When I first started in real estate investing I had multiple lenders tell me “no, you can’t lend on that”. And I took their word for it. I thought “If one or two say no, then they all must say no”. And that was completely wrong. There is a difference in lenders and sometimes the difference is pretty big.
Having great lenders can make you more profitable in real estate. Lenders take up 70%, 75%, 80%, or even more of our deals. And some of these loans are for 30 years – that’s longer than most businesses and longer than most marriages! So yes, having good lenders is somewhat important.
This post will focus on "buy and hold" real estate investors with residential (1-4 unit) properties and how to find good "investor friendly" lenders. Basically, if you are using the BRRRR method to keep a home to rent it – this post is for you.
We are going to hit 4 main areas in our discussion today:
- Loan Types
- Differences in Lenders
- Questions to Ask Lenders
- How to find the best “Investor Friendly” lenders
- Loan Types
There are lots of lenders in the US most of what we will discuss today is how to separate lenders from each other. Many will say “sure, we can write a loan on an investment property” but that doesn't mean they are good at it. One of the main reasons that you hear different stories from lenders is because lenders might have different TYPES of loans. Generally speaking there are 2 main types of loans for investors. Now this is how I define them. If you go to a lender and ask “which one of the two loan types do you offer” they won’t know what you are talking about. These definitions are for you to understand the difference conceptually and why one lender will say one thing and another something totally different. I’ll call our two loan types “Conventional” and “Portfolio”.
Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are 30 year fixed rate loans. They have the lowest rates and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans (more on those in a second)....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. These loans types are based on you personally. Your personal credit. Your personal income. Fannie/Freddie money = Fannie/Freddie rules. Which means that lenders don’t have much say in these loans – they have to follow the rules they are instructed to follow.
Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. Sometimes referred to as "non-QM" loans. Sometimes called "DSCR" loans. Whatever they call them, the loans come from the lender's own source of funds. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. These loans are easier to get but the terms are different. They usually don't care about your personal income but rather the income of the property. Even Hard Money is a form of "portfolio" lending. If the lender has control, it comes from their portfolio of funds. Thus the name. Since there are over 8,000 lenders in the US, that means that there is over 8,000 different portfolio loans. It can vary WIDELY between lenders some times with this type of lending.
Some other common differences between the two loans:
- Appraisals – Conventional loans will always go off of “sold comparable properties” (or comps). Portfolio loans could be based on that too but mostly they are based on the rental income method of evaluating the value of the property.
- Lending to an LLC – Conventional loans must close in your personal name. Even if you switch the title to your LLC after closing the loan will always be on your personal credit. Portfolio loans should be able to lend to your business in every situation and never report to your personal credit.
- Rates – Conventional loans are 30 year, fixed rate, no prepayment penalty, no balloon payment. It is very common to see a portfolio loan with a higher rate, a shorter term, and maybe even be an adjustable rate – and sometimes all 3 of those.
- Loan Structure – Conventional loans are based on 1 property. If you buy 4 separate properties…you will have 4 separate conventional loans. Many portfolio lenders will have a “blanket” option to go over multiple properties with one loan (Just lookout for that release clause).
And we could certainly keep going here. Keep in mind that I cannot speak for every single lender in the country. So could your local lender do something different that is not mentioned here? Yes, completely possible. But hopefully knowing the difference between lenders will help you understand what type of lender you are speaking to and what to expect.
- Difference in Lenders
Since portfolio loans come from each individual lender there will be obvious differences between each lender. Comparatively, Fannie Mae and Freddie Mac dictate conventional lending rules which means that most lenders will be required to follow the same rules – mostly. The difference between lenders with conventional loans is almost unnoticeable if you aren’t a real estate investor. But if you are a real estate investor the differences can be DEVESTATING to your deals.
