A Type of Real Estate Loan that NO One Talks About…

by | BiggerPockets.com

There have been entire books written on financing options for real estate investments.  I am definitely not going to try and give an accurate summary of all of them.  However, I am going to talk about the financing option that I use myself as a real estate investor.  I also underwrite these loans on a daily basis.

On Bigger Pockets, I see discussions on a daily basis regarding Hard Money Lenders and something about government-guaranteed mortgages (i.e. FHA, HUD, FNMA, USDA).  However, there is a third-option that is rarely mentioned,  an investor loan from a community bank.

Loans from Community Banks generally have higher interest-rate than government guaranteed mortgages.  However, they also have significantly lower rates than hard money lenders.  See the table below.

Screen Shot 2013-07-22 at 8.39.19 PM

Community Banks have significantly more flexibility than their large bank competitors, because decisions are made right there in the bank.  This flexibility also expedites the loan-process.  I have seen customers get a $400K loan within 24-hours.  This is why:


This customer has a great relationship with their loan officer.  The customer keeps their financial statements up-to-date at the bank, and let’s them know about any big capital spending plans and future real estate acquisitions.


It says a lot when you have deposits at the bank.  Community banks might not have the technology that larger banks have.  However, if you maintain a small business account this helps your loan officer get the loan approved.


When you agree to pay a higher-rate, you are saying to the bank that you do not treat your lending relationship like a commodity and value the timely service the bank provides.  Note, if your community bank doesn’t close fast, I would not recommend them.

I know the rate discussion will cause a lot of controversy from investors, because at the end of the day, a  higher rate means less money for you.  However, let me provide you with two real life examples, where rate was secondary, and why:

Example 1: The Flip

Earlier I mentioned that a customer got a $450K loan within 24 hours.  This was a foreclosure deal and he needed the money within 24 hours.  The home’s last appraisal was for $650K.  He lived in the house for a year, and then sold it for $650K.

Example 2: The Multifamily Deal

My friend was looking to buy a duplex for $85K.  The last appraisal was for $146K.  He was pledging another property so this amount was fully-leveraged.  His monthly profit was $400.  A community bank offered him 6% and big national bank offered him 4%.  The community bank would have closed the same week.  However, he went with the large bank and they took 4 months to close.  The worst part is that instead of closing in April and getting all of the college kids he closed in August and it took him an extra month to get the property rented.  My friend therefore lost out on 5 months of revenue and profit.  The difference in the two payment structures was $93.89.  He was lucky he still kept the property under contract and the seller didn’t go with someone else that could close quickly.


In summary, a loan with a community bank is a good choice for many real estate investors.  However, like all types of banks there are good community banks and bad community banks.  I would encourage everyone to call three or four community bankers, let them know your goals and plans, and get their feedback.

Have you worked with a community bank? What have your experiences been like?  Share your thoughts or comments below!

Photo: 401(K) 2012

About Author

Jimmy Moncrief is a bank underwriter and real estate investor. He blogs at RealEstateFinanceHQ.com where he talks about all things real estate. He also is the creater of free evernote templates for BiggerPockets members to learn how to better organize and automate their real estate investing.


  1. I would add the small community banks that survived the RE bubble have systems in place that included staying away from subprime loans of any kind, or smoke and mirror type deals.

    I would suggest those with poor credit stay with hard money, as without some net worth and some way for the lender in a foreclosure to access your assets and a good credit rating you have little chance of closing a loan with such a bank.

  2. Jimmy –

    I agree completely. I always used a smaller community bank for my rentals and rehabs. I also had all of my accounts with them. It was easy to get the loan done quickly and with almost no hassle. We have a couple here that actually specialize in investor loans. You will pay a little more, but you won’t find yourself in the situations you described. You also won’t find yourself losing out on a great deal because you can’t close quickly.

    This month I found out that I had a retail buyer on my wholesaler buyer’s list. I didn’t realize he was only looking for something for himself. He looked at a house I was wholesaling a few weeks ago (that’s when I found out), and he wanted to write a full price contract on my house.

    Then he dropped the bomb — he was pre-approved through one of the largest national banks in the US and it was in another state. He had gone online for his loan. I was pretty sure this wasn’t going to work. I got the name and phone number of the loan officer from him and called him up.

    As soon as I mentioned that I planned to double close, the loan officer said “I’ll call you back, but I don’t think it will be a problem”. That’s when I was sure he was new at his job.

    Long story short, he called me back and said they “might do the loan, but it would take probably a month longer (than the usual 45-60 days), AND they would only loan my buyer the amount I was paying for the house. He further said that since “I got the house cheaper” I should pass those savings onto my buyer. What an idiot.

    I said to him so, “Since you are getting your money way cheaper from the feds then you will be giving that same rate to your buyer right? You don’t intend to make any profit off of your buyer correct?” Well, we all know how that story ended.

    My buyer stopped by the local community bank that same day He filled out an application and I got a call from the appraiser the next day (Friday). I met the appraiser along with the buyer (Monday) and we had a loan approval within 48 hours. We are closing that transaction tomorrow and just over 2 weeks have passed. We could have closed last week but the seller was on vacation. That really is how easy it is to work with those types of banks.

    Investors should set up some type of account with one of them, go in and get pre-approved (and keep that updated) and then you will truly be a cash buyer anytime.

    Well said.

  3. I would love some advice on 1) How to find a good community bank 2) How to evaluate a community bank to tell if it is a good one that can close fast 3) How to develop a relationship with a banker.

