Has Anyone Hit Their Lender's "Concentration Limit"?

Question

I had two conversations last week that keep replaying in my head.

First investor: 10 properties with his lender. Wants to refinance another deal - 1.25x DSCR, 720 credit, portfolio performing well. Lender says he's maxed on their concentration limit. Done.

Second investor: Acquiring 20 non-warrantable condos. All cash-flowing. Lender caps at 10 loans per borrower, makes an exception for 3 more. Loses the other 7 units because of an internal cap.

Both situations are frustrating because these aren't risky borrowers. They're successful investors getting penalized for... being successful investors.

I see this pattern constantly. Traditional lenders minimize their exposure risk by capping how many loans one borrower can have. Which makes sense for them. But it kills momentum for anyone trying to actually scale.

You spend months or years building a relationship with a lender, get your system dialed in, then hit an arbitrary wall. Now you're juggling multiple lenders, slower processes, and potentially missing deals.

This is why there's value working with lenders who can fund in-house and have secondary market access. No concentration caps. If your deals perform and you're a strong borrower, you can keep scaling.

My question for the BP community: Have you hit concentration limits with your lender? How did you navigate it? Did you have to split your portfolio across multiple lenders?

Curious what everyone's experience has been with this.

Nick Belsky · Answer

@Julien Hill

This is further support for how conventional lending is NOT ideal for the average investor.  I've posted many times on BPC about this, but personally, I'd never use conventional financing.  The exposure cap is only one reason, but even some DSCR lenders have an internal exposure limit.  It may be 10, it may be 20, most have no cap whatsoever.  The DSCR process is far superior for investors and is designed to be that way.  Too many lenders have adopted a "Fannie/Freddie" style of UW these as well.

Flags are if they ask about any other properties you own other than the subject, ask if you own a primary or have to show 12 months of primary housing expense, ask if you are an out of state investor, etc... these are things that are normally asked by Wholesale lenders.  These folks adopt too many conventional guidelines as they sell DSCR on the secondary markets as well.  They don't have their own funds and run mostly on warehouse lines.  We avoid these lenders for our clients in most cases.  Other lenders UW DSCR the way they were designed for, using only the subject property.  Our clients find these lenders to provide the most beneficial and an overall better lending experience.

Details always matter.  Digging in before hand is helpful, but if you can get to know the owners/presidents/VPs/etc... often you can discover the reasons why such guidelines are in place.  Once you understand that, then you can explain to your clients as well.  It highlights your expertise and helps build confidence with clients.

Cheers!

David Krulac · Answer

When there was a situation of Fanny/Freddie 10 mortgage limits, the first 10 were bought by me then the second 10 were bought by my wife.  After that we used portfolio mortgages (not sold on secondary market), DSCR and seller or private financing.  The limits set by the government never stopped us from buying.  I always thought that the 10 mortgage limit was arbitrary and misguided.  For example what is more of a lending risk: a borrower who has 10 fifty % LTV mortgages for $100,000 each or a borrower who has 3 ninety % LTV mortgages for $1,000,000 each ?

Jeremy Horton · Answer

Seems like you would just swap lenders to finance new deals

I don't personally see how this happens, unless the lender is tiny, has some kind of capital problem or the deal is just really big relative to the size of the bank

Meaning my local single location credit union probably would not be willing to finance a 200mm apartment complex in Miami because it's a risk concentration thing. Meaning they could be in real trouble if I defaulted somehow. The bank doesn't want to position themselves where your failure would result in their failure as well. This may change as you build a track record and get bigger and bigger - I'm sure some (Trump/Grant Cardone etc are more partners with the bank than strictly clients)

How is he financing these? Downpayment? Loan type? with DSCR loans it would be more of a total financed amount vs the # of loans. ie they would do 20 100k loans for 2 million total as opposed to a single 200mm loan

I'd assume you're talking about DSCR loans already - if you're talking about conventional - well of course there are limits there since the loans are sold frequently. They have to follow certain guidelines. The rules are pretty straightforward on this - the limitations for most would be DTI ratio and then probably your credit score.

I've never hit this limit, I don't have a desire to try either to be honest

AJ Exner · Answer

These appear (cursory glance) to be issues with Conventional lending vs. more of the DSCR side of things.

It sounds like it is time for those investors to pivot towards DSCR lenders that will, not only refrain from 'concentration limits', but give them better pricing and help them scale without getting bogged down. Especially when you build a nice book of business with a trust-worthy lender, the processing becomes smoother and it should alleviate some financial/time pressures that would help them grow beyond any kind of potential 'concentration' issues.

I do get the 'diversification' of lenders across a portfolio, but sometimes that is just out of necessity (rural-ish vs. urban, regional constraints, vacancy concerns, 1-4 units vs. 5+)

I would really push once you hit these limits to look into some DSCR lenders that can help them get what they need.

Has Anyone Hit Their Lender's "Concentration Limit"?

Most Popular Reply