The Real Estate Investor’s Resource

Turning Intentions into Action

How to Deal with Your Escrow Shortage & Increase Your Cash Flow

Property taxes and insurance are increasing every year.  If your mortgage requires an escrow account to cover taxes and insurance, this will increase the payment.  Often it results not only in an increase in mortgage payments but an additional payment due for a shortage in the current mortgage escrow account.   This quickly decreases cash flow; however, there is a way to get some relief! 

Typically, mortgage companies will allow two options when there is an escrow shortage.  One option is to pay the escrow shortage in full with one payment.  The other option is an increase in the mortgage payment spreading the escrow shortage over a twelve month period.  The mortgage statement will come with a notice to either pay the shortage payment in full or start paying your new (increased) payment amount. 

 It is not unusual for real estate investors to receive several of these increases each year on multiple properties.  Even if you only own one property, your primary residence, the additional monthly expense is no fun.   However, for real estate investors owning multiple properties, these payment increases can really hurt cash flow.  Even if the increase is only $20 – $40 per property, it adds up fast when you multiply the increase by 5 or 10 properties or more.  

Most mortgage companies are willing to spread the escrow shortage over a longer period than twelve months – if you request it.   Some mortgage companies will spread the escrow shortage over a 36 month period, which can really lighten the burden and increase your cash flow if you have multiple properties.  All you have to do is send in a written request asking them to spread your escrow shortage over a longer period of time.  It is helpful to explain that the increase in payments is creating a hardship.  After all, it is always hard when your cash flow goes down, right?  You may want to call the escrow department ahead of time and ask how long they are willing to spread out the escrow shortage; and then make your request for the length of time you want the payments spread out based on the information they give you. 

February 26, 2009 Posted by | mortgages, real estate investors | , , , | Leave a comment

Loans -Risk Based Pricing/Loan Level Price Adjustments

Allow me to introduce you to the latest in the mortgage business for 2008 – Risk Based Pricing or Loan Level Price Adjustments. Basically, the concept is that additional points are being added to loans based on how risky the borrower is. These are not the discount points used to buy down the interest rate, these are additional points making the loan cost more. The lower the credit score of the borrower, the more points and cost.

Yesterday I was chatting with a lender at First Horizon about a potential “refi” on an investment property. Here’s the scoop or an example on what the points are looking like now based on the offerings from First Horizon:

Full Doc
680 & Above – no points
679-660 – 1 point
659-640 – 1.5 points
639-620 -1.75 points
under 620 – 2.5 points

Stated Income Loans -Must have a minimum of 680 score
720 Score – .5 point added for stated income
680-720 – 1 point added for stated income

This is a far cry from the old days when as long as the borrower had over a 620 credit score, loan costs were basically the same.

Thankfully, real estate investing provides creative ways to invest even without having great credit. However, when you are ready to refinance those deals that didn’t require credit to purchase them, credit becomes very important. If your credit is not the best and even if you are successfully investing without credit, begin working towards improving your credit score. There’s tons of great information at www.myfico.com.

January 12, 2008 Posted by | credit, mortgages, Real Estate Investing, refinancing | Leave a comment