    When I opened my first checking account way back I opened it at a community bank that I had heard good things about. We had a good relationship for a couple of years, and I enjoyed banking there. When I moved out of state for a couple of years, I kept my account and mailed deposits in. While I was gone, the bank merged with a larger bank, and closed a few branches. I kept the account, even opened my business account there when I moved back. However, it was never the same. Finally, during the financial meltdown, the bank took TARP money and told me rather plainly that they were not interested in making loans at that point. (They had made some risky loans on an aprtment complex and lost a lot of money, and were in damage control).

    I eventually moved all of my accounts to other banks- my personal account is at a credit union that I reallly like, but for my business account I have tried 3 different banks now, and havn’t been extrodinarily pleased with any of them. At the last one, the bankers didn’t seem to stick around long enough to build a relationship with them.

    Any advice would be helpful!

  4. Thanks for sharing. This is information I will tuck into a recess in my brain, and hopefully use it when the timing/situation is right. I have yet to explore community banks; one more thing to learn about in life!

  5. Extend this further. Credit Unions. Non-profits. Often free checking and no fees. I have eight equity lines of credit (secured by eight different properties) at two different credit unions. Half are in my personal name, half are business lines with personal guarantee. Personal LOCs (total $220k)report to my personal credit, so I rarely run those over 50% in play. Biz ones (total $160k) I’m less concerned about since I don’t know much about biz credit scores. It’s great to have cash to access when I need it to push through a deal, then I refi into a normal mortgage (again, from credit unions, also a couple community banks.

    Final note. Unless you’re very good at schmoozing or have high LTV, no bank or credit union will lend to an investor if your credit scores are below…640? 720? I don’t know. But I know they require decent scores just like the big banks. But at least they can be flexible, and work with you.

  6. I love community banks and used one to finance rentals 5-10 after the hitting the 4 property financed wall.

    The problem I have found today is that the community banks underwriting is not much different than the big banks. Thus if you don’t have a w2 it really doesn’t matter how much you cash flow or your net worth. Yes they can close faster and easier but at the end of the day they still want to see a W2 which will not work for everyone.

  7. Excellent! I do all my deals with money from a small bank (3 branches) . Typically close in less than 10 days. They just use common sense approach. Keep your financial statement up to date and try to maintain good deposit with them.

  8. Fantastic article!

    I’m currently looking to expand my financing options for potential deals. This option would certainly fill the gap between private & hard-money lenders I have lined up today.

    I have a name at my community bank that I will call soon. Fortunately, I should be able to provide the W2 and credit worthiness it sounds like they need. I’ll report back my experience….


  9. I deal with two credit unions in my town…one of them only has 2 branches here. I have personal accounts at each of them as well as a business account with one of them. I like the fact that they are so small I can just walk in and easily deal with the people who are the decision makers. Getting business done is so much easier and stress-free. I doubt I will ever deal with big banks again.

  10. Good article Jimmy, but let me tell you about my current experience with a “community” bank. I will preface this by saying that the sales fellow initially said his bank does NOT charge points when I enquired about refi with cash out. Since our FICOS are in the 790-810 range with plenty of liquid assets (just not enough), I was told about their portfolio loans for self-employed people like us, and following his prequal, he said he could close in less than 3 weeks. Wow. So I busted cheek and faxed everything they requested–then it dragged on, with one hoop after another to jump through. After 3 weeks he tell us the underwriters are now bombarded with loans, so it’ll take another 4 weeks. From the initial quote of 3.50% (0.50% higher at the time than for people with paycheck stubs) it has now jumped to 4.625% with a 1% loan origination fee, PLUS a 0.50% fee because the loan is below $720,000. I might also add that they slapped a prepayment penalty on top of all this. Oh, and we have 50% LTV. So far it’s been 6 weeks.
    When I look at this loan on paper, I would think it was a hard money loan, but after exhausting mortgage bankers, my own loan servicers, our own local banks and a credit union, our hands are tied. Most of the Banks will sell the note, so their underwriters will have to adhere to Fannie Mae guidelines, which will disqualify a lot of self-employed people.

    • Chris

      So sorry you are going though all of this! I’ve NEVER heard of somebody enforcing prepayment penalties on a loan that small.

      I would call up some other community banks and credit unions!

      Get some referrals from your REIA!

  11. Sounds like Chris’ “community bank” is trying to have their cake and eat it too, as they make sure it conforms to FHA stds so they can sell it down the river. Too bad there aren’t more choices. LIke maybe an equity line of credit? What do they say when you show them the proof–via emails?–that they originally promised a better deal? It’s possible they’re getting tapped out of lendable funds, or their “investors” (bank owners) are getting anxious, or greedier. What does bankrate.com say about their finances and stability?

    FWIW, I’ve never had a credit union or community bank sell any of my loans down the river. And they’ve always accepted my 1040s and a financial statement as proof that I can repay. There are always hoops to jump through (though HML loans have far fewer…for a price!) My equity lines are at 4-6.5% and my refis have been in the 6% range, so despite the hoops and hassles (and there’s always that), Chris is still getting decent rates for a non-owner-occupied loan.

    • Thanks so much ThosMN, for your lightning fast input. Yeah, when I showed the proof, his rebuttal was that he had to switch us over to a brand new program for self-employed people, for which their interest rates are based on the prime rate +1%. He forgot to mention that this came with a hefty 1.875 points fee + 0.50% (under-jumbo) fee, + LO fee. Without the 1.875 points, our rate would be 4.625% plus the other fees and a PPP. I had already paid for the appraisal based on his initial “approval”–before the switch. He then decides to get 2 appraisals (both their own AMC’s) so wants us to pay almost $700 for that. I think the rate is ok, but that stinking PPP is the thorn. Couldn’t find a HELOC less than 8%, but still looking!

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