@Ryan R. I am actually in the process of switching my primary residence to a rental and buying a new home with the 3.5% FHA which I will convert to a rental at a later date. This is the only way I have found around having to put the 20% down. I have two problems right now. First is my debt-to-income. I have 4 mortgages right now and no other debt but I have struggled to get the banks to allow the full 75% of rental income because of their interpretation of what "two years rental history" is. Had I not applied your approach to learn on BP and then ask the lenders "why" I would not have found out that Fannie actually requires two years of rental history per PERSON, not per PROPERTY. I finally found a lender that handled it correct and have rented out my primary home. I got it rented last month because I wanted to capture some rental income in my tax return and I am in an intermediary home at the moment that I am renting from a friend. Once my taxes are done early next year, my lender said I will be able to use all of my rental income as income at the 75% requirement including my former primary home. This allows me to overcome the DTI issue moving forward and I will be able to go get that FHA at 3.5% down. its an inconvenience right now, but I am hopeful it will work out in the end.
With respect to the staying in the home for less than a year, I have asked many lenders about this and the smaller/regional banks are completely against it, but the commission based mortgage bankers like Quicken Loans told me it wasn't a big deal. After talking with several people I realized that the guy from Quicken just wanted the commission and didn't tell me that if Fannie Mae finds out they will call your note due immediately and/or put you into foreclosure. I think you might be able to get away with close to a year, but I wouldn't get a home a an owner occupied for 2-3 months.
Remember, that 20% down is not lost money. It helps your cash flow by reducing your mortgage to gross rental income spread and given the current rental market, I have found this to provide a much better return on investment vs. 0-2% CD's or bonds
Originally posted by @Callum K. :
Had I not applied your approach to learn on BP and then ask the lenders "why" I would not have found out that Fannie actually requires two years of rental history per PERSON, not per PROPERTY.
Do you know if this is true for owner occupied multifamilies? For example I'm looking to get my first property as a 2-4 plex. Will the rent from the other units count towards my 2 year clock or does it not count because it is technically owner occupied?
Honestly, I only do single family units, but I am sure it would be the case for multifamily as well. Someone else might better be able to assist.
I have found that everytime I get a "No" from my lender, I hop on BP and find out more legitimate information that I go back to the lender or a new lender and ask them. After you tool yourself with enough information to challenge them they will "have to get back with you" and at that point you are finally working with them...
If I remember correctly all you need to do is provide rental history on your tax returns. owner occupied or not shouldn't matter but Fannie wants to make sure you have experience in renting out so their criteria is tied to the tax return or lease agreements which you would have in your multi family or single family.
That's true @Callum K. . I guess the 20% does help cash-flow more from each property. Do you have a target cash flow goal for each property?
you know any retired people get crappy returns? you could hit them up for $75k & offer 7-10% interest for 6 months with a point then refi AFTER 6 months. that's what I did.
Here's also what I did:
1. wife had a condo. she moved in with me when we got married. rented her place out for 2 years with her name on the note but both our names on tax returns.
2. rented out my home this past june (loan under my name only) & bought a primary with 20% down (under my name only for the loan).
3. borrowed $ from my folks to buy an REO (closes in jan) + $ for rehab & closing/refi costs. will refi (w/ cash out if appraises high enough) after 6 months. We'll see if the loan goes under my name, the wife's, or both (probably the latter).
You wanna keep as many of those up to 4 loan spots free as possible. since #1 home is under both our names for tax returns, I can include the rent as income 75% - PITA. Keep in mind, you've got DTI going against you (hopefully you have no other debt).
They say to apply the 50% rule, (consider 50% of your gross rental income to cover operating expenses excluding the cost of financing). Because I go with $175k-$250k properties, I have never seen anywhere close to the 50% rule. Mine has been fortunately closer to 25% costs. I also manage my properties myself so that saves about 10%.
For lower income properties, everyone on BP swears by the 50% rule so I would not question that at all.
For my investment in homes, If I can't get at least a 15% cash on cash return then I don't bother. I am refinancing my former primary home now and now that I have a long term rental lease in place I know my cash on cash return can be as high as 30% (assuming there are no repairs or maintenance issues which is unheard of). Because I bought the property as an FHA home loan with 3.5% down in order to refinance it to generate sustainable cash flows I am having to put down about 7% down (the home currently has about 10% equity prior to the refinance) so this additional investment should generate about 20% return.
@Callum K. don't foget to add PMI into your cost of doing business & also the that FHA charges a certain % of your primary purchase price (is it 1.5%?). So if you bought $200k home, that's $3k.
But you can always refinance in 2-5 years when your primary hits 20% equity & get rid of the PMI. The $3k, you're stuck with. That's why I put 20% down on my primary.
