Colorado Springs, CO · Member since 2021 · 33 posts · 12 votes
Hello, I am in the process of getting a pre-approval before I start my hunt for my first rental property. My mortgage broker is pushing the idea of a non-QM lender being the one who funds this deal. My broker says I can be looking at 10% down and ~5% interest fixed for 30 years.
My question is this, I am very new to this (first time) and I want to make sure that I don't end up with such a high mortgage that I run too close to 0 on net cashflow. I have ~40k to spend total on down payment, closing costs, rehab, etc. I want to use this 40k to buy 2 condo properties to rent out. That being said, if I go conventional (20% down, 30 yr fixed etc.) that means I will not be able to buy 2 properties with my 40k, but I feel like there is benefit that I am not seeing.
This leads me to my overall question: What is your experience using non-QM lenders, and your advice for me?
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
5y
I've been waiting for some fellow loan originator that I deem credible, either on the phone, in one of our private facebook groups, or somewhere else, to utter words to the effect of: "It was a smooth process, no hiccups, closed on a reasonable 30 day timeline, guidelines were transparent, and overall the investor/buyer/refinancer was happy with the process, minimal 'surprises,' just work with ABC Home Loans for that."
I've been waiting for about 5 years, since non-QM first started pinging the radar. I am still waiting...
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
5y
I've been waiting for some fellow loan originator that I deem credible, either on the phone, in one of our private facebook groups, or somewhere else, to utter words to the effect of: "It was a smooth process, no hiccups, closed on a reasonable 30 day timeline, guidelines were transparent, and overall the investor/buyer/refinancer was happy with the process, minimal 'surprises,' just work with ABC Home Loans for that."
I've been waiting for about 5 years, since non-QM first started pinging the radar. I am still waiting...
So would you suggest staying conventional? Forgive my ignorance but I’m assuming you’re saying non-QM lenders are a headache and a half?
Ultimately it's up to you. But if that too-good-to-be-true thing dangling in front of you compels you to bark up that tree (btw, I get the same spam every other mortgage broker gets, I've not seen any spam about 90% LTV investment property), be prepared for some pain.
Let's put it this way. If I had that, 90% LTV, rental property (no funny business with a "second home"), and it was real, deliverable, consistently, without any 11th hour bait-and-switch type stuff or other funny business that would tend to make me look bad, rate in the ballpark you mentioned, no crazy fees... paired with my ~10k posts on biggerpockets, I'd get so much business JUST from you folks alone, and NO other sources of business, that I'd be able to retire in about 12 months.
For the time being, I am not planning an early retirement.
If that ends up coming through for you, post back, and please ping me, so I can start my retirement planning (not joking, it wouldn't matter where I'd need to hang my license or w/e).
Colorado Springs, CO · Member since 2021 · 33 posts · 12 votes
5y
@Chris Mason
Thank you, I’m definitely going to contact other mortgage brokers and see what they have to offer, but can you give me an idea as to any red flags that indicate I’m going to be led into a bait and switch funny business sort of deal? Sorry if these flags may be common sense, still learning!
Thank you, I’m definitely going to contact other mortgage brokers and see what they have to offer, but can you give me an idea as to any red flags that indicate I’m going to be led into a bait and switch funny business sort of deal? Sorry if these flags may be common sense, still learning!
I'm a broker as well. The only non-QM lender I know of doing less than 20% down on an investment property is Angel Oak. They'll do 15% down on one of their products, but I know of nothing else in the market and rates are ALWAYS higher if your LTV is higher. That is your tradeoff, the rate.
So, you really just need to do your math. Do some projections. Bust out your spreadsheet and start throwing numbers in there. I just threw some numbers around my spreadsheet and here's what I came up with.
If you've got 40k down that could be 25% on a $160,000 property or 2 10% down payments on $200,000 properties. I used $800 for rent on the single property and $1000 for rent on the others. Not sure what rent is in your area but I'm just trying to be conservative. I also used 80% of the 200k property maintenance I estimated for the 160k property. So, I tried to balance the fact that a 200k property will rent for more and cost more to maintain.
