Financing my first Multi-Family

19 Replies

I am in the process of loan shopping for my first real estate purchase (2-4 unit multi family). I have gone to a mortgage broker (1 month ago) who initially told me I can do 5% down on a conventional loan and we did pre approval at $200,000. However, the interest rate I was quoted seemed high at about 4.8%.

I proceeded to contact Bank of America, and the mortgage professional I spoke to said that the lowest money down on a conventional loan I could get was 20% down on a 2 unit and 30% down on a 3 unit. I have read differently here, so I asked him if that was across the board, or just for me, and he said across the board.

We proceeded to discuss FHA as that would be the only option where I could put low money down (3.5%). He provided me pre approval for $280,000 with an interest rate of 3.87% (30 years). However, mortgage insurance seemed awfully high at 1.35% annual fee. This would kill just about any cashflow potential.

In addition to this, all of the fees/closing costs seemed so much higher than I expected. My APR came out to 5.4%. My inexperience shines here, but the fact that this is so different from my interest rate means I am paying a lot of fees, right? He even factored in a 2% concession from the seller at closing.

Where should I head next? Is it a better option for me to pursue a loan through my mortgage broker, or should I request that the Bank of America officer look into conventional financing for me again?

Any loan with less than 20% down is going to have mortgage insurance in some form.  The high leverage and mortgage insurance will indeed hurt cash flow.  Rentals are really a cash on cash return game and its hard to have much return with little cash in the deal.

Are you going to live in this property?  AFAIK that's the only way to get one of these low down loans.   If this is a pure investment the lowest down I've heard of recently (from a mortgage broker) is 15%.  But even that will incur mortgage insurance.

You may have better luck with small, local banks than the big guys. Though if you're going FHA it probably doesn't matter too much.

Is this going to be owner-occupied? If not, the best you're likely to find is 20% down. If it is OOC, you can put down as little as 3.5% to 5% depending on type of loan. Depending on your market, if you're going FHA, you may not cash flow but you should be able to live for free and pocket a bit every month.

I have done a In House loan back in 2010 that had 15% down an NO PMI! Check with some smaller local banks about a N house loan. It is good to develop a relationship with a local bank.

You might look into credit unions as well

Hey John,

I am currently in the process of purchasing a fourplex for 193,500 with an FHA loan 3.5 percent down. If you want to maximize leverage, this is the way to go. By living in the property for free by letting the tenants pay for you, this will free up other money if you have a full time job to invest in other properties. I optimize based on where I live the amount at which to rent the property out. At this point, I will then have to buy another property and live in it. This is while purchasing investment properties in between and flipping. Send me a PM, I would love to share my experience so far and strategy with you since we are in the same situation! Good luck and hope all goes well!

@John M.  

If you can get a Homepath loan on the property, you can get the low APR without PMI(LMI). I believe VA loans have the same bonus.

Thank you for the great responses guys, really helpful so far. I should have clarified, I will be living in the property, and my goal is to reduce my housing expenses to as close to zero as possible while also taking advantage of the benefits of owning a property. 

@Jon Holdman   Thanks for the suggestion on the local bank. I have one in mind that another local investor recommended to me, and I will pay them a visit to see what they can do for me.

@Brian Johnson   Hey Brian, thank you. Unfortunately the location I'm looking for is pretty tough to find a multi-family in at a price where I'd be able to afford 15%-20% down without making myself very cash poor and or selling other investments that I'd rather not sell. At my ideal price point, $200,000, I would need to do 3.5-5% down, especially with these astronomical closing costs that I am seeing. 

@Matt Heath You're situation sounds very similar to mine. My goal is to leverage as much as I can, I just need the numbers to work out with PMI which is proving to be a bit of a challenge in the area I am looking for (near a Downtown area). The properties I'm looking at so far would be short term living situations for me until I'm ready to move on to the next one, just like you. Are you familiar with the requirements of how long you have to live in a FHA loan property before you can move out? Can I proceed to get another FHA loan if I intend to again, owner occupy the property? I'm sending you a PM also.

@Aaron Montague I heard that Homepath is no longer available as of about a month ago. Is that not the case? If it's still available, getting a loan with no PMI sounds like a bargain after hearing what my monthly PMI rate would be otherwise.