Things like not using rental income, limiting the number of properties, not offering cash out loans, loan minimums and seasoning are all different items you will face when interviewing conventional lenders. For example – Fannie Mae and Freddie Mac do NOT have a loan minimum. So why do so many lenders have a loan minimum if Fannie/Freddie don’t? The answer here is with the nature of what we do – we are real estate investors. Investment properties foreclose at a higher rate than primary homes. By default, they are “riskier”. So if I am a lender, maybe I want to limit my risk to investment properties. And if I am a publicly traded company – then maybe even my shareholders want me to limit my risk to investment properties. Shareholders have rights too. And this is why we don’t work with large, national, publicly traded lenders. They have too many restrictions to investors. We speak about smaller, local lenders for a reason. They have less “OVERLAYS”. Overlays are the rules that lenders put OVER the Fannie/Freddie rules to limit their risk to us…well, our properties. Fannie Mae and Freddie Mac say that using an overlay is totally allowable. If you want your credit score minimum to be 680, even though Fannie/Freddie minimum is 620, then go ahead. You cannot be LESS conservative though. You still have to follow Fannie/Freddie guidelines. Some common OVERLAYS are:
- Credit Score
- Not using Rental Income
- Loan Minimums
- Making us have more downpayment than needed
- Not using “After Repair Value”
- Limiting the number of loans
- Requiring more reserves than needed
- And plenty of others too
So imagine you are trying to use the BRRRR method on a property and your lender states "We can't use the ARV until after 12 months, we can't refinance until after 12 months, we can't use rental income until it is on your tax returns, your loan amount can't be below $100,000, and we will require you to have 30% equity in your property".
If that was the case we couldn't do the BRRRR method - ever! And I’m using that example above because those are all examples of OVERLAYS that we have heard. Except no one probably told you they were overlays before. You can absolutely find conventional lenders with no loan minimums, no seasoning, using rental income immediately, and so forth. You just have to know how to find them.
- Questions to Ask Lenders
So how are we supposed to find good, investor friendly lenders with all of these differences? I have put together a list of questions for you to ask your lenders as you interview them. You can certainly ask other questions if you like, but this post is for us "buy and hold" investors. You MUST ask these questions as a part of your interview process to make the BRRRR method (and other "buy and hold" methods) work.
Questions for Lenders
- When do you start using rental income to help me qualify? (the answer needs to be immediately)
- When do you start using “After Repair Value” on my property? (also needs to be immediately)
- How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
- What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
- How many loans can I have with you?
- Can I change title to my LLC?
- Do you sell your mortgages?
- What is your loan minimum?
- Can you explain to me what your reserve requirements are?
These questions are more for the “Conventional” Style loan. So if you ask these to a “portfolio” style of lender you may only get 25% downpayment minimum. But with Fannie/Freddie, their guidelines say 15%....and no seasoning….and using rental income immediately….and loan minimum…and so forth. We KNOW what their rules are, we just need to find a lender who follows their rules with as few of overlays as possible.
So what if the lender you are interviewing answers all of these questions except #8 they say $75k? That means 2 things:
- Just make sure your ARV will never have a loan amount below their threshold.
- But it also means that they might have some other small overlays somewhere else.
Fannie Mae’s guidelines are over 1200 pages long. Freddie Mac’s are over 2000 pages. It would be impossible to provide you with every question to every scenario to get answers to everything. So there’s one more technique to know on how to find good lender.
How to Find “Investor Friendly” Lenders
We now know what the differences are; we know what to ask; so how to we find them? The best way is to lean on other real estate investors! They’ve already done all the hard work of finding good lenders (hopefully) so put on your networking cap and start making friends!
Here's my 3 suggestions:
- Post in the Bigger Pockets STATE forum that you are looking in. There are usually some good, local investors that monitor those forums. Maybe they already have a suggestion or recommendation for you? Certainly try there.
- Visit your local REI groups. There are many groups that meet across the country. Obviously things are a bit different right now but many are meeting virtually. Some post here on the Bigger Pockets Marketplace. Many post on meetup.com. Networking is always a great practice and you never know who you might meet there and what good information they have to share. Would certainly recommend visiting if one is close to you.
