Questions for the bank

17 Replies

My boyfriend and I are going to the bank on Saturday to ask about financing options. We are planning to go about this individually because we have drastically different finances (income, debt, other expenses). In general, we're each just trying to find out what our budget would be to purchase a house to rent so that we can start looking for a specific property. Are there any questions that we should be sure to ask, or details we should look out for?

Thanks!

@Joe Impagliazzo

Ideally we will purchase separately, but we are also planning to ask what kind of financing we could get if we were to do it together. If I could get 200k and he could get 250k, but together we could get 600k, then it would make more sense to team up since multifamily homes are about 400-600k in Massachusetts.

@Max Ockner

A few things to consider before you jump:

Don't limit yourselves to banks, try mortgage companies also.  While the requirements will be pretty much the same if you are buying in your own name, (residential lending) you'll find different attitudes. 

And consider buying in the name of an LLC instead of your own name. In that case, you open up your options to properties that are not in perfect condition or fully rented. This would be a commercial loan, and sometimes a private loan. (non-institutional)

So when you talk to a person about a mortgage, ask also to speak to the commercial lending department, and ask the same questions.  I assure you the answers will be different.  Understand, however, that commercial lending is very different, so I'd do a search here on BP before you go.  Educate yourself.  

In addition, Black Diamond (url in my signature) is having a meeting on 1/27 on "Packaging your Commercial deal for the best rates, terms and sources of funds".  It is free, no selling speakers, and will be presented by a commercial mortgage broker.  It may be a little more than you are ready for, but education is always good.

You should be aware that commercial insurance and appraisals are more expensive, but there are reasons to insulate yourself in an LLC for liability purposes.

@Stephanie Birkhimer  

While together you may be able get financing for a higher loan amount, that doesn't necessarily mean your overall return will be greater.  If you plan on buying multiple properties and have the income to support it, you may be better off buying them separately.  Typically the first 4 homes you finance you only need 15% down, homes 5-10 25% down, and at 10 you are maxed out for conventional financing.  So you could possibly purchase 8 homes with only 15% down if you do it seperately

The issue would be in actually getting the financing. If neither of us can get a loan great enough to buy a multifamily home, then we may end up pooling resources to buy one together (50% of something is better than 100% of nothing!)

We're both recent college grads, so we might not look all that desirable for a bank.

@Max Ockner  

@Stephanie Birkhimer   Welcome.

Usually I run an Application through our Credit agency and Fannie Mae's Desktop Underwriting, then I can tell how to maximize borrowing capabilities (who has strength in which areas and which we don't use)

Lenders are usually looking for 2 years work history but if you are close, doing well and in your degree field that may help.

If you're looking at rentals and you'd like to meet the Housing Court Judge, he'll be speaking at our meeting 12/30 link is below in my signature...

@Ann Bellamy  I'm not sure what the real benefits would be of looking into commercial loan options right now. My primary goals for purchasing a property now in Massachusetts are to reduce my living cost by renting out the other parts of a multifamily house and to gain some experience in the industry. I am planning on moving out of Massachusetts within the next 5 years (probably closer to 2-3 years), so I'm treating this more like a learning experience and a way to get my feet wet than anything else. Do you believe that there would be any significant positive to taking the steps you've mentioned right now? If not, then I think I would personally be more comfortable sticking with what I know more of for my first purchase. 

On a side note, I'm trying to plan for the meetings. Another BP member suggested the Black Diamond meeting to me this week, but I wasn't able to make it. Do you think they are worth the travel/time input, or will BP provide the info I need?

@Mike Hurney  I just graduated in June 2014 and began work at my current job in August, so I definitely don't have 2 years. Do you think that will hurt my chances of being able to get traditional financing?

Stephanie, if you are going to live in it, you can only do a residential loan, so commercial is off the table anyway.  I thought you were buying as an investment property.

