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The Definitive Guide to Finding Investor-Friendly Lenders

by Ali Boone on July 12, 2014 · 24 comments

  
The Definitive Guide to Finding Investor-Friendly Lenders

Last week I wrote an article talking about finding investor-friendly real estate agents (actually, I was really questioning whether they even exist or not… see The Epic Guide to Finding an Investor-Friendly Real Estate Agent). This week, I want to talk about lenders. Why? Because in the past month, I have seen a solid handful of deals tank, or nearly tank, solely because of the lender on the deal.

Whether a real estate agent is investor-friendly or not isn’t a big deal (just a pain and possibly inefficient if they aren’t). But lenders? It’s critical they are investor-friendly because lenders hold your deal in their hands and they are amazingly good at killing deals. So if you want to keep your deals on the table, make sure your lender is investor-friendly.

Is There Such Thing as an Investor-Friendly Lender?

Yes, there is. What constitutes an investor-friendly lender exactly? Well, I’m not certain to tell you the truth. Most definitely, though, they work largely with investors rather than primary homebuyers. I can tell you one thing, the big banks are not typically investor-friendly. Wells Fargo, Bank of America, Chase… all the ones you know and love (or don’t love) are not typically investor-friendly. Despite being good banks for normal banking purposes and even for loans on personal residences, they are not accustomed to funding investment properties and you stand a really good chance of losing your deal.

Related: How to Get a Bank Line of Credit to Invest in Notes

So what can a smaller lender do that the big banks can’t do that makes them investor-friendly? Well, I don’t know that either. Maybe someone reading this knows the internal workings of mortgage lending and can explain how it works. My guess is, the big banks could be more investor-friendly but because of how large their corporations are and since investors are not their primary clients for mortgage lending, they wouldn’t get a lot of benefit out of spending the time or effort to be more up on lending on investment properties.

They are likely under much more stringent microscopes when it comes to their processes and procedures than smaller banks are which means they probably just don’t want to go there. That is not to say anything the smaller banks do is illegal or they are working the system at all, it’s just that they aren’t under that microscope as strongly so they have more room to maneuver. I could be totally off on all of that and maybe someone reading can give a better explanation, but that’s just my best guess.

Why it is how it is doesn’t matter. Just know that not all lenders are banks are investor-friendly (for whatever reason).

How Can Lenders Kill Deals Unnecessarily?

Well again, something I can’t speak to the internal workings of. This article gets more informative by the minute, doesn’t it?

In the last few months, I have seen some of the following things happen:

  • A loan was denied because the appraiser found issues with the property that needed to be fixed. I’m not sure if a lender can really deny a loan based on that, but maybe they can. Regardless, the seller agreed to all of the fixes and even wrote them out in an addendum in the sales contract saying they would be repaired and the lender went ahead and denied the loan still and said no.
  • The lender refused to let a different appraiser evaluate the property after the first one blatantly misread comps from recent sales and therefore severely undervalued the property in question. The value was unjustifiably low and the deal fell out. The appraisal was very obviously wrong but the lender wouldn’t allow for the adjustment.
  • A cash deposit that couldn’t be accounted for in a buyer’s bank account (accounted for in terms of written proof) caused denial by two lenders but finally a third, who didn’t need to see seasoned funds dating so far back, approved the loan.
  • After three months of being under contract for a property, and the loan was approved but contingent on the final construction and appraisal of the property, the property became ready and all of a sudden the lender denied the loan based on the buyer “not having enough credit history”. Huh? Wasn’t it approved long-before? And it took three months to decide that?
  • In some cases, apparently there is a formal statement about a buyer’s income that has to be signed and that signature expires after 30 days and has to be re-signed. For this particular loan, the underwriters continued to question random facts about the buyer’s qualification for so long (and for no reason at all), that it kept triggering that signature to have to be renewed. The bank became so harassing to the buyer’s accountants about the signature, the accountants finally told them to never call their office again. The loan was denied for ‘lack of proof of income’. The buyer tried to get in touch with the bank repeatedly after this announcement to ask how in the world that was even possible, and the previously-responsive contacts there never would answer their phone again.

