Using a SBLOC to avoid mortgage insurance on a small multifamily in Los Angeles CA

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Using a SBLOC to avoid mortgage insurance on a small multifamily in Los Angeles CA

David Lasky
Member since 2021 · 7 posts · 1 vote

This question is for all the lenders out there please let me know if this plan holds water. 

I'm a first time home buyer. My goal is to buy a small 3-4 unit multifamily property in Los Angeles by the end of the year. We want to find a property that can cover our housing expenses. My company will be relocating me back to LA and I am tired of renting. If everything works out I'll be able to put 10% down from savings on a $1M property by years end. I would like to try to avoid PMI if possible. My brokerage is offering a Securities Backed Line of Credit (SBLOC). They can lend me the other 10% at a floating 8.5% interest only line of credit. I would then try to fix up the units and pay off the SBLOC as fast as possible. If this scheme can be pulled off I will still have about 6 months of expenses saved up for whatever surprises might be in store.

My main questions are:

Will the SBLOC affect my ability to qualify for a loan? I was told that the SBLOC does not show up on a credit check. 

The stocks would have to drop 65% before a margin call. Is that safe enough?

Is there a product that could roll renovation costs into the loan so I could have a little cushion to improve the property?

Should I go FHA or conventional for this plan?

Thanks for your thoughts. I'm looking forward to hearing your opinions in the comments. 

-David

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Dave Skow
Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
3y

@David Lasky- thanks 1) get a pre approval underway and ask your lender these questions 2) the loan you mention is likely acceptable as its a secured loan ( like a 401K loan ) ..make sure that this is fine with your lender 3) if you want to put 20% down you will need to use FHA loan as conventional requires 25% down 4) if using FHA make sure you ask lender about the self sufficiency test requirement for the new proeprty

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  • Dan Portka
    Real Estate Agent · San Pedro, CA · Member since 2019 · 253 posts · 128 votes
    3y

    hey @David Lasky If you're okay with the inherent risk, sounds to me like your plan will work. I'd recommend giving a lender a call to see what you can qualify for, let me know if you need a solid recommendation. I know someone that does reno loans as you describe too. 3/4 units are tough with FHA in LA due to the self sufficiency requirement. Because our rent to price ratios are so low here, it usually doesn't work out. So you'd likely be going the conventional route. You could put less down and not have the self sufficiency requirement with a duplex, have you considered that?

    1Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    3y

    @David Lasky- thanks 1) get a pre approval underway and ask your lender these questions 2) the loan you mention is likely acceptable as its a secured loan ( like a 401K loan ) ..make sure that this is fine with your lender 3) if you want to put 20% down you will need to use FHA loan as conventional requires 25% down 4) if using FHA make sure you ask lender about the self sufficiency test requirement for the new proeprty

    1Reply
  • David Lasky
    OP
    Member since 2021 · 7 posts · 1 vote
    3y

    Thanks for all of the great replies. 

    On the self sufficiency requirement. Am in correct to understand that the the mortgage (PITI+PMI) must be no more than 75% of the pro forma rents or does it change from lender to lender? That sounds like live in one and let your 3 renters pay your mortgage. That is my goal. If only it was that easy.

    What do I typically have to show the lender to back up my claim of pro forma rents? Do I need leases in hand or can I use neighborhood comp?

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  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    3y

    @David Lasky- FHA lender will use fair market rents and vacancy details from the appraisal ...on a 4 plex purchase - the rents from the 3 rented units need to at least cover the full PITI amount

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    3y
    Quote from @David Lasky:

    Thanks for all of the great replies. 

    On the self sufficiency requirement. Am in correct to understand that the the mortgage (PITI+PMI) must be no more than 75% of the pro forma rents or does it change from lender to lender? That sounds like live in one and let your 3 renters pay your mortgage. That is my goal. If only it was that easy.

    What do I typically have to show the lender to back up my claim of pro forma rents? Do I need leases in hand or can I use neighborhood comp?


    If the units are vacant, an appraisal for the rents must be ordered. If there are few comps to show (which is common in LA), Rents may come back lower which will make it harder to pass that requirement. Also you can use all 4 units as long as you do not need any of the expected rental income to qualify for the loan in regards to DTI.

    Be prepared to put more down and/or buy down the rate to pass this requirement on FHA loans

    On Freddie Mac Conventional Loans, you could use ADU income to qualify for a loan doing 5% down. (as long as the ADU is permitted.

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