3 Unit - A Commercial Loan?

18 Replies

Good day BP!

I have a quick question.  I have a 3 unit under contract and the local banks and credit unions keep telling me my loan is commercial, but it is a simple 3 unit. I have not run into this problem in the past.  Am I giving them too much info?  Like telling them I will not be living in the house, it's 3 units, etc.

Thanks,

Justin 

@Michele B. Zoned residential and I am not over the 10 personal loan threshold.  

The last bank (US Bank) I spoke with insisted that they are putting me in the commercial loan category and that it is still a residential loan, but because it is 3 units Fannie Mae requires 25% down.  On the BP podcast, they often talk about how one can get a 20% down residential loan on up to 4 units.  Does anyone know the language I need to you use or what I should be doing?

Originally posted by @Justin Holley :

@Michele B. Zoned residential and I am not over the 10 personal loan threshold.  

The last bank (US Bank) I spoke with insisted that they are putting me in the commercial loan category and that it is still a residential loan, but because it is 3 units Fannie Mae requires 25% down.  On the BP podcast, they often talk about how one can get a 20% down residential loan on up to 4 units.  Does anyone know the language I need to you use or what I should be doing?

 Podcasts or other content >2 years old shouldn't be relied on as accurate when it comes to anything pertaining to mortgages. 

As of right now, 25% down is the standard for a 2-4 unit investment property, both Fannie and Freddie. 

There are portfolio lenders that'll go for 20% down, but rates/terms are trash to the point of killing your cashflow... split the difference between HML and Fannie for an idea of where the rate will be.

@Justin Holley As long as you are purchasing in your name and not in an LLC (or any other commercial entity), it can be purchased as a residential loan. With the residential loan, though, you should expect to put down 25%.

You could use a commercial loan with a local bank/credit union and expect that at least some of them will lend to you with only a 20% downpayment. 

There are obvious pros and cons to either situation.  

@Chris Mason Thanks I really appreciate your input.  What's strange is that the podcasts I am referring to are quite recent.  Not saying your wrong, its just a bit confusing.  I just spoke with a buddy of mine at BofA and he stated that he thinks they can do it.

@Justin Holley I closed on a three unit property a few months back and was being asked by confirming lender to put 25% down payment. The property was a bit unique since it was 3 separate and very different homes so they had trouble comping and I ended up going with a commercial loan - they too required 25 % down. Since you are below 4 doors you can go with a conforming loan (Freddie and Fannie) but will be required to put 25% down.
@Justin Holley Shop around. How many banks have you tried? Have you talked to a mortgage broker? Just suggestions. There’s no reason, based on what you are saying, that your loan should be commercial. Maybe ask for an investment property loan?

Is there another qualifying reason the banks are not mentioning on why they are pushing you to a commercial loan? For instance, if your DSCR is now too high, and the commercial product allows for a higher DSCR or they are allowed to count more of your rental income towards that.

I closed on a duplex in February with 20%. It’s a residential mortgage at 5.25% and the home is not owner occupied. I would think you could do the same. 

Most of the lenders I approached were looking for 25% down, but I was able to negotiate down to 20% with one lender.  The numbers were good and I was persistent. Totally worth the hassle. 

A residential mortgage is defined by your intention to occupy the home when under 4 units.  When you intend to live in a building 4 units and under it is governed by a whole different set of laws RESPA, TILA, DODD FRANK, etc as well as different underwriting standards.  The fact that you are not going to live in the building is what makes it a "commercial mortgage".  

Besides having others pay your rent, the whole point of house hacking is to get those residential mortgage rates on an investment.  

That doesn't mean you can't get great rates if you're a very well qualified borrower.  

The lenders point of view is that someone living in the building has a much greater incentive to not go into default since it would mean losing the roof over their head.  

Thank you, everyone, for responding. Still speaking with banks today.  Now I can get 20% down, but the term is 25 years. @Matt Nolan do you mine sharing the bank you worked with? @Lincoln James   I have spoken with 7 banks and 2 credit unions.  @Tyler Weaver I'm am guessing DSCR means Debt Service to Credit Ratio, if so mine is very low. @Alex Bekeza  Thank you for your insight! What language are people using when they purchase a single family for investment?  Is the BP community purchasing these as second homes and not using the word investment?  Investment property seems to be the hot word that is getting the lenders worried.

Originally posted by @Justin Holley :

Thank you, everyone, for responding. Still speaking with banks today.  Now I can get 20% down, but the term is 25 years. @Matt Nolan do you mine sharing the bank you worked with? @Lincoln James   I have spoken with 7 banks and 2 credit unions.  @Tyler Weaver I'm am guessing DSCR means Debt Service to Credit Ratio, if so mine is very low. @Alex Bekeza  Thank you for your insight! What language are people using when they purchase a single family for investment?  Is the BP community purchasing these as second homes and not using the word investment?  Investment property seems to be the hot word that is getting the lenders worried.

 PM sent. 

@Justin Holley

Well second home has its own guidelines but what I will say is that lenders are asking you to state your intention. (intentions change). Investment properties immediately get grouped into "NOO" or "Non-Owner Occupied". This is where things change.

Bigger Pockets spends a ton of time talking about house hacking. Which is an awesome technique! But certainly does not work out for everyone's lifestyle. The way so many people have been able to put down less than 20% on an investment is typically by occupying one of the units OR by using an individual private investor to hold the lien. You may want to consider that because they may be willing to accept a lower down payment. Also I'll say that many commercial lenders require 25-30% down but will allow a CLTV (combined loan to value) of up to 80-85%. Meaning they will loan 70-75% and allow you to get an additional 5-10% from another source as long as that second source holds a second position lien and is subordinate to the lender.