@Scott W. That's right. I bought my home prior to the FHA adjustment in 2009 so I had forgotten about it. Thanks for the clarification
@Callum K. no problem. in the end, there is no right or wrong answer. i put more down so have less in reserves; if a renter doesn't pay, you have more in reserves than me. not a bad idea.
seems you're buying more for appreciaton ($175-$200k) than lower end cash flow. a lot on here will disagree with me but I think you made a FANTASTIC decision & will reap the rewards when the market comes back (sooner rather than later IMO)
@Scott W. I was able to pick up most of my properties from friends of mine, coworkers, or friends of friends who were strapped when they lost jobs, had poor credit and couldn't refinance, or just plain difficult situations. All of my properties have generated tons of cash flow probably because the pool of higher value Real estate investors is much smaller than the lower income levels. The ratio of investors to renters seems to me to be substantially higher than the ratio in lower income properties. I haven't seen anyone on BP that does this approach and I can't speak for other markets, but rental rates here are very high and are here for job rotations, or cant get loans because they lost their job in 08-09 and screwed up their credit. Coupled with higher lending requirements the are a lot more renters that can afford the $200k property but can't get a loan, so they rent. I don't know many people who own multiple homes of this value here so there are not as many homes available which increases rental rates.
The best part about it for me is the minimal problems. Almost all my renters are direct deposit (two of them actually have it dispersed when they receive their paychecks instead of their bank account) and the maintenance is low. I'd go full time but I would be bored to death.
Originally posted by Callum Kerr:
I was able to pick up most of my properties from friends of mine, coworkers, or friends of friends who were strapped when they lost jobs, had poor credit and couldn't refinance, or just plain difficult situations.
I've bought dozens of houses from banks and they are always a mystery. You never know what kind of problems you will find. I recently purchased a house from a friend who moved out of state. We waited five months for his short sale to go through. In the end, I got a nice, well cared for house. I know everything that happened with the house for the last ten years. It worked out great. I'm going to look for more deals like this as you have done.
Putting 20% down will increase your cashflow but at what expense? 5%, who wants to put more down when the money is essentially free?
I doubt you'll find somewhere to put less than 20% down though, especially as an investment.
As i said most banks will go with fannie and freddie guidelines. fnma wont buy loans that are out off those guidelines therefore a bank most likely not to do the loan because they wont have any buyers on the secondary market(fnma) .
Fnma buys the loans so they can free money for the smaller banks to do business and lend more to people.
Fha mip is 1.75% for 5 yrs. There is ufmip(upfront mip )also 2.25% off the loan. government is running out off money thats why they raised the mip percentage.
My bank will ask you for 20% down minimum and 6 months reserve for every property.
more units the more the percentage required.
2.25% of the loan upfront? That's a $4500 "service fee" on a $200k loan. Yikes, the govt sucks!
The 1.75% - does that equate to $29/month? That's not as bad.
I recently purchased a property with less than 20% down. The way I did hasn't specifically been addressed here, so here's how I did it. There is a FNMA guideline called the deferred financing exemption. If you purchase the property for all cash you can then finance it with FNMA with the loan to value based on the appraisal regardless of what you paid for the property. The financing has to be completed within 6 months of the all-cash purchase. For me this translated as follows:
$105k appraised value
$85k purchase price
$5k closing costs
70% LTV allowed (I'm in the >4 financed properties and this was on a duplex, so my max LTV is lower than yours would be).
Loan amount I got was (105*.7) = $73.5k making my effective downpayment $11.5k (about 13.5% of purchase price compared with the 30% I would have put down had I not done this).
Like most loan programs there are a million guidelines and rules surrounding how this has to be done, so it won't work for very many situations, but if you can make yourself fit in the FNMA box it can be done. The main downside is that the purchase has to be all cash and there can be no mortgage on the property you buy (So HMLs are out). What I did is get a person I know with some excess cash to write me a HELOC against my primary residence and used that HELOC for the cash to buy the house. FNMA considers proceeds from a securitized HELOC to be the same as cash. I then repaid the HELOC with the proceeds from the deferred financing exemption loan.
I know this may not work for your situation, but if anyone was wondering where the "White Unicorn" of less than 20% down conventional financing is, there you have it. (In my case I avoided the problem of the fees eating up the benefit that @Brian Hoyt mentioned by using HELOC funds rather than HML.) Obviously the "White Unicorn" isn't so white as FNMA has cluttered up the rules of getting a mortgage so much that you have to have a VERY experienced mortgage broker to make sure you can actually get this done without last minute snags. (I'm a former mortgage broker with 9 years of experience and I wouldn't have been able to do it, so I had to find someone with more experience than me to get it done.)
