How To: Find Real Estate Investor Friendly Lenders

[Andrew Postell]

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:

1. Loan Types
2. Differences in Lenders
3. Questions to Ask Lenders
4. How to find the best “Investor Friendly” lenders

Let’s begin.

1. 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.

1. 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
• Seasoning
• 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.

1. 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

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. When do you start using “After Repair Value” on my property? (also needs to be immediately)
3. 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)
4. 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)
5. How many loans can I have with you?
6. Can I change title to my LLC?
7. Do you sell your mortgages?
8. What is your loan minimum?
9. 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:

1. Just make sure your ARV will never have a loan amount below their threshold.
2. 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:

1. 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.
2. 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.
3. 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!

[Andrew Postell]

@Therese V. as mentioned above anything that is 5 units or more is in the commercial world so "portfolio" lending would be the only loans to use at that level.

Ah, now when using Hard Money Lenders we usually only use them with residential properties. Because their fees are too high at a $1.5million level. It just wouldn't be feasible in 99% of the scenarios to use HML on a purchase price that big. Even at $500,000 we try to select different funding options.

So when using commercial loans on multi-family properties we always run into the same block - where do we get our downpayment from?  Commercial lending is almost a different animal.  Usually a commercial loan will base the loan on 2 years of rental history.  So if we are buying a "challenged" property....what if the rents are super low?  What if there are no rents?  If we are looking to buy and fixup a multi-family property then we usually need a different strategy entirely.  So check out the commercial forum for some techniques.  This post was mostly for residential lending...but many of the same concepts will work.  So lean on other real estate investors working in this space and I think that will help you with what to do on a property that you were describing.  Thanks!

[Therese V.]

Originally posted by @Andrew Postell:

@Therese V. as mentioned above anything that is 5 units or more is in ...

 Thank you so much for the response. I'll check out the other forum to learn more about larger multifamily!

[Josie W.]

@Andrew Postell.

Thank you for the post. I learned a lot from it. I am currently searching for my 4th rental property. Third property it is fully paid, I purchased with loan funds from my residence. I already contacted 4 lenders. Two of them local and two of them national. I initially asked for a mortgage rates for this new property but I also asked for current rates for home equity loans because I am also considering getting a loan of my fully paid rentL to buy this next one. Of course I understand rates are changing too fast and rates are not guaranteed unless they are locked. I think as long as rates are lower for loans I could continue doing this. I have been doing a lot of reading about this and want to continue learning!! I learned a lot from reading your post.  I wanted to share what I am doing and if possible, I would like your feedback. Thank you

[Andrew Postell]

@Josie W. thanks for posting.  Feel free to reach out any time.  Certainly here to help!

[Nancy Huang]

This was super informative! I just started my journey to search for mortgages and all things home purchasing and this put me on a great path. Thank you so much @Andrew Postell!! 

[Andrew Postell]

@Nancy Huang you are most welcome!  Good luck with your journey!

[Philip Joseph]

I'm trying to refinance out of hard money and I was offered rates of 6.8% from one bank and 6.4% from another for a 30 yr fixed rental property loan. My local bank was going to loan me 80% LTV at 5% for 5 years with a 20 year amortization, but yesterday they called and said they could only do 80% of the original purchase amount which meant I would not even be able to pay back the hard money. I did not expect to see rates go this high so quick. Rates are changing weekly.

cajun

[Jason Revere]

@Andrew Postell, what an awesome post. Exactly what I was looking for. Definitely going to hop into the state forums (NW Louisiana) to find funding help. Thanks for the information. I'm definitely going to need the "portfolio" style loan based on income. How much does your credit score affect interest rate when the loan is based on income producing property?

[Andrew Postell]

@Jason Revere sorry I didn't see this post previously. I guess the tag for my name didn't work or something. Anyway, your credit score is always important. But it's not AS important with more of those commercial/DSCR style loans as it is with Fannie/Freddie style loans. Your credit is a test - when you have 200 properties that's 200 property tax bills, 200 insurance bills, 200 maintenance bills, bills, and bills and bills and bills. I say your credit is a test because if you cannot manage 20 bills...you'll never get to managing 200 bills. I don't mean this in any way but as a suggestion. Just think about it (and anyone else who is reading this). Thanks!

[William Manning]

@Andrew Postell posts like this one is making me believe that I didn't screw up when I paid $390 for a subscription to this site. All the points you made probably saved me thousands in the future.