The summary is that in 5 years your bottom line will look about the same. Adding up payments, rental income, expenses, interest, appreciation, balance owed, and estimated equity, you're turning your 40k into 70-75k in 5 years with either scenario. The big benefit comes in years 5-10 by owning 2 more expensive properties vs one. Appreciation and amortization start to work more in your favor as the years go on because you've paid down the mortgage a little and you have 2 higher value assets appreciating. By the 10 year mark the 2 property scenario is about 20k better on your bottom line. This is all based on a 30 year conventional at 3.125% at $120,000 vs 2 loans of $180,000 at 5%.
Now, can you actually find investment property loans with 10% down and a 5% rate? I think not. I don't like to make assumptions about what is going on between two people, but there are a lot of MLOs and borrowers out there that try and fudge an application and call an investment property a second home. 10% down and 5% rate are lined up with Non-QM second home terms, not investment property terms. I highly doubt you are being quoted an actual investment property so if I were you I would treat that as a red flag to investigate and be clear about. As Chris mentioned if that product exists it's a unicorn and everyone would want it. That means we'd have heard about it, most likely. So it would be a good idea to question your broker about it and make sure you'll be checking the "investment" box for occupancy. There is a bad habit of MLOs to either be ignorant of guidelines, or to try and say something is what it isn't if that means they can offer better terms and therefore increase their chance of closing a loan.
@Chris Mason is absolutely right (although many of our borrowers are repeat borrowers and most of our loans do close in 30-45 days. Given the nature of these loans, however, there are always hassles. Otherwise they'd go conventional):)
I can tell you that 90% on an investment property for long term financing with a rate below 5% does not exist. Most reputable companies where loans are sent to be funded are just coming around to going 80% much less 90%. Unless you're looking at hard money, where there is rehab involved and the loan is an interest only loan, 90% does not exist.
Please don't misconstrue this post. It's not a solicitation. I'm just urging you to be careful because more than likely, the terms are going to change.
Colorado Springs, CO · Member since 2021 · 33 posts · 12 votes
5y
@Daniel Hennek
Thank you for running preliminary numbers on two scenarios and showing me that perspective. I think something is fishy about this deal but what do you mean along the lines of a second home?
Lender · Lewis, CO · Member since 2017 · 218 posts · 159 votes
5y
We only use Non-QM when we have to. If we can offer better terms under a different program it's a broker's fiduciary duty to do so. And why would anyone take a loan with less favorable terms... Non-QM is only for when people don't qualify for better loans.
On any application you declare the occupancy type. Primary means you're living it. Secondary means you use it as a home you occupy part of the year and it's not a rental. Investment is a rental property. Primary and Secondary are both considered owner occupancy and therefore get more favorable terms. Rates for owner occupancy are at least half a point better, and sometimes on certain scenarios can be up to a whole point different than what would be offered on an investment property. That is why people try and fudge things to call an investment property a second home and get the significantly better rate, but don't be fooled by the word fudge because what we are talking about is occupancy fraud which is a type of mortgage fraud and is not something you want to play with for a better rate.
The down payment of only 10% is also an indicator this is being quoted as a "second home". Make sure you get LTV and rate quoted based an investment property occupancy if it's a rental. If it's a rental its NEVER a second home.
Colorado Springs, CO · Member since 2021 · 33 posts · 12 votes
5y
@Daniel Hennek
Okay, I see the point now thank you! So for someone like me (new never done before, good credit, etc.) I should probably consider conventional methods before jumping to non-QM?
Lender · Lewis, CO · Member since 2017 · 218 posts · 159 votes
5y
Probably. More down, but the rate will have you cash flow better. Perhaps propel you to the next property sooner. If I were to adjust my numbers and use investment property rates from Angel Oak with 15% down the 2 property scenario would look significantly worse than the single property conventional loan scenario.
If you're not already, I suggest getting good at using a spreadsheet. You can google appreciation and amortization formulas to help you fill it in. There is no replacement for actually knowing the math yourself.
