Coventional Financing without Junk Fees

23 Replies

I am looking to purchase a couple home in Texas over the next 60 days. Both I expect to purchase under ARV. BRRRR one of them and live in the other. Can anyone offer some advice on what banks have no junk fees and a good process for getting loans closed? I have used NFCU in the past and had a decent experience. They are less knowledgeable on investment loans though, so my second property loan is more of my concern.

@Chad Maxwell

I would try to reach out to all local banks and credit unions. I would also ask to make sure the bank rep you are working with has completed loans on similar properties. It is amazing how many people in banks and lending have little to no experience in their bank's lending products and investment properties. This helps to avoid surprises on the closing statement.

Originally posted by @Chad Maxwell :

I am looking to purchase a couple home in Texas over the next 60 days. Both I expect to purchase under ARV. BRRRR one of them and live in the other. Can anyone offer some advice on what banks have no junk fees and a good process for getting loans closed? I have used NFCU in the past and had a decent experience. They are less knowledgeable on investment loans though, so my second property loan is more of my concern.

@Andrew Postell is in Texas and knows his investment property financing.

Note that for smaller loan amounts, waiving all lender fees will come with a staggering cost in terms of interest rate. Compliance costs are relatively flat, but lender revenue comes from loan amount.

For example, a mid-range estimate for per loan Dodd-Frank/CFPB compliance costs is $5,000 that consumers must pay one way or another, but let's say lenders already bake $4,000 of that into the rate by default (loan will sell for $4k more with a higher rate, as part of a mortgage backed security on Wall Street), leaving you with a $1000 "underwriting fee" to pay.

$1,000 is 1% of a $100k loan, but only 0.2% of a $500k loan. So if I click the little "waive all lender fees" button (really it should be called a "bake fees into rate" button) on the $100k loan, that's going to be a significant rate bump, whereas on the $500k loan the homebuyer will not even notice the rate difference. This is true no matter the lender, Dodd-Frank and CFPB apply to all lenders on residential 1-4 unit real estate.

Loan amounts of about $400k and up are where it makes more sense to click that button. Less than that, let 'em have their pound of flesh and charge the $900 to $2k in "underwriting" and "processing" aka Dodd-Frank/CFPB Junk Fees.

@Chris Mason - thank you for this information. To clarify, loans technically cost the same to write/close, however, the costs can be applied to the loan amount. How do investors make $100k home loans work if they are not paying cash. Seems to me that you would lose quite a bit of equity this way (5%) based on your numbers above.

@Charles Carillo - I will research for local banks.  Do local banks typically understand investment loans though?  This has actually been more difficult than I initially thought.  I looked into the typical banks online and their fees/overlays were elevated to say the least.  

@Chad Maxwell thanks for posting.  Always good to meet a fellow Texan here.  Bigger Pockets also has a pretty active Texas forum as well if you ever want to post there too.  Some pretty good locals monitor there as well.

And as mentioned above, Investment Property loans generally aren't worked by most banks very often so it is hard to find an "investor friendly" lender....some of us would be willing to take an "investment KNOWLEDGEABLE lender" at least.  Those are hard to find as well.

And the answer to your question is it just depends on how you are acquiring your properties. If you are buying them off the MLS...then a lot of banks can do that reasonably efficiently. But if you are buying off market, using BRRRR, neeing to refinance out in under 6 months, etc. then that will narrow the bandwidth quite a bit. Just mentioning BRRRR might have some going cross-eyed. And this isn't just a "Texas" thing. Lots of investors have these same issues in every state. So I created a list of questions you should be asking your lenders when you interview them. That is, these are the questions you need to ask if you are BRRRR off market properties. I'm always open for a phone call if you want to discuss but here's what I would suggest you ask your potentials:

Questions for Lenders

  1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
  2. When do you start using "After Repair Value" on my property? (this had better be immediately too)
  3. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
  4. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
  5. How many loans can I have with you?
  6. Can I change title to my LLC?
  7. Do you sell your mortgages?
  8. What is your loan minimum?
  9. Can you explain to me what your reserve requirements are?

And thanks for the mention @Chris Mason .  Greatly appreciated!

Originally posted by @Chad Maxwell :

@Chris Mason - thank you for this information.  To clarify, loans technically cost the same to write/close, however, the costs can be applied to the loan amount.  How do investors make $100k home loans work if they are not paying cash.  Seems to me that you would lose quite a bit of equity this way (5%) based on your numbers above.