@Russell Monson - perhaps you might want to share your experience on these other two threads, where the delayed financing question arose:
Great Job @Russell Monson . You should change your user name to Unicorn Slayer. Thanks for the reassurance that there are ways around "no".
Originally posted by Altin Velaj:
Fha mip is 1.75% for 5 yrs. There is ufmip(upfront mip )also 2.25% off the loan. government is running out off money thats why they raised the mip percentage.
According to HUD, MIP charges for 30-yr mortgages are:
1.75% up front (can be financed into loan)
1.20% annually if LTV is < 95%
1.25% annually if LTV is > 95%
In addition to the delayed financing rule that was mentioned, @Monica Breckenridge wrote about this at the link below, though I'm still fuzzy on a few details of how this mortgage company operates. I had tried emailing her contact person at Denver Mortgage Co. at one time, but didn't get a reply. Don't know if there are other mortgage companies operating in a similar fashion in other areas.
Here's the note I'd sent to Denver Mortgage Company, to which I received no reply.
Hi Natasha –
I was reading a post on the Bigger Pockets forum by Monica Breckenridge regarding loans she has completed with your company, refi’ing out of hard money with no seasoning into 30-yr fixed rate financing below 5%.
My question: How is your company able to write 30-year fixed rate loans at such a low rate? It obviously is a great product for an investor, I just want to understand a little better. It appears that these loans would not be sellable to Fannie/Freddie due to lack of seasoning, at least not when they’re originated. Is your company (or your wholesale funding source) able to sell these types of loans into the secondary market later, after they have seasoned? I certainly wish lenders in my area were offering such a product. None that I’m aware of will offer any fixed rate longer than about 7 years for loans they keep in their own portfolio, and the rates are quite a bit higher than 4.8% on single family houses.
Anyway, your company is obviously doing something right and appears to have a great track record.
Thanks for your help and best wishes with your business,
Ryan, you happen to stumble on to the best financing you can find. Think about it, I have purchased properties with seller financing and received the following benefits at different times. I always got these loans with 0 points and fees. Never had to pay or worry about appraisals. Although right now it might be hard to compete with banks low interest rates, when rates do go up and they will, you can negotiate lower rates with sellers. I've had sellers allow me to postpone payments for up to six months. Best of all I had a seller discount his note 20 percent just after 1 year. Many times I have the seller carry 100 percent of the price.
It's not easy getting sellers to carry the loan but once you have completed a few deals, sellers will be more apt to carry the loan.
Good luck with your deal.
hey Ryan. lots of good advice so far. I dont have much advice for you or tons of banking "guidline or regulations" info for you, but i would like to give me 2 cents.
the 1st sfh i bought, the loan was through a local "small" bank. they required 20% down and I funded all repairs. 5 year loan/20 year amortization with balloon payment at end. this puts me at about 33% equity and cashflowing nicely. after 1 year (will be in April), I plan on refinaincing, leaving 20% equity. not sure if i am going to do a 15 or 30 year note, but i should get most of this cash back out and still be cashflowing nicely.
fast forward to my second deal. i needed to close within 10 days around Christmas time. I called the banker expecting the same terms and all. He said he couldnt close that quickly this time of the year. I didnt want to pass on the property so I got in touch with another small bank that I have a relationship with. I personally know a few people there. They were happy to do the deal with no money down, but I am funding all repairs. I will probabaly refinance this as well.
the reasons I believe they accepted my proposal of no money down was because I had a little more of a track record. purchase price was almost 50% of tax value and because I had my ducks in a row when I went to them for a loan.
For what its worth, my recommendation is to get to know a small bank that you can build a relationship with. find out WHY they want the terms and what you can do to be a more appealing loan to them. at the end of the day, they are making an investment as well.
Keep it up.
Buy the property as a primary residence if you want to avoid the 20%. Just note if you bought your primary residence within X span, you have to wait that span out. Your loan paperwork should mention this time period.
I've heard an expert say that such X span doesn't really matter though. As a lawsuit typically arises from a loss of money. Buying another property doesn't result in the loss of money unless you're of course just making a stupid move.
The only other way I know to avoid 20% is by owner financing it.
Buy cash, rehab, and use the gained equity as the down payment. My first deal, and only thus far sadly, I had a $106k in the duplex, it appraised for $140k and I got a 70% LTV loan through WF for $98k. My $8k was only 6% down. It was odd financing because I was in college and was using a co-signer. Had difficulty financing the property honestly and got lucky it worked out but no risk no gain I suppose.
I refinanced the deal about 18-months later to decrease my rate by 2.75%, set-up a HELOC, and ultimately build a working relationship with a local bank. It was a portfolio loan for them and I paid nothing but closing costs of about $3k. I had 39% equity in the property by this time.
I don't have access to the cash anymore so now I'm just trying to find the financing to wash and repeat my way to a nice stream of passive income.