@John M.  

The Homepath "no-PMI" loans do seem to have disappeared. They have a couple of decent incentives left, but I don't see any sort of replacement for the HPM or HPRM :( I was under the impression there was another instrument coming to replace it. Apparently not, or not yet.

You have to occupy the property 12 months before you can completely rent the property or sell it. If you have to re locate via job or something, they will allow you to rent it out sooner. If you do have to move you can get two fha loans. Normally you are only allowed one fha loan at a time and after a year you will need to refinance and switch the loan to a conventional loan to take away the pmi. If you had the finances a conventional loan is way better, no pmi. 

@John M.  

 How were you able to be initially quoted a loan with 5% down?

with a conventional loan you can owner occupy it with 5 percent down. Fha is 3.5 percent 

I'm in the same boat. I just signed my offer on a 4 fam with tenant issues for 56k 30 minutes ago. Playing with an FHA calculator my payments will be 700 for 30 year or 800 for 15 year with taxes and insurance. The pmi is a percent less on a 15 year. Looks like it makes sense in a case like this.

Tenants pay heat and I'll get about $425/month rent so 

$1275

$800

$340 main. & vac.

$200 house electric and water

So I'll pay about $65 a month to live there or I could cash flow $35 to live there. Then refi later should be worth around 100k just hoping it passes FHA appraiser. The lender that pre-approved me needs 25% down on a multi for a conventional loan. Which would be all my cash.

I recently talked to a mortgage broker and was told that primary residencies can be had for 5% down with no PMI. Investment properties require 20% down. Interest on investment properties is going to 0.5% higher than for primary residence.

This was a revelation for me as I was assuming 20% down primary and 25% investment.

The other thing she said that was of interest is that she could get me conventional loans on up to 10 properties before banks were going to tell me to take a hike.

OMG - there are clearly soooo many TERRIBLE loan officers out there.  not surprising with BoA though :)

Let me clear the air...with a non-portfolio lender (i'll get to them in a sec) you will need the following min down for an investment property:

15% for 1 unit (this has MI since down pay is less than 20%, but only a small amount)

25% for 2 - 4 units

That's right...25%.  This is a Fannie Mae guideline and since ALL lenders get their money from the same source and sell their loans back to the same source...the guidelines are going to be the same wherever you go.  

As for FHA, yes, it's 3.5%, but 1.75% UFMIP (upfront mortgage insurance premium) is sucky, as is the monthly MI of 1.3%.

Portfolio lenders don't sell their loans and maintain the entire risk that you will default.  Hence, their rates are much higher.  However, they are a little more flexible.  Portfolio lenders are worth "shopping" but finding a good "regular" lender shouldn't be. 

First, don't use a bank or credit union.  Use a mortgage broker or mortgage banker.  Second, don't aim for the lowest rate.  The lowest rate may not mean the lowest payment.  Third, closing costs and rates are inversely related.  If you want to have zero closing costs, either get some sort of seller contribution and/or lender credit.   How do you get a lender credit? It is a slightly higher rate than par and the lender will give you a credit that can be applied towards closing costs and other fees.  And last but not least it shouldn't be about finding a bank or credit union or even mortgage broker or banker but rather a loan officer. Every institution will have a wide range of loan officers, some skilled and some very unskilled. Who knows, you may find the highest skilled loan officer actually works for Bank of America! I doubt it but then again I've seen stranger things.

The following is a test you should use to choose your loan officer...Ask them the following question: if two people buy the exact same type of house, one right next to the other, both put down 5%, both have the exact same credit scores, the exact same debt to income ratios, how is it possible that the person who got 5% rate has a lower monthly payment than the person who got 4.75%?

The only answer is that the 5% guy used the higher rate to get a lender credit which paid for MI in one single premium.  There are no other possible answers.

If you find yourself a loan officer who answers this question correctly, he's your man.

