Q: I have been shopping around for a cash-out refinance loan on a piece of rental property that I own. Currently, the property has no mortgage.
 

I am self-employed and was told I needed a stated-income loan. I walked away from one closing because of the high interest rate (they upped the rate to 8.2 percent at the closing table) plus additional closing charges not quoted on the Good Faith Estimate.

On the most recent application I filled out, I’ve been offered an adjustable rate mortgage with a starting rate at of 8.63 percent. I requested a loan without a pre-payment penalty and recently received settlement papers from a subprime lender noting that I may or may not have pre-payment penalty.

My mortgage broker informed me that the pre-payment penalty is 1 percent of the loan. My credit score is 735, and I expected to find a fairly decent loan with decent interest rates.

It this the penalty for the stated loan program or what is the problem? Please reply ASAP!

A: The real problem is that you have a host of issues all working against you.

First, you’re trying to finance a rental property rather than an owner-occupied property. Interest rates for investment property are usually .50 percent to 1 percent higher than for an owner-occupied property.

In other words, even if you weren't self-employed, your starting interest rate would be around 7 to 7.5 percent for this loan.

On top of this, you're getting a stated income loan. That means the lender is just taking your word for it that you can afford this mortgage. That could easily bump up the interest rate another one percent or more. (Self-employed people need to have at least 2 years of tax returns plus a current profit and loss statement in order to qualify for a more conventional loan.)

The fact that you're getting quotes from sub-prime lenders could indicate that there is something else going on. Please talk to a knowledgeable mortgage broker or local bank to find out what other options you have.

If the bank where you have your checking and savings accounts also grants mortgages and then keep them in its own portfolio, they may have the ability to give you a loan on better terms than other lenders.

Here’s one other way to go: If you own the home that you live in, you might get a better interest rate by taking out a loan on that property rather than trying to finance the rental property. You may also need to refocus your efforts and find a good lender in your area that is still working to help real estate investors like you. If are using the services of a mortgage broker, try calling some community savings and loans or community banks in your area to see if they would be willing to help you.

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