- Calling - and then there's this option. You can certainly just google search lenders and call each one. Which is what I have had to do many times...it stinks. Try to other two first.
*WHEW* I know that was a lot but hopefully this helps in some way on how to find “Investor Friendly” lenders. This certainly isn’t designed to be all-encompassing but maybe with some good luck and hard work you will have a great partner for years to come. The assignment from here – 4 lenders. If you are just beginning your assignment is to have 4 lenders at a minimum. You don’t want to find a great property that can’t get financing. Make sure you have multiples and you will have a significantly higher chance of success.
Thanks for reading!
Having a great lender is incredible, it definitely makes investing that much easier. Appreciate all this information as well, it is definately super helpful.
This is great information, I still have some questions as a novice:
1. Is 10 the limit amount of loans you can get with a conventional (bank)?
2. What's the difference between a Credit Union and a mortgage company?
3. Do you have to be there in person to sign for the Loan?
4.If I call my local Chase bank and then call another chase bank in another city will they have different rates or the same?
5. What are the other types of loans like you're going to get a more than a 4 unit?
6. How can you play into it where you can use the 80/20 rule or 80/10/10 rule? Basically you don't pay any money?
7. How can you use the apprasial to buy into another house, for example if I buy a house for 60k and it appraised to 100k the bank is willing to give 80% = 80k SO i take out 60k and leave the 20k in there How can I use that 20k later for in a later time?
8. Let's say it's been 28 years and my property has been paying itself so can I sign another mortgage onto that house basically a second refiance and can I do a 3rd or 4th?
@Fahadbin Alam thanks for posting. I almost missed this. If you use that @ symbol and the name then that will flag us (like I did with you) but here are your answers:
- Yes, the 10 loan limit is a Fannie/Freddie limit.
- Basically a credit union is a "not for profit" lending institution. Conceptually, profits are returned to the members in forms of lower rates and lower fees. A mortgage company is usually an organization that only lends mortgages. Meaning, no savings or checking accounts available. Their niche is just mortgages. I hope that helps with the basic differences of the two.
- This does depend on the loan type and the state laws that govern the transaction. Most need at least some type of notarization process and some will require you to sign in person but certainly not all types. Lean on your title company and lender for more specifics on this since it is such a state specific answer.
- Well, if that city is in another state they might have different rates. States will sometimes have small differences but if it's in the same state it will be the same.
- Anything that is 5+ units is a commercial building. Commercial lending terms would apply.
- The 80/20 or 80/10/10 loan types are no longer in existence. Those went away when the housing crises occurred. It is still possible to get homes without coming out of pocket a lot of money and the most popular method for this currently is the BRRRR method.
- Well, in theory this would work but this is almost impossible to do in this current market. Well, immediately that is. You can certainly wait over time and do this and that is a reasonable strategy. There are good methods written about doing this every 5 years or so on your properties. But doing it very quickly will be very challenging.
- And certainly. This would be called a standard "refinance".
Feel free to ask anything else. Thanks!
@Andrew Postell wow thank you for that info. Getting ready to but my first rental (3rd property overall), & I just learned a lot about lenders from your post in just a few mins. Now I'm off to the forums & meetup to find a lender in my market. I do have a question based on your follow ups. You mentioned Freddie/Fannie has a hard cap of 10 loans, I'm assuming that's to an individual? Would "portfolio" lenders (or of course private investors) allow me to get around this cap when I hit it? What about an LLC, assuming that I can find a bank that will lend to an LLC eventually? Basically is the cap based on whose name is on the loan?
@Andrew Postell thank you for the superb response!!
I’m still a little confused on some of the questions:
1. so if I were to max out on the Freddy/mac loans which is basically the government funded loans, can I still reach after credit Unions? Or do they also follow the Freddy and Max? If not would it be better to go after a hard money, because the only con I see to this is the high rates.
