modification

By Banyan from Cupertino, California

Kate, I have an investment property that is under water. I paid $350K in 2007. It is valued currently at $150K. It is a vacation rental.

The loan is a 5/1 30 years with starting rate of 6%. I am currently at 2.857% as the Treasury index is down.

I want to know if I can do a loan modification to have the low interest rate fixed for the remainder of the term of the loan.

***zz-portrait-left.shtml*** Ask Kate answers: Investment Property Hamp Tier 2 Loan Modification

Hi Banyan,

HARP 2 refinancing and HAMP Tier 2 loan modification programs can both be used to finance rental properties. HARP opened up this option in spring 2012 and HAMP in summer 2012.

If you take the route of HAMP loan modification, pay close attention to the terms. Although often starting with a low initial interest rate, it might not be fixed for the entire term.

If you'd like to compare underwater mortgage options, go to HAMP Tier 2 Modification vs HARP 2.0 Refinance Program and Is HARP or HAMP Best.

Best wishes,


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Options for loan modification or short sale on rental property
by: Sam from Coral Springs, Florida

Hi Kate -

My husband has a townhouse, in his name only, that we currently rent out. We also rent another villa in another city.

So in essence, we are landlords and tenants. We lost the homestead, but that townhouse is the only property we own since we rent our current villa.

There are two mortgages on the property; first is an ARM, second is a HELOC interest-only loan. House could sell for about 185k. He owes $245k. Losing about $100 a month from rental income.

Should we apply for loan modification or do a short sale? And should we move back to the townhouse to do either or does it matter? He is current on the mortgage and credit is excellent.

Thanks in advance, Sam

Hi Sam, Kate here.

Sorry to hear you're having to make these decisions. It's never easy.

One way to decide between short sale and HAMP tier 2 loan modification is to contact your lender and see what terms you'd receive on each plan. This might make it easier to choose.

When a home is being rented, the bank's terms are not as attractive. But loan modifications don't have closing costs. Even so, pay close attention to the monthly mortgage payment, making sure it's affordable. Also look for future adjustments in the interest rate and balloon payments.

Whether you decide on a short sale or modification, check with an accountant for tax consequences since this involves a rental property. Let your CPA know you have the option of moving back into the townhouse.

Best wishes, Kate

P.S. I believe same or similar paperwork is used for both HAMP modifications and real estate short sales.

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