As for Black Diamond, I am somewhat biased, since I am one of the co-founders.  If you plan to become a real estate investor, you should attend as many events as you can, whether my event or others.  You will meet people who may be the one you need to complete a transaction, and who know people who you need to know.  Education is always valuable, so soak up as much as you can for free, whether Bigger Pockets or local events.

@Stephanie Birkhimer  

The 2 year job requirement will not be an issue, at most they may ask for transcripts to show you were in school.

Originally posted by @Ann Bellamy   Bellamy:

And consider buying in the name of an LLC instead of your own name. In that case, you open up your options to properties that are not in perfect condition or fully rented. This would be a commercial loan, and sometimes a private loan. (non-institutional)

Ann how would setting up an LLC open a buyer up to more financing options? The banks are just going to ask for a personal guarantee anyways since the LLC has no history and since its a first time investor the banks are going to scrutinize any deal moreso than a seasoned investor. Maybe Im misinterpretating your comment. Thanks.

Commercial loans include individual loans on a property for business purposes, blanket loans on multiple properties, hard money loans, etc.  

Residential lenders won't lend on a property in disrepair, with a couple of exceptions.  They also won't lend on 5+ unit buildings.  They won't do blanket loans on multiple SFRs.  

Virtually all lenders:  residential, hard money and commercial (except non-recourse which is fairly rare) require a personal guarantee, @Rob Beland and it doesn't have to do with the LLC having no history.

I did not understand from the original post that she was going to live in it.  So I was explaining how you open up more financing options when you include commercial in your thinking.  You then use the particular loan that fits a particular situation.  

There are lots and lots of posts here on BP about people who walk into a conventional bank, sit down with the "mortgage person" and are told they can't get financed for whatever the project is.  When you include the commercial lending department of banks, commercial mortgage brokers, and hard money lenders, you open up a whole bunch more options.  None of which are related to signing personally.  You almost always have to do that anyway.  

It's not the LLC itself that opens up the options, it is considering commercial funding. And most commercial loans require that the borrower be an entity, not a person. Most, not all.

Sorry if I was unclear, does this clarify?

@Ann Bellamy  

I'm getting started just like @Stephanie Birkhimer  . I'm currently looking for a multi unit property and talking to mortgage lenders. My question is how to begin building a relationship with a lender that will benefit my future goals.

Does receiving a conventional loan for an owner occupied multi unit improve my ability to get a loan from the same bank/lender for a newly formed LLC in the future? If new LLCs require a personal guarantee, does my past performance on a personal mortgage come into play? I'm trying to maximize my future options, so I'm looking for a bank that does FHA, conventional, and commercial loans. Is this a valid idea or am I just wasting my time?

I'm looking to use a FHA loan on the first multi unit in hopes that I can save my cash and be that much closer to a second property. The second (and subsequent) properties would likely require larger down payments (and even larger down payments if purchased through an LLC).

It's not new LLCs that require a personal guarantee.  New has nothing to do with it, frequently  LLCs are formed by real estate investors for each project.  Personal guarantees are required by commercial lenders in almost all cases, period.  Why would they take the risk if you won't?

What will improve your chances for a commercial loan when you are first starting is getting one or two small rental properties under your belt, and making them cash flow positive, and being able to properly document that progress and cash flow.  

Having a relationship with a bank can make the application process easier, but I wouldn't limit myself to one bank.  Network with investors in your local area to find banks and lenders.   Communicate with those lenders and find out their preferred type of deal.   Don't overlook commercial mortgage brokers, they can find sources of capital that you can't.  

Don't let all the options run you off!!  After you go see the bank report back here what they said and then you can get more input.

I didn't read all of the responses, so I hope I'm not repeating anyone. I wouldn't go to a bank. They will only discuss how the two of you fit their lending parameters. Bank's are heavily regulated and the majority try to make mortgage loans that they could sell in the secondary market if they had to, so they follow the same cookie cutter criteria. I would approach a mortgage broker (get the contact information of a good one from some of the other investors on this site). They have access to all kinds of lenders and programs and are in a better position to explain your options. Best of Luck.

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