4. I’m a bit confused on the banking. So I’ve listen to the BP podcast and they’ve said to call as many banks in your area to get the best rate. What does that mean? Do I call my local TD, Wellsfargo, and chase banks or do I also call the credit unions?
8. For refinancing how many times can I do it? Let me explain so let’s say I refinanced this year and I wanted to refinance again in a couple months hypothetically. Will this be possible or would the bank be like “oh we can’t give you a refinance you have to wait X amount of days”
Another question: I'm utilizing the BRRRR method I've used pure cash to buy my first property I'm in the step of rehabbing it. My question is when do I seek for a refinance? Would it be after I'm finished with the rehab? Since I Read the book I am still confused on the pre approval part. Does that mean you call your bank and be like "hey I'm about to buy this property and I'm gonna fix it up am I approved to get this amount of money" or would you call the bank after you rehabbed?
@Aaron Wisch I like the question and i
@Aaron Wisch yes, the 10 loan limit that Fannie/Freddie have is per person. So if you have 10 and you are married....then your spouse can have 10 as well. And if you do have 10 - what a great problem to have! Portfolio/Commercial loans lend to your LLC. I guess you could have them lend to you personally but there's not point really. One of their main benefits is that you aren't personally responsible for them. Hope that all makes sense.
@Fahadbin Alam here's your answers:
1. This would depend on what types of loans they offer. So if they only offer Fannie/Freddie, then they can't go over that 10 loan limit. If they offer portfolio options, then they can. It used to be said to focus on Credit Unions since their lending terms would be better than some places....and maybe that's still the case but for the most part smaller, local lenders seem to work best. And your local real estate investors will know which lenders are good ones to start with. It is possible to find good or bad lenders of any type. Just because they are "X" doesn't mean they are good or bad....and those questions will help you filter through them easier.
And hard money is temporary money. We use HML in the "BUY" step of the BRRRR process. You will then "REFINANCE" out of your "BUY" money into a long term "conventional" style loan or "portfolio" style loan.
4. I certainly do support what Bigger Pockets does but it's not all about rates. You can certainly call around if you like. It is one of the methods I suggested to find good lenders. Leaning on other investors on who's a good lender might be a little easier. The point of this post is to demonstrate that it's not all about rate. There are other things that are really important as well.
8. You can refinance as many times as you like. Keep in mind the seasoning question when you are interviewing your lenders. We want to work with lenders that have no seasoning.
I would always recommend to get prequalified BEFORE you purchase a property. If you can. That way if your prequalification affects any of your numbers you know it ahead of time. You can adjust your offer if you need to.
Since you already own a property that you purchased with cash you will face some challenges. Absolutely start your search and see what you find. Most refinances are taking about 45+ days now anyway so depending on how long your rehab has to go you might need to get started anyway.
Hope this helps. Thanks!
@Andrew Postell Again thank you for responding! You’re a big help in this community!
1. I’m still confused on refinancing. So let’s say I finished up my Rehab and I want to look for a refinance I got a person to come to the house to see if I get an appraisal, is this how the process works?
2. So I get you should get a refinance or quote before you purchase a property so how would you know how much to spend on the house? Like I’m having a hard time using the BP calculator.
1. Basically your lender would send the appraiser out to the property to appraise the value of the home. It is usually handled by them.
2. I'm not very familiar with the BP calculator but I would certainly encourage everyone to get prequalified. Absolutely. Every time. If you are using the BRRRR method I would encourage you to get prequalified on the "BUY" step and the "REFINANCE" step. Knowing the loan terms on those steps will help with structuring your deal.
@Andrew Postell in my mind I just still don’t understand. Why would a bank give a pre approval of a refinance? Like can you give a scenario of how the conversation would go?
@Fahadbin Alam I mean, I guess I can't speak for every lender here but that's the point of this post. If a lender cannot provide a prequalification letter, then we would likely need to go to a different lender. Some Hard Money Lenders will actually REQUIRE you to be prequalified with your permanent financing lender to make sure that your exit strategy is in place. The conversation is just like any other conversation will go - "I'm going to Buy a property, then Rehab it, then Rent it, then Refinance it....can you help with that?" And then go into those questions above. Same as always.