Thank you

[Eddy Baik]

@Andrew Postell Just wanted you to know your amazingly detailed post has helped yet another newbie RE investor - me! Thanks so much for writing it and sharing

[Andrew Postell]

@Eddy Baik you are most welcome!  Thanks for the kind words.  Glad this post is helpful.

[Ikenna Okoye]

@Andrew Postell Thanks for this really enlightening post! I have a few questions about your screening questions before I am able to put them to use.

1. 1. When you mentioned minimum downpayment, are you referring to the equity you have to leave in the deal for a cashout refi, aka the LTV? I ask this from the perspective of a HML being covered 100% and using the cash out to pay off a HML.
2. 2. With changing title from you to an LLC, is this a question you ask because you might purchase in your personal name?
   
3. 3. Selling mortgages? Are you asking this question for simplicity in paying loans monthly?  
4. 4. What would you say are reasonable reserve requirements? 

[Andrew Postell]

@Ikenna Okoye thanks for the questions!  Here's the answers:

1. 1. When you mentioned minimum downpayment, are you referring to the equity you have to leave in the deal for a cashout refi, aka the LTV? I ask this from the perspective of a HML being covered 100% and using the cash out to pay off a HML. - Saying "Loan to Value" is a good term.  Sometimes you won't be doing a "cash out loan" though.  I prefer asking about the downpayment.  And some of these questions are designed to just sniff out if the lender has overlays.  So even if you never use a 15% downpayment to purchase a home - I want you to still ask the question.  If that lender doesn't answer it correctly, then we need to go to a different lender.
2. 2. With changing title from you to an LLC, is this a question you ask because you might purchase in your personal name? - Ah, so this is a question because I want asked for that reason but also to test the loan officer.  If they say something along the lines of "I don't know, let me ask" then they aren't experienced with what we do as investors and we need to go to another lender.  
   
3. 3. Selling mortgages? Are you asking this question for simplicity in paying loans monthly? - No, I want to know if they sell their mortgages or not.  This may not be a deal breaker for me but I want to know up front.  Not every lender sells their mortgages.
4. 4. What would you say are reasonable reserve requirements? - Reasonable? Maybe 3 months of payment per property?  As you get more properties, your reserve requirements will increase though.  But 3 months is a good start.

Hope all of that makes sense. 

[Matt Wells]

@Andrew Postell This is an extremely helpful post and I have a question. So does Fannie/Freddie not have a seasoning requirement for a cash-out refinance at ARV? That 6 months of seasoning I have to wait is my lender's decision? I am using conventional loans.

[Andrew Postell]

@Matt Wells typing this out might get complicated in a hurry so I'll try to summarize and you can certainly reach out directly if you would like to talk it through.

Conventional loans categorize loans into 3 main categories:  Purchases, No Cash Out Refinance, and Cash Out Refinances.  "No Cash Refinances" have ZERO seasoning.  None.  Cash Out COULD have Zero seasoning - if you purchased with cash...and then there's some limitations based on the scenario.  But it COULD also have 6 months of seasoning.  Since it's so confusing, I try to avoid the "Cash Out" scenario all together.  Meaning, I either take all the money I can from my Hard Money Lender (or other acquisition loan) so that I'm just doing a "No Cash Out" Refinance when I get there (thus no seasoning) or I structure it differently.  I wrote an entire post on how to properly structure "Cash Purchases" that you can read HERE.  We've been using that technique for years.

Needless to say, it can be confusing and complicated.  So make sure you are working with someone that knows how to navigate these rules.  It took me a few years to get it down but you can 100% refinance with no seasoning. 

Hope all of that makes sense. 

[Matt Wells]

@Andrew Postell I read your "Cash Purchases" post. It makes perfect sense. I'll be asking my lender about this ASAP!

[Andrew Postell]

bumping this post since there have been lots of questions on this topic recently.

[Gustan Cho]

Great post . 

[Andrew Postell]

@Gustan Cho thank you sir.

[Laurie G.]

I will echo what many others have stated. This post is incredibly informative. Thank you for taking the time to thoughtfully consider each question and respond accordingly! Now I just need to find an @Andrew Postell in NC!  Thank you again!

[Andrew Postell]

@Laurie G. thanks so much Laura.  Greatly appreciated!