Hello, I hope everyone is doing well. I was trying to help my parents invest in RE and was wondering what the best strategy would be for getting loans and using leverage.
I heard that you can get a maximum of ten loans for each person but the first five you only have to put down 20% but for the next five you may have to put down close to 30% and maybe the interest rates won't be as good.
My mom has a 780 credit score I don't think my dads is as good I think it is about 700. How can they obtain the maximum amount of loans? They have enough money for down payments on about 20 houses combined if each house sells for 75k. Is it important that each person applies separately to get the maximum of 10 loans each or can they apply for each conventional loan together and put both their names on each mortgage and still get 20 loans combined?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
Downpayments on rental properties are generally 25% for the first four mortgaged properties and then 30% after that up to ten. Finding a lender for the 5-10 properties can be challenging. They will also need cash reserves. For 1-4 its six months PITIA (A = anything else like an HOA) for the subject property and two months for all others. Once you get past four, you needs six months for all properties.
Yes, they will need to apply independently if they want to get to 20 conforming loans.
There are other programs out there, though. There are banks still doing commercial (i.e., non-conforming) investor RE loans. The terms is probably shorter, 15 years max. But this is an option if dealing with all the ins and outs of conforming loans is a problem.
The kicker is going to be income. To get a loan the applicant will need to have enough income to cover the payments. You say they're retired. But they must have income from somewhere. Initially, they're going to need to use some other income to cover the payments on the property.
Also, since they are retired, need the cash flow from these properties, and don't have room for big mistakes, be sure you and they learn about the realities of rental property. Cash flow is NOT rent - PITI(A). Banks will calculate "net rental income" as rent * 75% less the PITI payment. That may still be a little optimistic if they're going to hire a property manager. If they're managing the properties themselves, it probably close.
Investor · raleigh, NC · Member since 2010 · 45 posts · 18 votes
14y
Hi Tyler,
Technically each person could get 10 conventional mortgages. Beside credit score, income is an important factor. I saw a good advice from another thread here on BP: keeps shopping banks. If I'm in your situation, I would pick up the phone and talk with mortgage lenders around, explain your parents situation and see what they recommend.
Best of lucks.
Kevin
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
Downpayments on rental properties are generally 25% for the first four mortgaged properties and then 30% after that up to ten. Finding a lender for the 5-10 properties can be challenging. They will also need cash reserves. For 1-4 its six months PITIA (A = anything else like an HOA) for the subject property and two months for all others. Once you get past four, you needs six months for all properties.
Yes, they will need to apply independently if they want to get to 20 conforming loans.
There are other programs out there, though. There are banks still doing commercial (i.e., non-conforming) investor RE loans. The terms is probably shorter, 15 years max. But this is an option if dealing with all the ins and outs of conforming loans is a problem.
The kicker is going to be income. To get a loan the applicant will need to have enough income to cover the payments. You say they're retired. But they must have income from somewhere. Initially, they're going to need to use some other income to cover the payments on the property.
Also, since they are retired, need the cash flow from these properties, and don't have room for big mistakes, be sure you and they learn about the realities of rental property. Cash flow is NOT rent - PITI(A). Banks will calculate "net rental income" as rent * 75% less the PITI payment. That may still be a little optimistic if they're going to hire a property manager. If they're managing the properties themselves, it probably close.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
14y
Regarding "I heard that you can get a maximum of ten loans for each person..." this is sort of true. It's good to know the rules on getting cheap government backed money. Shop banks all you want, but they all go through DU. To achieve your goal, each person must individually establish ownership interest in the secured property and become liable for the note. So credit scores, pension income, rental income... all apply per individual.
See page 216, B2-2-03 Multiple Financed Properties for the Same Borrower in the Fannie Mae Selling and Underwriting guide. Use this in addition to relying on a mortgage broker, because many mortgage brokers don't read all 1221 pages.
An Example of co-signing from page 218: If the borrower owns two financed investment properties and the co-borrower owns three other financed investment properties, then jointly, the borrowers have five financed investment properties in addition to their principal residence(s), if applicable.
See also B3-4.1-01, Minimum Reserve Requirements, B2-2-03, Multiple Financed Properties for the Same Borrower, B3-3.2-07, Rental Income. Basically, these sections are more detailed (e.g. 6 months reserve plus 2 months on each financed other investment property (table page 362)) than Jon's quite excellent summary.
Also note that credit scores drop as your underwritten mortgages increase. Certainly true for unseasoned loans, but after 4 or 5, it doesn't matter if they are seasoned or not.
Per the Fannie Mae Eligibility Martix, that 700 FICO will probably work for 1 purchase, then you need to work on getting the credit score up.
References: https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel012711.pdf and https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
For investment loans, you can go up to 45-50% DTI. If they have no other mortgaged properties, car loans, etc, they could use that pension income to justify investment loans. Once the rentals are up and running, and assuming they are positive with the lenders (rent *0.75-PITI) guideline, they will help their DTI. If they're negative by that forumla they will continue to need other income to support them. Since (I believe) your parents want cash flow from their properties, they shouldn't buy negative cash flow properties.
Now, some lenders may require the rentals to appear on two tax returns. Others may be more flexible. You and your parents will need to do some lender shopping.