I really can’t tell you how lenders do what they do, or why they do certain things, or what their laws and restrictions are, but somehow it almost always turns out that when a buyer I know uses a lender or bank that doesn’t work as much with investors, the deal gets killed. I can’t explain it. On the reverse, anytime a buyer uses an investor-friendly lender (confirmed because either I know the lender or the lender speaks very well to their experience with investors), the deal goes just about as smoothly as any deal can.

Related: Deferred Maintenance – A Silent Cash Flow Killer

How Do You Know if a Lender is Investor-Friendly?

As with any other team member, the best way is to ask other investors for referrals. You can definitely ask here on BiggerPockets. Another great place to find investor-friendly lenders is to attend your local REIA meetings as I know every time I’ve ever been to one, there are always one or a few lenders lingering around looking for business.

Note: Remember, lenders are licensed per state, so not all lenders can work in all of the states. So be sure when you ask for a referral that you are telling people what state the property is in. Which state you live in doesn’t matter, it matters where the property is.

If you can’t find a referral for where you are trying to buy, start calling around. Skip the big banks and start with smaller ones. When you talk to them on the phone, ask:

  • What % of their clients are investors.
  • What % of their investment property loans actually close (huge question! Because how many they work with could be 1,000 but if only 1 closes, that’s heinous.)
  • Ask the options for investment property loans that they can offer. Investment property loans are different than loans for primary homebuyers, so they should be able to speak to this in detail.
  • A really cool question you can ask is- do they help their clients much with strategic planning in terms of loans? Every investor-friendly lender I know is very good at helping their clients put a plan together ahead of time for how best to acquire as many properties as they are hoping to ultimately buy. As you know, there is a limit to how many mortgages you can accumulate. So if you are planning to buy more than one, figure out your game plan ahead of time so you know what to expect as you continue to get mortgages.

A couple disclaimers to this article:

  • As it is quite obvious at this point, I have no idea the internal workings of the mortgage system. Why or how it can vary between lenders, I have no idea, I just know it does.
  • I am referring solely to traditional-style mortgages for this article. I am not familiar with foreclosure or non-standard property types as far as funding them, hard money lenders or other styles of lending, so I am speaking strictly to mortgages on regular purchases.

Know that when someone recommends a lender to you to use for a property, it is unlikely they are referring you to that lender for any kind of referral fee or kickback because legally lenders can’t pay out referral fees anyway. The reason people will recommend some lenders over another is based on their experience with the lender and knowing that deals that lender handles typically go through. It’s a big deal! No pun intended.

Comment below with your lender experiences!

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{ 24 comments… read them below or add one }

stephen July 12, 2014 at 2:37 pm

I think it’s pretty simple Ali. The problem is: large banks have no Boss. There is no one experienced and skilled man (idiomatic use ) who judges the situation, considers the options, assays the risks versus the rewards, and then says yes or no. Instead there is a committee. And just as meetings are the death of productivity – so too are committees the death of initiative and use of ability. Most corporate decisions are made based on: is my ass covered? / will I have somebody else to blame for any future problems? Everything else is secondary. And also: large banks make loans not to keep and quietly profit from over their term – but rather to bundle and monetize by selling. So they lend based on what they can efficiently market and sell.

With a small bank it’s different – because there is a single Boss, or at least a major shareholder, who can make actual decisions, and will.

stephen
———–

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Ali Boone July 14, 2014 at 11:16 pm

That’s a great explanation Stephen, and makes total sense. It’s the typical story of large corporations over mom-n-pop type of businesses. I think you hit it!

