Confusion on a mortgage product.

17 Replies

I am shopping around for a loan on my first investment property in SC. I managed to find a lender with a decent product (SAFE Federal Credit Union). However, they only loan 80% of the purchase price for investment properties. Maybe I am missing something? If the purchase price of a home is $100,000 and needs $20,000 in rehab, they will only lend me $80,000? First issue is, it doesn't even cover the entire price of the home. Secondly, I'm left paying rehab costs out of pocket. Aside from that they seem to offer decent terms with 20% down at 7% interest for 15 years. I just feel like they may be losing out on a lot of business due to the 80% rule. Has anyone else used this lender? Perhaps I misunderstood the 80% rule? 

All conventional loans will top out at 80% of the appraised value. (Some will limit to 75% for investment properties) With this in mind, you have a few options: 1) purchase with a mortgage, put in the extra 20% down payment plus rehab costs, then refinance in 6-12 months. Doable, but you’ll be spending a lot on closing costs times 2 2) find some private money. Friends, family, individual lenders, and have them put down most of the purchase and Reno funds. (You’ll still probably have to put in some of your money since most people won’t loan you 100% until they get to know you and your experience). Then in 6 months refinance with a bank based on the new after-Reno appraised value of the house (say $130K). Then You’re only putting in 20% of the $130 3) other options... though those are the two main ones.

I'd say that is pretty typical.  Most conventional lenders that I am aware of will want you to put at least 20-25% down on an investment property.  It's not the same as your primary residence where you can put down less.

7% interest rate also seems high, even though it's a 15-year.  Why do you even want a 15 year?  If your goal is to pay off the property sooner and spend less on overall interest over the life of the loan, then it makes sense.  But if you are trying to maximize your cash flow then a 30 year might be a better option.

Some other options to consider...there are "low doc loans" that may require less down if that's your hurdle. They typically base it on the project and the DSCR. The rates are higher, but so is the flexibility. Another option is to use a HML for the purchase then refi with a conventional lender once you have rehabbed the property. If the property is distressed, it's often challenging to even get a loan from a conventional lender. HML's will usually give you 70-75% of the purchase plus rehab (some have more/less flexibility in their terms). So in your example, you'd have to come up with $30k rather than $40k using this approach. Then after you drive the ARV to let's say $150k and you get a lender to give you an 80% LTV then you just paid off the HML and have $0 of your own money in the deal. This is the famous BRRRR strategy that is talked about alot on Bigger Pockets.

I understand what your saying about lenders being weary of lending the 100% of the value. And I'm all for 80% Loan to Value. However, im curious why I was told I could only be lended 80% Loan to Purchase. So essentially if the purchase price is $100,000 and the ARV is $150,000 and needs 0 rehab I would still only be able to borrow $80,000. Just makes zero sense to me. Thank you for your wisdom.

@Benjamin Z. Pickens you are correct in your assumptions. An investment property loan will be 75%-85% loan to cost (purchase price). 7% on a 15 year term is high, you can get less than that over 30 years. Conventional loan products aren't meant for rehabbers, they are geared toward turnkey properties. You can go the Hard money route, where you'll probably put less down, and they'll loan you the rehab (on a draw, so you'll still have to front the initial rehab and get reimbursed), and then refinance into a long term mortgage based off of the ARV.

Yep, with a purchase it’s 80% of the purchase price, or appraisal, whichever is lower. They want You to have some cash in the deal. It makes perfect sense from the lender side. 

Ok so it seems like if i go the conventional loan route I will have to have more upfront money in addition to the down payment? If that's the case I don't know what my options are. I will have access to funds for a down payment and closing. Perhaps someone can refer me to a HML that is first time-friendly.

@Benjamin Z. Pickens most of the big HMLs will lend to new investors. The regional ones are usually more customer oriented. Lima one and lending home are two of the biggest. First equity funding are good people but I dont know if they lend in Ohio. BP has some good resources on HMLs
@Benjamin Z. Pickens If you've got the 20% (of the purchase price) for a down payment then go with the conventional loan, rates now are around 5% maybe a little lower. For the rehab you can look at any number of ways to fund that, depends on your goal with the property. Hard money, HELOC on your primary (if this isn't your primary), friend and family loan, hell even CC depending on size and timeline of rehab/ sell or refi. The list goes on. 80% LTV and 7% on a 15yr note sounds like a portfolio loan, no need to go there until you've exhausted your conventionals.

use private or hard money to buy and fix, then apply a conventional afterwards. if you own it for 80% of the ARV then you can get 100% of cost mortgage.

The issue im haveing is minimal funds. 10-13k that's it. That will get me a down payment, yeah. However, if work is needed on the property im up the creek without a paddle. Most hard money lenders I've researched are not first timer friendly. I think I have actually found a conventional loan that works for me but like I said all the money I have access to will be tied up in the down payment. Cannot get friends or family to invest due to being skeptical on buying rental properties. I'm trying to keep moving forward and staying optimistic but man is it difficult. 

Originally posted by @Benjamin Z. Pickens :

The issue im haveing is minimal funds. 10-13k that's it. That will get me a down payment, yeah. However, if work is needed on the property im up the creek without a paddle. Most hard money lenders I've researched are not first timer friendly. I think I have actually found a conventional loan that works for me but like I said all the money I have access to will be tied up in the down payment. Cannot get friends or family to invest due to being skeptical on buying rental properties. I'm trying to keep moving forward and staying optimistic but man is it difficult. 

yes it is difficult

I didn't buy my first property for YEARS because I was just saving money. No one would lend me any, and I had no previous experience to sell anybody my ideas.

This whole industry is a grind, enjoy it! ;)

Its a grind for sure. I just know once I can get a little skin in the game and some experience gained it will start to work more in my favor. Thanks eveyone for your wisdom. Currently in talks with a wholesaler/flipper that is looking promising as a partner. However, like you said, Its hard to get someone on board when you have no experience. 

1 - There are much much better lender options in SC.

2- This isnt a cash poor game, despite what you may have read in a get rich quick scheme. There is no way I would buy a 100k investment property if I didnt $50k sitting liquid.

3- You mention Columbia/Sumter those are 2 very very different markets. I know SC extensively  and OH a little bit. That's like saying I am thinking of investing the Dayton/Cincinnati areas. Both of those markets btw have some "$100k yellow lines"...thats a term a partner uses for when which side of the street you are on makes a $100k difference.

In both markets today properties are selling above asking in days if not hours. If you think you have found a $150k house for $100k you are almost assuredly wrong.