Financing - Big Bank vs Small Bank

5 Replies

I am a new investor looking to purchase my first single family property.  Me and the property owner have made a verbal agreement on price, thus my next step is financing.

I contacted several banks in my area big and small to compare rates for a conventional mortgage.  The big banks seem to offer lower fixed interest rates, the small bank seems to be ~1 percent apr higher and is only fixed for 5 years.  I want to support the local bank for the increased flexibility and responsiveness, but I don't want to over pay.  So right now I am leaning toward the big bank, but I am concerned that they may appraise the property more harshly which could default the loan

The property is a turn-key deal with tenants living there for the past 5 years, and no plans to move.  I had a home inspector look over the property and there are some areas of concern in the 'M=Marginal' category, but none in the 'D=Defective'.  One thing that concerns me is a visible crack in the foundation on the outside of the house.  The home inspection report says 'the crack should be filled in and monitored for possible future maintenance', so maybe it isn't a big deal, but would this be something that could cause a large bank appraiser to default on the loan?  I can attach the home inspectors report if needed.

Let me know what you guys think regarding choosing the lower cost big bank or the higher priced, more flexible local bank.  And do you think this crack may be a potential big problem with obtaining financing through either bank?

Thank you everyone! This looks like an amazing community that I hope to contribute to as I embark on my real estate investing journey.

It is my understanding that the appraisers don't work for the banks. They are sort of randomly assigned to do appraisals... a law that was created after the housing crash. Sorry, but I don't know enough to give further advice on your post. My opinion? I'd go with the better value, but I wouldn't like a 5-year fixed rate unless I was SURE that I wouldn't hold the property longer than that. I suggest getting at least one more quote... they are free and quick.

@Ross Miller

I think from what I can tell you are looking at 2 different products. 

Conventional mortgages are sold off to the secondary market and are for the most part all the same.  30 year fixed rate, should be about 4.25 apr for investment homes and 20% down. 

Large and small banks offer these products and they are both about the same in fees although they can vary. I prefer to work with the smaller banks so that I can get the rep on the phone any time I need to. In fact I have my morgtage brokers cell number with me all the time. 

The other product out there that usually the small banks offer is what I call “in-house” loans. This product is NOT sold off to the secondary market but the individual bank keeps this loan on their books.  These loans are WAY more flexible and are usually negotiable based on the risk of the individual that is applying for the loan. 

However because there is no morgtage insurance on these they typically want them to be less than 5 year balloons. Amt @ 15 to 20 years, and usually 5 to 6% interest to account for risk. 

We have use different both loan products but usually use the “in house” stuff and a short term option in order to refinance in to better “secondary market” loans later. 

They are both great tools when applied right.

Looking at your situation, without knowing all the details, I would recommend looking for a secondary market loan from 3 to 4 small/regional banks.  While you are there ask about their “in house” prodoucts that way if you need them at some point you are educated in how the work. 

Good luck out there! 

Thanks Josh and Cameron.  I think I understand better now.  Although one thing has always confused me.  Many investors buy a foreclosed property, fixed it up, and rent it out.  In that scenario, how are you able to buy the property using a conventional mortgage?  Wouldn't the appraiser see the foreclosed house and deny the loan until it is fixed up?

I understand that you should be able to get a conventional mortgage on the house once you fixed it up, but don't you have to buy the property first?  How does that work?

Thanks!

Ross

Buy with cash or a hard money loan, renovate then put permanent financing on it based on the post-renovation appraisal.

I would recommend Credit Unions.  I say that because hands down, they have the best interest rates in every category and typically, their loan are automatically in-house.  By being a member, you get the benefits of the bank loans (all loans).  I found this out by accident and joined a credit union on purpose.  I saved a nice amount on a refinance in 2013.  Several years after my transaction is completed, no other bank can match the fantastic deal I negotiated.  I INTERVIEWED several banks for 9 months until I got everything that I wanted.  Yes, I interviewed them because banks qualify you for a loan and you should qualify them for a loan!  I told everybody I spoke to at a bank, "If we are to be married for 30 years, we are not getting divorced"....LOL  Interest rates are general lower for first time buyers.  I hope this helps.

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