Investor · Denver, CO · Member since 2017 · 42 posts · 17 votes
There has got to be a wealth of information on BP about this subject but I can't find it! I am interested in the BRRRR strategy and also out of state investing using conventional mortgages but want to get the best terms possible, and know that I an working with a lender who will refi when the time is right (after new ARV, seasoning, etc). Whenever folks talk about the BRRRR strategy, they just kind of gloss over how they are getting the financing piece done. How do you find lenders that understand and agree to this strategy? Are you using brokers? Are you cold calling banks? From the yellow pages or Google or what? Who do you ask for? What are you saying? What are you asking? I have NO idea how to do this and am really looking for some step by step guidance. Also, if I'm looking to invest out of state, do I need to be calling banks in that area?
Also, we just refinanced our house from an FHA to a conventional loan so we could potentially house hack with a new FHA on our next property, and we did this through a broker. Do you have success with brokers or should I always go direct to banks?
If there are posts or articles or books that address these questions, I would really appreciate the links. And of course, any direct advice would be much appreciated!
Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
9y
@Catherine Peters In full disclosure, I am a broker so I'll put that out first so you know my bias. From reading comments by @Chris Mason in the past I know he has done both brokering and direct lending, so he is a good source of information on the subject.
As Chris mentioned, any lender can have overlays and many of them do to varying degrees. The difference in working with a direct lender is that they are set in their guidelines and deal with their own overlays. They also have their set of loan products to work with and it can be difficult if you need something that they don't offer. Their advantage is having in-house underwriting which gives a slight advantage in processing time although I like to think I can hold my own in processing timeline.
As a broker, I work with several different lenders, so I know their guidelines and which scenarios they handle well and which they don't. For instance, when working with investors, I immediately screen down to the set of lenders I know work well in REI scenarios. Basically I take each specific scenario and tailor it to the lender that is going to offer the best deal given what we have to work with. Also, I really don't have a limit to what programs I can offer. All I have to do is find the lender that offers that product. So I have access to lenders who have some overlays as well as lenders who have virtually no overlays but each has their place and offers something unique to certain scenarios.
I will say that I see Loan Estimates from other loan officers once in a while, both broker and direct, and I see very little distinction in rates and costs between the two. About 95% of the loans I do my compensation is paid by the lender. It's only in rare instances that I do otherwise and typically that is to the advantage of the borrower for one reason or another. The key advantage to brokers is the flexibility that they have.
On the subject of BRRR, the real question is what model you want to follow for your investing. If you're trying to do a velocity model which involves purchasing the property, rehabbing, pulling your cash out, and immediately starting on the next property rinse and repeat within a 2-3 month timeframe, you're going to need a lender who can work outside of Conventional guidelines except for very specific scenarios. That is where having a portolio lender is to your advantage. Like with many things in lending, there is a trade-off that goes along with this. Because a portfolio lender manages their own portfolio of loans and thus sets their own guidelines, you can get your cash out in less than the six month timeframe if you find the right one. The trade-off is that their rates and terms can be less ideal than if you could work with a conventional loan. If you're not as concerned about immediately stepping from property to property in a short time window, you're better off working with a conventional lender who can get your cash out after six months and have the better rates and terms that are associated.
The last thing I will say is something I harp on a little bit on these forums, and that is that I wish more investors would search for a loan officer rather than a lender. Within the same lending institution you're going to find varying qualities of loan officers in how they handle their business and how well they know their guidelines. This is especially important in REI which is a little bit of a niche area within mortgage lending that requires a certain knowledge, attention to detail, and mindset. The best thing you can do is find the loan officer who specializes in REI and can offer you the best programs, rates, and terms to match your specific case.
Rental Property Investor · Greeley, CO · Member since 2017 · 226 posts · 99 votes
9y
Cat,
Talk to other investors in your area and ask who they are working with to get started. Talk to whoever you bank with now. Then start cold-calling. You want to identify portfolio/commercial lenders.
My strategy is to work with two different portfolio lender as well as a mortgage broker but I also have in my back pocket some other portfolio lenders in the area if I get in a jam. When you talk to them explain your basic strategy (buy, rehab, rent, refinance, repeat). Let them know your time-frame (i.e. they may be holding the promissory note for 6 weeks, 6 months, or 6 years. Ask them if they lend on the types of properties you have identified. Then ask them if they would be interested in working with you. Be sure to ask them lots of questions about how they structure their loans (rates, fees, appraisal requirements, variable or fixed terms, etc). Take notes on these so you can compare them across lenders.
Be prepared to talk to them. Have three years tax returns, a current balance sheet, and information on your identified property (price, rehab costs, current and/or expected rents). Bankers love documentation so make sure you note how you got the information.
A lot of banks do not like to cash-out-refinance to themselves. Which is why this works better with multiple banks. Buy your property with one bank and then do you eventual cash-out-refinance with a second bank (or mortgage broker if the property has been seasoned for 12 months).