Markets where $100k is a typical loan amount have better rent-to-value ratios paired with lower appreciation. That's where you see people talk about "cash flow markets" v "appreciation markets." For most, the key is to fight the right balance -- the market where homes sell for $20k, you will probably have zilch for resale value and high vacancy paired with gunshots, but high theoretical rents. And then on the other extreme you've got San Francisco, where sure it will appreciate a bunch, but you're cashflow negative in the interim (though we do 100% see people buying in SF or Marin, etc, purely speculating on appreciation... these are higher net worth individuals who don't need the cashflow and can float the $2k/mo in the red).

Not all states have extreme cases like SF or Manhattan, but aside from that extreme all states have markets where the dial is turned more one way than the other. Find where you want the dial set. 

@Andrew Postell - That was a valuable response, thank you.  Besides conducting an extensive google search to find lenders with such qualifications and niche products can you offer some advice as where to find these lenders?  I have spent quite a bit of time with minimal success.  I would be very interested in the local TX forum, got a link by any chance?  Also, I noticed you are a lender...

@Chad Maxwell feel free to message me directly.  Depending on your scenario there might be some lenders I know that can help or maybe one that I prefer.  Bigger Pockets does not allow us to promote openly in forums....which I'm kind of glad about. This would be a different site if it had a bunch of people trying to sell their stuff here.  Help first.  Business second.  Seems to work out pretty well that way.

And here's the Texas forum: 

https://www.biggerpockets.com/forums/585-texas-real-estate-q-a-discussion-forum

@Andrew Postell

Can you explain what you mean on points 2 and 4 please?

  1. When do you start using “After Repair Value” on my property? (this had better be immediately too)
  2. How can they use the ARV before the work is done?

  3. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
  4. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)

I’m thinking about this from the perspective of a HML to 30 year, but how do you only put 15% down?  Or are you talking about commercial (non QM?) loans?

Total format fail.  Sorry

@Chad Maxwell

Movement Mortgage is not a broker. They are direct lender and stuck to only quote their over priced loan products.

There is a Big difference between Mortgage Banker (direct lender, big box banks, credit unions) and Mortgage Broker. Brokers work with hundreds of lenders to pair you with the best wholesale lender and product for the lowest cost.

Mortgage Broker is the only lending professional that has a fiduciary duty to you. Everyone else has to put their employers needs before you.

@Chad Maxwell I work with a local bank, who holds some mortgages but also shops the secondary market. There is a national real estate company that opened a mortgage arm and their agents are advertising lowest fees. I compared this lender to my existing lender and both the loan cost and mortgage rate were higher. So although I like this large real estate company and my agent, their mortgages are highway robbery. My point is when someone says "low fees" they could literally be a couple thousand dollars more. It is shocking how much two different loans can differ. 

Ask for a sample settlement statement that discloses all fees. This will allow you to compare apples to apples. Be on the look out for low closing costs that come with higher interest rates. It is easy to do the math on payments to figure out how much the low fees are costing you.

@Bruce C. thanks for reaching out.  

For the "After Repair Value", sorry, I wasn't 100% clear about all the scenarios here but many banks won't use After Repair Value....even if the repair is complete! Some will require you to wait 6 months, etc. before they allow it. During that "6 months" or whatever their period is, they will only allow the purchase price to be used. Pretty crazy sounding but it absolutely exists. I was working under the assumption that you would have the repairs completed (if you had repairs to do). I just want people to make sure that their lender will use that ARV...with no waiting. Hope that makes sense.

For the "15% down" part, this is almost a "test" for the lender.  Meaning, you may not use 15% down but if the lender allows 15% down, then it is likely they will not have OTHER overlays.  Those questions could easily be 30 or 40 questions long.  So the questions themselves are mainly designed to see how the lender responds and to keep it reasonable in length for anyone to remember.  Now, to actually USE 15% down there are 3 main purposes:

  1. If you are purchasing using Fannie/Freddie.  If you purchase outright, 15% down is the minimum.
  2. When refinancing....what if your appraisal comes in a little lower than you were initially calculating? Well, having the flexibility of going up to 85% of the LTV allows flexibility for this. That way you won't bring money to closing even if the appraisal is a little lower.
  3. If you used a 1st lien, like hard money, and a purchase money 2nd (from a private lender for example), then you could refinance them both into an 85% LTV mortgage.