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Casey Delaney July 12, 2014 at 4:29 pm

Great tips on finding investor-friendly lenders! I believe Jimmy Moncrief touched on the process of lending and underwriting in one of the podcasts. I dont understand it either but I found a great lender using Jimmy’s advice. Took about 20 phone calls/meetings with banks. Finally found somebody who worked with me (small bank) and even gave me references to other investors he works with. Keep calling around. Its frustrating but eventually you will hit the jackpot.

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Ali Boone July 14, 2014 at 11:17 pm

I agree Casey, and that advice goes for all team members you work with in this biz as well! It’s doubtful you’ll find the perfect person on the first call. Just be patient and keep calling.

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Papa Gator July 13, 2014 at 9:53 am

I have been trying to make a deal for the redevelopment of old mobile homes into a nice RV Park. My personal credit is all messed up. I can cure that with a blanket lien on my paid for properties. The lenders or loaners have hidden under the rocks. They are not friendly. They shy away from anyone who isn’t already loaded with money. The sad thing is having property in a location that is the best for a transformation and no one wants to help. I don’t want to sell out to a developer. I want to be the developer. This is a hard sell in my area. I am not a politician and that may be the broken spoke of the wheel.

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Ali Boone July 14, 2014 at 11:18 pm

I agree Papa, it can be tough. Loans are a funny thing. It’s like they will only loan to the people who don’t really need the loans. But the good news is, there is always a way! You’ll figure it out.

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Bruce Silverman July 13, 2014 at 12:29 pm

As a Mortgage Banker for the last 26 years, and the past 10 in the private lending arena, I can attest that you make some good points in your article. I am also glad that you make some disclaimers such as you not being familiar with the inner workings of the mortgage system and that you are referencing more traditional lenders. Traditional lenders are not the lender of choice for real estate investors. They do not understand the intricacies of real estate investing; especially rehab lending for “fix & flips.”

A good point you make is that the lender be “investor friendly” as it won’t work any other way. This is where private money or “Hard Money” lenders come in. That’s their business, and they do these loans day in, and day out. Another point is that you have to work with a direct lender. Far too many people out there represent themselves as lenders, when they are just brokers and are not using their own money, so the loans have to be shopped. That’s why deals that are “approved” don’t close.

The third point, and I feel the most important, is that you work with someone who will help you structure the deal the right way so that you not only close the loan, but MAKE MONEY when you sell. There are many lenders out there, and they are in every major market in the country, that do all of these things but you need to ask the right questions to find them.

This is not a solicitation, as our lending area is restricted and I don’t want hundred’s of emails, but I want to give you an idea of what to look for. Our firm is 100% investor friendly and that’s all we do. Most of our business is rehab lending and we do not do any owner-occupied property at all. We are a direct lender, use our own money and control the process from beginning to end including the servicing of the loan. Another thing is the amount of due diligence we do, which not only protects us as the lender, but the borrower as well.

With the shortage of inventory out there many investors are working with wholesalers to help them find properties. There is nothing wrong with that as long as you have your eyes wide open. Some wholesalers have a tendency to overestimate the “after repair value” while under estimating the cost of repair. This can be the difference between making money and barely breaking even. A good private lender will work with you to analyze the deal so that everyone makes money. If it’s not a win-win situation, why would the lender or investor get into this business at all?

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Ali Boone July 14, 2014 at 11:20 pm

Great comment Bruce! Thanks for sharing. You’re right about the hard money lenders. I know for me it’s tricky because I don’t rehab, I buy rentals all ready to go, so hard money typically doesn’t work there because of the shorter term and higher rates. For my types of properties, mortgages are the way to go. But then it gets tricky. Great info on what to look for in a lender!

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David Goldberg July 16, 2014 at 2:37 pm

Great points, all, Bruce. As a hard money lender myself, I, of course, agree with your assessment that THE most investor-friendly lenders are usually going to be private or hard money lenders. Most of us work exclusively with investors and do it day in and day out. And we’ve all been in the trenches, knowing first-hand what investors face because we’ve been there and are still there ourselves. And while I can’t disagree that finding direct lenders is great, there ARE brokers who do deliver, get deals funded and have access to huge reservoirs of funds and many, many private lenders so please don’t write us off so quickly!