As far as whether I prefer banks or brokers, I personally prefer portfolio banks. They are typically much easier to work with, especially once you have established a relationship with them. However, once you are done with a property for a while I recommend locking in your rate and terms for as long as possible with a mortgage broker. The rates may be comparable to a portfolio lender, however brokers will get you locked into those nice long 30 year loans which lowers your payments. A portfolio lender typically will not exceed a 20 year amortization. So really, you need both.
I hope this helps. Let me know if you have any questions here or send me a message.
If you are willing to wait six months from purchase to cash out refinance, nearly any lender can do BRRRR.
The only thing that would/could come up is you might need to use rental income that has not had a chance to appear on tax returns. It can totally be done, but there's some situation specific nuance to it.
Calling lenders licensed to do business in your state would be a good place to start, see who can speak intelligently about the above paragraph.
Don't worry about the mortgage broker v loan officer debate. Both standard pitches have some truth to them, but if either standard pitch was true then the other channel would have gone out of business years ago. Find someone you trust that knows what they are doing.
Investor · Denver, CO · Member since 2017 · 42 posts · 17 votes
9y
@Joshua Fulenwider I keep hearing that brokers use overlays that can make the process more difficult and/or result in higher interest rates. What is your thought on that?
A "portfolio lender" refers to the banks portfolio of loans not your portfolio of investments. Since you do not have an identified next property now is still a good time to start interviewing potential lenders. That way you are not scrambling when it is actually time to purchase the property. The better defined your plan the more serious you will be taken. For example a person who is going to invest in rental properties sometime in the future will not be given a whole lot of credibility. However, if you are investing in 2-4 unit properties built after 1976 in Westminster, Thornton, and Northglenn and are currently hunting properties and plan to make offers to secure your next one in the next 3-6 months you will come across as a lot more professional.
A balance sheet (or financial statement) is just a breakdown of your assets and liabilities and helps lenders identify items such as your net worth, current ratio, and equity ratio (all numbers that factor into lending decisions). Real estate specific examples are rare most banks prefer simplified balance sheets that they can easily decipher and understand. If you shoot me an message with your email address I can send you a copy of the one my bank utilizes most frequently.
Just feeding off your thread title, "Difference between banks and brokers", banks are lenders. Brokers represent lenders who may be banks, and non-bank lenders such as retirement funds, trust funds, etc.
When seeking a portfolio lender, then, you're most likely to be talking to banks as other lenders support their investment goals by trading "paper" on the secondary markets.
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y
Originally posted by :
@Chris Mason I keep hearing that brokers use overlays that can make the process more difficult and/or result in higher interest rates. What is your thought on that?
Anyone can have overlays.
If brokers consistently had higher rates across the board, they'd be out of business. Similarly if direct lenders consistently had higher rates across the board, they'd be out of business.
Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
9y
@Catherine Peters In full disclosure, I am a broker so I'll put that out first so you know my bias. From reading comments by @Chris Mason in the past I know he has done both brokering and direct lending, so he is a good source of information on the subject.
As Chris mentioned, any lender can have overlays and many of them do to varying degrees. The difference in working with a direct lender is that they are set in their guidelines and deal with their own overlays. They also have their set of loan products to work with and it can be difficult if you need something that they don't offer. Their advantage is having in-house underwriting which gives a slight advantage in processing time although I like to think I can hold my own in processing timeline.
As a broker, I work with several different lenders, so I know their guidelines and which scenarios they handle well and which they don't. For instance, when working with investors, I immediately screen down to the set of lenders I know work well in REI scenarios. Basically I take each specific scenario and tailor it to the lender that is going to offer the best deal given what we have to work with. Also, I really don't have a limit to what programs I can offer. All I have to do is find the lender that offers that product. So I have access to lenders who have some overlays as well as lenders who have virtually no overlays but each has their place and offers something unique to certain scenarios.
I will say that I see Loan Estimates from other loan officers once in a while, both broker and direct, and I see very little distinction in rates and costs between the two. About 95% of the loans I do my compensation is paid by the lender. It's only in rare instances that I do otherwise and typically that is to the advantage of the borrower for one reason or another. The key advantage to brokers is the flexibility that they have.
On the subject of BRRR, the real question is what model you want to follow for your investing. If you're trying to do a velocity model which involves purchasing the property, rehabbing, pulling your cash out, and immediately starting on the next property rinse and repeat within a 2-3 month timeframe, you're going to need a lender who can work outside of Conventional guidelines except for very specific scenarios. That is where having a portolio lender is to your advantage. Like with many things in lending, there is a trade-off that goes along with this. Because a portfolio lender manages their own portfolio of loans and thus sets their own guidelines, you can get your cash out in less than the six month timeframe if you find the right one. The trade-off is that their rates and terms can be less ideal than if you could work with a conventional loan. If you're not as concerned about immediately stepping from property to property in a short time window, you're better off working with a conventional lender who can get your cash out after six months and have the better rates and terms that are associated.
The last thing I will say is something I harp on a little bit on these forums, and that is that I wish more investors would search for a loan officer rather than a lender. Within the same lending institution you're going to find varying qualities of loan officers in how they handle their business and how well they know their guidelines. This is especially important in REI which is a little bit of a niche area within mortgage lending that requires a certain knowledge, attention to detail, and mindset. The best thing you can do is find the loan officer who specializes in REI and can offer you the best programs, rates, and terms to match your specific case.