I hope all of this makes sense.  We could probably have entire forum posts on each of those questions and why they are important but feel free to ask anything else.  Thanks again!

@Andrew Postell - I wish this information you provided was easy to find. This is incredibly valuable, since I assume most of us newer investors believe 20-25% is the standard and minimum. How do banks know what the ARV is? Isn't it a bit arbitrary since each home will be repaired/updated according to the investors idea of repair? Will reach out to you later today, thanks again.

Originally posted by @Jesse Hinaman :

@Chad Maxwell


Mortgage Broker is the only lending professional that has a fiduciary duty to you. Everyone else has to put their employers needs before you.

 That's true in CA, but is that true nationally? Genuine question, I don't know the answer.

California reference, for those curious. A direct lender / banker pretended to be a mortgage broker, thus becoming a fiduciary for the purposes of that transaction, thus getting in trouble for knowingly not giving the client the best deal available in the market given borrower's circumstances. 

@Chris Mason That’s a great article! I’m going to throw that in my archive and use in the future. I know you come from good stock being that you reside in my hometown stomping ground (I was just slighlty north up the 101 in RP)

I see what you mean regarding “legal” obligation in CA as a member of the DRE. For all those wondering, CA is only state that allows loan originations to be done with either a DRE license -we all carry real estate licenses- or DBO license (all registered with NMLS). DRE has very established fiduciary rules and requirements.

To me, the fiduciary responsibility still sings true even with the DBO or other financial oversight department in another state. Bottom line is the ability to shop multiple lenders for the client. Cut out the high margins these banks charge, and pass the savings onto the consumer. 

I know Brokers that stretch multiple states; However, it is rare to have one broker that covers all states. I do feel there is a much higher level of camaraderie among independent mortgage brokers, and we connect with many other brokers in other states; gladly referring business knowing the client will be in good hands, and there’s no expectation of kick back from us, other than insight on tips and tricks of what’s working for their business in their market. Which means we are referring the client to who we feel is the best in their respective market.

This is all great insight in this thread. @Chad Maxwell , thanks for getting it going 👍🏻

@Chad Maxwell no problem.  This is such a common question that I thought I would reply here as well in case others are researching this topic.

Knowing how to calculate "appraisal value" and "repair costs" are two really important items for investors.  And even the best of us aren't going to match in value.  The lenders will have an appraisal performed on your property.  Now, depending on what type of loan you are receiving - will depend on the TYPE of appraisal.  But Fannie/Freddie for example use "comparable sales value" appraisal or "comps" as some refer them.  And knowing what a "comparable property" should be is really important.  Does a home that is 30% larger fit into "comparable"?  What about one that is over 2 miles away?  What about one that was built 50 years ago?  And so forth.  And there's no blanket "correct" answer here.  Rural properties should be treated differently than urban properties.  There will be differences in values between people but they shouldn't be THAT different.

So while the appraiser will run a CMA type of report it's the "adjustments" on the appraisal where human nature comes into play. What's the "value" of a bathroom? What's the "value" of new counter tops? It's common for one person to say $X and another to say $Y. So human "error" can certainly play a part. There are plenty of people who have done HUNDREDS of transactions. They only do that many if they are reasonably good at this and everyone can get really good at it. It might take some time but there are Real Estate educational courses on this topic that can help. And sometimes you know that there might not be good "comps" to use. Other times there might be good ones. So if you know that there's a chance that the value might be different, you just kind of need to plan for it.

Hope all of that helps in some way. 

@Andrew Postell thanks for the explanation, and yes it does make sense. 

I have gone in to mine assuming I’m “right” and will get my appraisal number (my wife would have a one liner response to that statement) or I’d have to bite the bullet and leave money in the deal. I believe I’m a little pessimistic on my numbers, but that leaves me more room. I’m sure it has the side effect of costing me to lose out on some deals (or not even jump in to them in the first place). 

I hadn't considered the possibility of a lender that might let me go 85% ARV. I've only dealt with WF, Cenlar, Moody, and Prodigy, so I've just assumed that 75% was it as that is all they offered. I probably need to look around more because having 85% or 80% as a back up would be good