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Bruce Silverman July 16, 2014 at 4:11 pm

Whoa, I never said not to use a broker. They may be very advantageous for new investors that don’t already have the resources, But since you mention it I would be very careful when using a broker and check references and ask to look at some HUD-1’s from deals they have closed. All too often brokers just get in the way and either muck up the deal or just make it more expensive so you’re always better off going direct whenever you can. I’m also glad you mentioned common sense. In my mind the single biggest advantage to working with small private lending companies is that they offer “common sense, asset based” lending, something the institutional lenders just can’t offer any more.

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Sharon Tzib July 13, 2014 at 12:35 pm

Ali, most borrowers (primary or non-owner occupied) are interfacing primarily with mortgage brokers, and not directly with a lender. Brokers will collect all of your information (income, credit score, work history, savings, reserves, DTI, etc.) and shop your loan to a lender that finds your status acceptable. Unfortunately, as your examples illustrated, initial approval from a lender isn’t worth the paper it is written on. At any point in the escrow, they can and will change their mind or request more information or push the restart button and ask for things you would assume they had looked at on Day 1.

My sister recently sold her house in Modesto, CA, and 60 days into the escrow, well after the buyers had received “official” approval and removed their loan contingencies, the lender decided they would not accept a portion of their income and denied the loan. The buyers lost their earnest money deposit because of it ($5K), but the bank didn’t care; and my sister had to start all over and go back on the market and find a new buyer. It was a mess for all parties, including the realtors, and even tho my sister got to keep the EMD, she would have much rather just sold the house!

Portfolio lenders, on the other hand, like small community banks, keep loans on their books, in house, so they can be much more flexible on criteria and last minute surprises are generally kept to a minimum. Also, as Stephen accurately suggests, most big lenders will be securitizing the loans the initiate, not keeping them in house, and the randomness of that market can change things at a moment’s notice.

While I’ve never used a portfolio lender myself, many investors on BP swear by them and seem to indicate that once you find one, they will keep your info on file and doing multiple loans becomes much easier. They usually charge a little more interest than the “big banks,” but what’s a little peace of mind worth knowing your loan will close for sure vs. 60 days into an escrow having the chord cut?

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Bruce Silverman July 13, 2014 at 12:46 pm

All good points Sharon! When working with a small portfolio lender, once they have your info, they have it. You don’t have to go through the whole approval process on every loan file. As you build your relationship with your lender of choice, you will find that deals start going together much easier AND much faster, which is the whole key to making money in real estate.

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Sharon Tzib July 13, 2014 at 12:55 pm

Thanks for confirming that, Bruce! We were typing our replies at the same time I think, so there was some overlap :) I was a realtor for several years in the late ’90s and early 2000s, and boy has lending changed a lot now. Back then you could fog a mirror and get approved. I don’t remember ever having one of my escrows thwarted by a lender like happens now.

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Bruce Silverman July 13, 2014 at 1:35 pm

Thanks Sharon. I am a private lender and my wife is in the conforming arena. The only similarity is that we are both in the “mortgage” business, but that’s where is stops. What we do is really quite dissimilar. She does owner-occupied purchases (refis have all dried up), has to deal with Dodd-Frank and government rules that change almost every day. I on the other hand only do N/O/O, underwrite my own deals with no interference from anyone, and with the demise of the sub-prime industry, business couldn’t be better. It’s a shame that some investors have so much trouble finding financing, but I think they’re just looking in the wrong places. Every city has private lenders that are ready, willing and able to fund deals for investors.

Sharon Tzib July 13, 2014 at 1:38 pm

I agree. I had never heard of private lenders until I found BP. Why do you guys stay so hidden? lol! Thanks Bruce!