@Andrew Postell Okay I understand that I can get prequalified for a Refinance. So let's say I bought a property for 57k and it needs some good rehab, about 20k and it would be worth...let's say 140k. Now what I'm confused at is that, would the lender give me the refinance after I'm done fixing it up. So this is how the conversation would go in my head:
Me: I'm going to Buy a property, then Rehab it, then Rent it, then Refinance it....can you help with that?"
Lender: Yes we can give a refinance, just contact us back.
And how would I have evidence that I have the pre approval is it just word of mouth by the lender or me or is there paperwork?
@Fahadbin Alam part of this will become clear when you go through the process but you will get a letter stating how much you are prequalified for. You should be able to know your rate, payment, terms, etc. They should be able to tell you all of these things BEFORE you have the property. At least, if they know what they are doing.
@Andrew Postell is there a software or app to know how much you can probably get refinanced for or do you just look at comps? Also when’s bank gives you a quote do they know the property you’re going after? Like let’s say I’m just looking for properties, do you just ask for a quote while your still searching for a property or do you have to be set on stone on a property that you like and then the bank or lender gives you a pre approval?
@Fahadbin Alam if you mean is there a way to calculate value there are several different methods of doing this and some programs like Zillow will help in some areas. Other programs might assist as well. Your prequalification is based on what you can "afford" and they don't base it on a specific property. It's more of a generic type of letter that can apply to any qualifying property.
@Andrew Postell interesting so let’s say I have a 750 credit score and everything is great. The lender/bank thinks I’m a great asset. So do I have a decision on how I want? So if I’m targeting a 100k property but I ask for 500k is that possible? Because with that I can buy that property and then use the other 400k to buy other properties while that one house is paying off that one loan. Hypothetically?
@Fahadbin Alam those questions are exactly what your prequalification would answer. Absolutely go into those questions when you are interviewing lenders. They'll let you know.
@Andrew Postell thank you for your help!!
What a great post!! So much good information here. I do have a question though. I left my W2 job few months ago and got my real estate license in hopes of selling real estate and investing in it. So, if I find a property, I will have to pay cash for it because I will not qualify for a conventional loan since I don't have tax returns from last two years as a 1099 contractor. So the only other option is a portfolio loan. If the properties numbers makes sense, will a portfolio lender give me a loan based of the rental income or equity?
Something I did not learn right away is that to a degree the terms you are given are all negotiable. I did about 3-4 deals before figuring this out. I keep a running sheet of local banks that I update about every month on their terms for holds and terms for development.
Here is what I am seeing right now around the Boston area:
LTV - 75-80% is what I see
Origination Fee - 1/2 to 1 point fee
I look for 100% coverage of hard construction costs
Interest rate - I’m between 4.25 and 4.75% at about 6 local banks right now
Term - highest is about 18-24 months. If you need an extension for some reason most are really good about giving you a little extra time if it came to it because they don’t want to have to do the work to take over the project.
LTV - 75-80%
Interest - 3%-3.75% as an arm from 5-7 years (we don’t plan to hold forever so better rates are more appealing to us here)
Amort - I push for 30 year but a lot are 25
Rehab loan if needed which rolls into PITI as you draw funds. Usually a term of 1 year to complete renovations
@Andrew Postell . Andrew... thank you for the write up! It’s very helpful and I’ll be saving this!
@Aditya Sharma thanks for reaching out but yes, this is EXACTLY the purpose of portfolio lending. You can reach out based on the methods that I suggested above but a good portfolio lender will ignore your income and base the loan on the income of the property. That would be the route to take. Thanks again!
@Eric Sullivan same here. You should see how many lenders and notes I have on them. As you progress in your career you will need more and more lenders. Good suggestion!