Newbie – Shopping For Best Rate

9 Replies

Two months has led to binging on the first 105 BP podcasts and reading real estate books, I’m now ready to pull the trigger. I have my first buy/hold duplex deal under contract.

My dilemma, I’ve asked five lending institutions what their rates and fees are. They ‘him and haw’ about the numbers changing often and low ball the rate when pressed.

I think it is pure folly to give away ‘quan’ for five appraisals and five sets of fees only to lie prostrate to the final judge, the underwriters and their denial.

Whom do I choose?

Thanks for your wisdom

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You don't say what state or city you are in.  For a duplex, it is like any other loan and the lenders should be able to give you a good estimate of most of the fees. I don't use the traditional banks (BOA or Chase, etc...) as their requirements and hoops are so much more than other lenders.  If you have a good realtor, they should be able to direct you to mortgage lenders that are competitive (and I prefer local).  Only do one appraisal after you have selected your lender.

@Michael Ricklick

Hi Michael,

Unfortunately, your experience is more or less par for the course. Many lenders will, as you aptly describe, 'hem and haw' regarding rates and terms. One of the primary reasons for this is that they want to 'get you in the door'.

@Stacy Eisenberg has a good suggestion above in speaking with a broker who works with investors. Another option is to talk to some local investors about whom they have had good lending experiences with. Speaking with someone who has actually closed a loan with a specific lender will be just about the most valuable information you can collect.

Additionally, I encourage you to consider looking at the lowest cost of capital as opposed to the lowest interest rate. The difference between cost of capital and interest rate is that cost of capital is more inclusive.

Your total cost of capital is going to include things like;

- Origination pts.

- Processing fees

- Underwriting fees

- Cost of appraisal (is it passed through, or is there a surcharge)

etc.

Getting a handle on this number will be more telling with regards to which loan is truly the lowest cost.

It sounds like you are already on the right track in inquiring about their fees. This is a good starting point, and will help you make a more informed decision.

Hope this helps,

Michael

I live in CA and my daughter and son-in-law moved to Rochester, NY for grad school. While visiting, I found that my CA income, the lower cost of properties and good rental income near the university and med school enticed me dive into the real estate market. Actually, the fact that my daughter was renting on the wrong side of the river pushed me into real estate investing and I m now glad I did thanks to BP.

A local CA commercial banker friend told me to that I would have better luck with local Rochester community banks. In last few days I have received loan estimates and will now sift through the numbers with greater scrutiny thanks to Michael Kinsella's advice.

Thanks again!

@Michael Ricklick check out family first federal credit union. They have been friendly to out of state investors and aggressive on rates and terms.

@Michael Ricklick this is always frustrating to hear but as mentioned before it is common in the lending industry.  The first thing I would suggest doing is trying to find a good lender in whatever market you are looking to buy in by posting in the local state forums here on Bigger Pockets.  So if you are looking to invest in New York, then post in the New York forum asking for some investor friendly lenders in that state.  Once you have 2 or 3 suggestions I would then look to interview them on a few subjects and the first is - What loan type are you trying to put me in?  Their answer should be something like "Conventional" or "Commercial/Portfolio".  

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.

The reason why it's important to know some aspects here is because if a lender doesn't even offer one type...you will get a very slanted view on what is required.  That 30 year fixed rate loan will help you cash flow better....but there is more paperwork to it.  And a few more rules too.  So if they offer the "conventional" loans then I would suggest asking 9 follow up questions:

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?
  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?

These are also important because if they offer "conventional" loans...but can't answer those 9 questions - then find another lender!  Fannie Mae and Freddie Mac are somewhat flexible for investors....but they don't force lenders to follow their rules.  Lenders are allow to put rules OVER the Fannie/Freddie guidelines...we call these "overlays".  For the sake of time I won't go into why they do this but just know that there are lenders with NO OVERLAYS...and those 9 questions are designed to help you identify which lenders those are.

If they offer the "portfolio" style of loans....then just about anything goes, but you will pay for it with rate or terms of the loan.

*WHEW* A lot to know, right?  Feel free to ask anything additional that you may need.  Thanks and good luck!

Hey Michael, 

From experience I've learned that interest rates tend to stay the same and they don't depend much on the lender but more on your credit score, LTV, appraised value and experience (with private money). Thus, I usually base my decisions on lenders that have the least amount of fees or cheaper fees, communicate quickly and effectively, and over inform instead of holding back on information.

Hope this helps and congrats on your first investment!!!