Ali Boone July 14, 2014 at 11:23 pm

Oh yes Bruce, I LOVE when I can stick with the same lender. It saves me the biggest headaches ever of not having to resubmit everything!

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Sharon Tzib July 15, 2014 at 7:47 am

It can be either, Ali. Just start talking to your local community banks and generally you can find one. Mark Ferguson swears by them. They also don’t care about those pesky number of house limits like traditional lenders do, which is a huge bonus for investors.

Ali Boone July 14, 2014 at 11:22 pm

I agree Sharon. Glad you shared another fail story so people realize what ridiculous things really can happen for no reason (and that they do). The portfolio lenders- is that more commercial based or still residential?

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Ali Boone July 14, 2014 at 11:24 pm

Bruce, what states can you service?

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Eve July 13, 2014 at 9:37 pm

Great Article! I worked for a private investor as a teen who did all cash deals, then became a fha underwriter, now work at a foreclosure law firm……the amount of changes in the mortgage industry over the last 10 years are astounding! Great explanations Bruce.

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Ali Boone July 14, 2014 at 11:25 pm

They are Eve. Thanks to lending being one of the biggest causes of the crash! One one hand I get it, but on the other hand, it’s gone out of control too.

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Shaun July 13, 2014 at 11:12 pm

Nice article. Nothing better than complaining about how stupid banks can be.

Had one loan for an end buyer denied after 5 extensions after I finally said that I wanted to know exactly what the lender needed to figure out before giving yet another one. Later that day they sent a denial letter saying their credit didn’t meet their loans guidelines. Seriously their CREDIT? Took them over 2 months to pull a credit report? Now I am not privy to what these people might have done, but they didn’t seem like the types to have bought a new car or run up the credit cards $30K during escrow.

Same bank denied a loan on another property like a year later 2 days before closing saying the borrower didn’t have sufficient work history. The guy wasn’t fired and didn’t change jobs so his work history didn’t get SHORTER over those 5 weeks!

Seriously if a buyer came with a used piece of toilet paper and said it was from their lender I would give that stronger consideration than a letter from that bank. (I’d normally put a smiley face here but I’m NOT joking!)

I also was personally denied a refi on a couple of small rental mortgages I have a while back. It was the in my 3rd fully year doing rehabs. In year one I acquired several properties later in the year and didn’t sell any that year. In the 2nd year I started selling those off as well as getting more and selling those off during the year as well. So when they looked at my 2 years of returns there was a several hundred thousand dollar difference. They actually accused me of overstating my income on my taxes to qualify for the loan (BTW It was only a rate term refi, wasn’t even looking for cash). I pointed out that the amount they said I was lying about caused me to pay more in taxes than the balance of either of the mortgages I was trying to refi!
Regardless of your position on debt I am pretty sure every one of us if given the choice to payoff a mortgage or pay more to the government in taxes that we would all own an extra free and clear property…

Thanks for the memories… :)

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Ali Boone July 14, 2014 at 11:30 pm

Lol…you’re welcome Shaun! Great stories, the toilet paper one being my favorite (but I’m totally with you on that too).

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David Goldberg July 16, 2014 at 2:49 pm

As a hard money lender, myself, finding investor-friendly lenders comes down to 2 words. – “common sense”. The bigger the bank, the tighter the regulations they must comply with and the less common sense and plain old good judgement they can use in their decision-making process. I think there are some potentially fabulous and investor-friendly bankers out there who would want to do more for investors but are so bogged down under regulations that they just can’t. A small bank has more flexibility and many can work very closely with you as an investor, but still has regulatory requirements they must meet – and the limitations that go with them. A private or hard money lender is the least restricted and can actually make their own judgments and listen to reasonable explanations, about what’s on a credit report, for example, and why it’s there instead of just rubber stamping a “NO” because of a low credit score.

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