Common Misconceptions With Conventional Investor Financing.

Common Misconceptions with Conventional Investor Financing .......... in the real estate world ...... And the Truths!

Misconception; Small banks and local lenders are always the best route to go.

Truth; This isn't always the case. Many times these are portfolio lenders and they work well when a property or investor doesn't qualify for conventional financing. In my experience, these lenders many times have higher fee's, or adjustable rate mortgages, compared to traditional conventional rates and fee's. 

Misconception; Only 4 mortgaged properties are allowed with conventional financing.

Truth; Conventional financing allows you to go up to 10 mortgaged properties. Not all lenders allow this maximum of 10 financed properties. It is an overlay.

Misconception; The maximum number of financed properties goes according to number of mortgages.

Truth; This limit of 10, goes by the amount of mortgaged properties. All liens on one individual property count as one mortgaged property, even if there is multiple mortgages or liens.

Misconception; Two years of rental income is necessary to include rental income on current properties and future purchases.

Truth; A mortgage history is required to count rental income. Tax returns are used if an investor has owned the property long enough. If the property is too new than 75% of lease agreements or market rent determined by the appraiser (whichever is less) is used.

HELOC vs Cash Out Refinance

Misconception; A HELOC is the better route of financing as there is a higher LTV and no closing costs.

Truth; Although a HELOC is better in the short term, the interest rate is variable. 5-10-20 years down the road when rates go up, this could make a drastic difference. That short term savings in closing costs, could end up costing a lot more in interest down the road.

Misconception; Delayed financing is only up to a maximum of 70% of the purchase price.

Truth; Delayed financing is up to a maximum of purchase price plus closing costs - So 100% of the initial investment. It still goes based on appraised value, you are just capped to this maximum, prior to 6 months. This is also an underwriter's discretion to determine the value. Purchasing below market value and improvements are a way to prove this.

Misconception; No sub $50k financing, $30k, $20k. You must go the route of hard money or private money with this purchase point.

Truth; You can go the route of conventional financing with these small mortgage amounts. This is a common overlay of many lenders.

Misconception; It is always better to go the route of a Mortgage broker versus loan officer at an individual branch.

Truth; Although mortgage brokers attempt to find the best rates, many times their fees are higher. Interest rates are not that drastic from lender to lender for conventional. You are getting a short term service with a broker. Developing a relationship with an individual loan officer will give you the consistent customer service you need for the life of your loan. An individual loan officer many times has less overlays than the broker does. A broker wants to shop you out to qualify with several lenders so they have more overlays or requirements. You may end up with a higher down payment, or not being able to count rental income without a 2 year history.

Pre-approval vs Pre-qualification

Misconception; They are used interchangeably.

Truth; A pre-qualification is done by a loan officer. A pre-approval is done by underwriting.

Misconceptions; You can get into a house with no money down. Subordinate financing doesn't work with conventional. There is a cap on LTV's that are the same as the down payment requirements. I see all sorts of investors looking for low down payment options, these are just not the case.

Truth; An Investor SFR requires a 15% down payment. A MFR requires a 25% down payment. This is the cap for investor financing and subordinate financing and second mortgages. 

Misconception; Rate shopping is the best route to go when looking for a lender.

Truth; A loan officer (not just the lender) is very experienced working with investors is best. A loan officer not experienced with investors makes every mistake possible down the line, including many times resulting in a loan not closing. Investor financing is its own world. The do's and don'ts and guidelines must be known very well to reach closing.

Here is why: 

• Primary mortgage purchase financing and refinancing is easy and simple, typically. It is what a majority of loan officers focus on. Therefore, they don't know the guidelines to cash out financing, investor financing, delayed financing and all the other methods. Mistakes are made and these above misconceptions are taught! Mistakes are made with seasoning periods, down payments and most of all calculating income! 
• The experience of the loan officer is more important than a loan officer that can provide a lower rate. I have seen wasted weeks of time and money for appraisals, inspections, etc with clients who first went to other lenders and weren't informed the proper information, just to find out that their deal won't close! All because their lender didn't know the proper guidelines for investor financing. 
• With investor financing....... A loan officer experienced in investor financing knows when NOT to give up on the deal and knows the proper way to "sell"