What did your finances look like?

Question

I’m interested in multi family in the $1-1.5m range. One lender said I don’t have the personal income to support this (150-160k). I haven’t dug in to this yet or called other lenders, but I’m curious what other people’s income was when they were first approved for loans over $1M. I know partners are an option, but not one I want to use right now.

Greg Dickerson · Answer

You will need the down payment, net worth equal to the loan amount and cash reserves for 12-18 months worth of payments right now. Best bet is to raise the capital and bring in a financial qualifier aka KP

Todd Dexheimer · Answer

@James York there are several types of loans out there that you can get for MF and they have different requirements

1. Agency debt (fannie, freddie, CMBS, HUD): You will need to be able to show a net worth equal to the loan amount and 12-18 months of principal and interest payments in liquidity. You will also need some experience. Basically for a $1mm loan they want to see a net worth of $1mm and $55k-$80k in liquidity.

These are non-recourse, so it is fairly common and easy to bring in a key principal (KP) to sign on the loan with you that has those requirements.

2. Local commercial lender: They are more lenient. They will look at your debt to income ratio, current income, property cash flow and your liquidity. This will be easier to qualify for, but comes with some disadvantages.

a. 20-25 year Am

.       b. Fixed for only 5-7 years

.       c. higher interest rates

d. Full recourse

Big advantages are that it is cheaper to obtain the loan, much more flexible and has no or low pre-payment penalties.

Call some more lenders. This has nothing to do with how you qualify for your personal residence, so ignore that advice from the poster above.

Here is a blog that I wrote on financing as well:

https://www.biggerpockets.com/member-blogs/10145/72001-getting-an-apartment-loan

Greg Dickerson · Answer

You must have a net worth equal to the loan amount. Net worth is not your income. Net worth is assets - liabilities.

If you are going after multifamily check out Freddie and Fannie small balance loan programs. The list the requirements and approved lenders who will also explain all the requirements as they have changed recently due to covid-19

Greg Dickerson · Answer

Every situation and every lender is different especially right now. Also you can’t do multi family as a second home it’s investment property. Second homes can be financed using conventional mortgages with much less strict criteria

Brian Garrett · Answer

You don’t need personal income or net worth requirements with commercial/portfolio lenders. That is a Fannie/Freddie guideline for agency debt. Just depends what route you’re trying to go. Obviously agency debt will offer the best rate/term but there are certainly other less restrictive options available.

Evan Polaski · Answer

@James York, I would talk with a local commercial broker, assuming this is a multifamily deal and not a $1mm single family rental or anything like that.

Most commercial lenders, agency or private will ask for the 1:1 net worth requirement and some level of liquidity covenant, yes.  When you start getting into larger deals, they will also pull your background (not credit score or income).  You will need to have an experienced PM lined up.

James York · Answer

@Chris Seveney and @Greg Dickerson in writing this may look like an argument to your point, but it’s not. Just trying to clarify. Are you suggesting that someone who has $3m investment also has an annual income of $3m? This doesn’t seem right. I’m trying to learn where I need to get myself to in order to get in to the properties I want. 25% Down payment and reserves isn’t a problem for me at $1m. Appreciate the advice!

Chris Seveney · Answer

@James York

You cannot even  a primary residence with that income and that type of property so an investment property would even be more difficult. You should not go more than 2.5x - 3x your yearly income.

Can you go higher of course but you end up house rich and cash poor. Especially on investment properties because their are so many risks and costs that come into play.

Kelsey T. · Answer

@Greg Dickerson This is great information to have! Is this a pretty common formula lenders use? Do you know how it would differ if the loan was structured as a second home instead of investment property?

What did your finances look like?

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