Investor · Denver, CO · Member since 2017 · 42 posts · 17 votes
9y
Great points, everyone! This discussion has been hugely helpful and I'm so glad I finally bit the bullet and asked it on the forums. I have talked to every broker I've run across socially in the last few months (surprisingly more than a few!) and I always get the feeling that they just have no idea what I'm talking about and are not accustomed to working with REIs at all. The broker I worked with on our re-fi has been really great to work with, but she is somewhat old school and isn't well-versed in different loan products that I ask her about (the FHA new construction loan, for example) and I think I need to work with a broker who can explore creative options with me and has the knowledge to understand what my goals are. To me this makes the most sense starting out. Again, you guys rock! Thanks for taking the time to educate me!
Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes
9y
@Joshua Fulenwider Hey, I'm not sure if I am asking this correctly but your debt to income does play apart of the refinance period ? So what if you pay cash for a property and you have all ducks in order as far as great credit, reserves etc and what if you don't have the W2 portion to cover your debt too income ratio and you've been out of work for awhile and been living on savings and cash flow. Keep in mind the property was purchased less than 12 months ago.
@Joshua Fulenwider Hey, I'm not sure if I am asking this correctly but your debt to income does play apart of the refinance period ? So what if you pay cash for a property and you have all ducks in order as far as great credit, reserves etc and what if you don't have the W2 portion to cover your debt too income ratio and you've been out of work for awhile and been living on savings and cash flow. Keep in mind the property was purchased less than 12 months ago.
Yup, still need to have a DTI that works for a refinance. If it's an investment property, rental income can be counted.
Investor · Hugo, MN · Member since 2016 · 208 posts · 68 votes
9y
Hi @Catherine Peters you have a great resource in Denver that understands this method, Pine Financial. They will fund 100% of the purchase and repairs up to 75% of the ARV. They will connect you with a lender to get pre-approved for the refinance and understand the difference between rental rehabbing and when you are rehabbing to sell/flip.
Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
9y
@Catherine Peters Pine Financial is a hard money lender - a good fit for the purchase and rehab money but not the end loan/refi. The short answer to your original question is - you want a direct mortgage lender - no overlays. Direct Fannie Mae lenders will have the absolute best terms/pricing for loans 1-10 - after that you will want a local bank, like FirstBank. Local banks have a little flexibility in their loans as far as loan to value and being able to over look certain items if the rest of the finances make sense - DTI, Credit, Reserves, etc. But typically the longest loan you are getting at a local bank is 15 yrs, the rate is a touch higher and closing costs are higher.
I am happy to connect you with the lender that does all of my conventional financing - shoot me a note.
Investor · Denver, CO · Member since 2017 · 42 posts · 17 votes
9y
@Travis Sperr That's what I thought, and my understanding with HML is that 1) you have to have a pretty big chunk of change yourself before they will lend to you and 2) they prefer to see a proven investor track record. I feel like I'm jumping the gun starting out with HML and would definitely prefer to stick with conventional loans while I have that option. If anything, maybe a mix of conventional loans plus private money loans from family for rehab costs. I feel like HML is riskier and I am not ready for that. Need to get some more experience under my belt!
Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
9y
@Catherine Peters types of financing are like tools, you need a full tool belt, each deal may require a different type of financing. Hard money is higher cost money but comes at higher leverage so you actually need less of your own money into the deal and you can close very quickly - but it needs to be a deal where you can add value to the property via repairs or are buying under market (off MLS). Experience not always a must.
Conventional or bank financing is pretty straight forward but capital intensive if you look to grow your portfolio quickly.
Wholesaler · Allentown, PA · Member since 2017 · 8 posts · 1 vote
9y
@Joshua Fulenwider Could you please send me a copy of the sample financial statement your bank uses as well? For some reason I am not able to post my email as this is literally my first post on BP. :)
not sure if you can send it privately to me on BP or if my email is needed?
As far as DTI goes @Chris Mason nailed it on the head. It's a requirement. I do more commercial and look at it as Debt Service Coverage Ratio (DSCR or DCR) and it is still hugely important as that is how I judge if I can reasonably be expected to get paid back. There are some extremely rare cases where we have disregarded this but in those instances the reason is typically to try to lower payments to make them affordable. Not to get cash out. If this is all you are missing can you bring in a partner that has the income to support the loan?
Investor · Hugo, MN · Member since 2016 · 208 posts · 68 votes
9y
@Catherine Peters Yes, Pine is a HML. However they understand the BRRRR strategy and have partnered with other traditional lenders for the rate and term refinance. Their program is set up so that you won't have to bring a large amount of cash into the deal to close and they work with you on the front end to get the refinance set up at the beginning. You may pay higher interest on the front end, but if your deal is good you won't have the cash out put in the beginning, you'll already have your exit strategy in place and you'll save a little on the appraisal costs etc because it's basically a package.