Now little more about investment properties... The guidelines for conventional financing of investment properties are rather strict these days. Not only are you required to put down at least 15% for a single unit and 25% for two – four units, but also you have to be aware of what the reserve requirements are. For instance, let's say that your primary residence still has a mortgage balance on it. You wish to buy an investment property. Depending on various items such as your credit score, debt to income ratio, type of property, etc., You might need as much is six months' demonstrable reserves before you get loan approval. Meaning if the total monthly payment of your investment property is $2000, you may have to show that you have $12,000 sitting in a bank or IRA or somewhere relatively liquid in order to get loan approval. And it won't matter a dime how much rental income the property generates. So just be prepared to prove you have significant liquid assets that are actually yours and not borrowed.

Feel free to private message me if you have any other questions but be aware that I may not be able to help you to the extent that I can for those who live in Washington state.

I should also add that when you do find a good loan officer, ask him or her what sort of bond or grant programs may be available to certain income earners. There are couple of juicy ones available to those who reside in California, Oregon and Washington state.

@Patrick Britton   Wow. Thank you for the insight. This is eye opening. I wanted to get clarification on something, as you mentioned investment property multiple times. When you say investment property, do you mean a non-owner occupied situation? If so, what would the differences be in the post you wrote if I plan to owner occupy? Would the down payment requirement be 5%, instead of the 25% you mentioned for an investment duplex?

The 1.75 UFMIP you mentioned, on a $100,000 loan, this means you pay $1,750 just to obtain the mortgage insurance? Is this a prepayment, or just a fee? I noted the word "premium" which leads me to believe it's a fee?

You recommend going to a mortgage broker, I have heard opposing opinions on this, and it's a bit frustrating as they are generally extremely opposing opinions. I do have a mortgage broker that I am working with (who is incredibly intelligent) in addition to getting information from Bank of America. My questions are this: Are mortgage brokers going to portfolio lenders for their "conventional loans"? My broker did quote me the 5% down on a loan, with that higher rate I mentioned in my first post, which matches what you said pretty well. 

To summarize, it sounds like even though BoA is able to provide a better interest rate on the surface, my best option is likely to continue working with my investor friendly broker to craft a loan that fits my needs. 

@Bram Spiero 5% down with no PMI on a primary residence? What type of loan was it? I want that lol.

@John M.  Brian probably got a conventional loan but with LPMI - lender paid mortgage insurance via lender credit.  

I think this will be better explained with a matrix:

primary residence purchase

units max LTV

1                  95%

2-4              20%

investment property

units max LTV

1                  85%

2-4              75%

So, if you buy a duplex and intend to live in one of the units, you'll be required to put down 20%.  If you buy a duplex and do not live in it, you'll be required to put down 25%.  

The 1.75% UFMIP can, and most often is, added to the loan.  That's why the actual LTV of most newly purchase properties with an FHA loan is something like 98% vs. 96.5%.  However, you can pay for it if you'd like.  but again, most people add it to the loan.  given the name/term "mortgage insurance premium" i suppose you can call it a cost of getting an FHA loan.  

mortgage brokers and bankers (like me) all get their money from the same pot and then sell the loan to investors like Fannie, Freddie, Ginnie Mae, Wells Fargo, US bank, etc.  There is no need to use a portfolio lender for a conventional loan.  in fact, by definition a conventional loan would not be something a portfolio lender would offer.  

Bank of America's rate are always deliberately low...to suck you in.  Again, rates and closing costs are inversely related so whatever BoA is quoting you, is guaranteed to be LOADED with closing costs and extra fees and maybe even points.  As well, unless BoA has written you a pre-approval letter, the rate they're offering probably assumes you're DTI is 30%, credit score is 820, and down payment will be 30%.  

to compare apples to apples, get a GFE from BoA and one from your investor friend broker.  I guarantee that your broker can kick the snot out of BoA any day of the week.


@Patrick Britton Thank you for the matrix. That helped. Unfortunately, now I've realized that there's a conflict between what I see here and what my mortgage broker told me (5% down on conventional for 2-4 units). I will raise that question, and if that is the case it sounds like my only option is FHA.

I do have a GFE from bank of America and the fees seemed crazy. This was given to me after chatting with a loan officer for about 45 minutes. Gathering info and coming up with the best option. Thank you for the  warning on their low interest rates as bait. That will be in my mind as I move forward.

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