Lender · Warner Robins, GA · Member since 2012 · 38 posts · 16 votes
5y
You need to ask your broker why they're recommending non-QM over conventional. Your broker is privy to info that we are not. They may very well have good reason for the suggestion. Or not. Be direct and see what they say.
Real Estate Consultant · Member since 2021 · 28 posts · 9 votes
5y
Non-QM is a great loan product for self-employed. Wage earners use it as well. There is no DTI ratio and it is a rent qualifier (DSCR) program only. Most investor go this route because it is no income verification and less paper work which means less headaches. Deals can close in 2-4 weeks vs. conventional which could take a little longer and more underwriting stips. The other brokers in this thread are 100% correct with their assessment. Bottom line is... its all about the numbers. You have to decide do you want to go full documentation or no doc. Also, non-qm loans are non recourse. Not all, but most.
Thank you for the warning, in your experience when do investors use non-QM as oppose to conventional then?
We always suggest our clients exhaust their conventional options before going non QM. It benefits the borrower because they can get the least expensive financing available and it saves us from wasting our time on a borrower that will jump to cheaper financing after we've invested a lot of time and a little money into the deal.
Lender · Denver, CO · Member since 2017 · 348 posts · 143 votes
5y
If you can go conventional I would say go that route.
The thing to make sure you are aware of upfront is if you qualify for conventional financing. Although it offers better rates they will require you to have 2 years rental income history to use that income as qualifying come to purchase an investment property. So if you do not have experience you will need to qualify for an investment property on top of your primary residence and all of your other debts which can be tough. So I would have that discussion with you lender to make sure you qualify or if they are recommending/pushing a NON-QM product because they are assuming you may not qualify to go conventional.
Also off topic but when looking at condos I would look at HOA fee history as that can play a big part in your cash flow. If they have a tendency to raise the HOA fee 10% every year you will want to account for that when looking at your cash flow projections. If numbers are tight to begin with and then you realize the HOA fee will go up next year that can hurt.
Thank you for the warning, in your experience when do investors use non-QM as oppose to conventional then?
We urge our borrowers to use conventional first. It eliminates the hassle of us doing a lot of work and then they go somewhere else to get a better deal. Once all conventional financing options are exhausted, then non-QM or portfolio lending becomes the only way to do a deal. Conforming doesn't work if a borrower owns too many financed properties, debt to income ratio doesn't work or non-warrantable condos. There are other reasons, but those seem to be the most popular right now.
Colorado Springs, CO · Member since 2021 · 33 posts · 12 votes
5y
@Michael Glist
The HOA point is a great one to bring up thank you, just to confirm what you're saying in respect to the topic. If I go conventional and I don't decide to owner occupy one then rent the rest, then the qualifications for an investment property become even tighter when applying for conventional?
Do you know of any lenders who will offer a loan product where they allow a higher LTV purchase if you give them enough business? I feel like if an investor repeats business over and over with the same lender, establishes a great track record of buying great properties, and pays on time like clock work lenders would be ok with a 90% LTV purchase every so-often.
Pricing on conforming is set when the lender or broker gets set up with the company that will provide the funding to eliminate an unfair advantage borrower to borrower. It's generally not that way in non-qm. Each loan is priced separately and repeat borrowers get a little better pricing.
Rental Property Investor · NJ · Member since 2019 · 109 posts · 83 votes
5y
@Hossam Elaskalani the non-QM deal doesn't sounds right to me. There's no easy way to invest in rental properties when financing these deals. If you plan on growing a portfolio of rental properties, go to a small sized local bank, hard money lender, or a credit union, and obtain a commercial loan which normally would require 20% to 25% down with likely a higher interest rate than 5%. Run your P&L and see where you land after all operating costs/expenses, then make a decision. Consider also creating an LLC as your rental portfolio holding company rather than under your name. hope this helps you
Colorado Springs, CO · Member since 2021 · 33 posts · 12 votes
5y
@Rex Celle
The more I read the replies the more likely I am to go conventional. But I keep hearing mixed things about an LLC when starting out. Some say it's not worth it until you have a good number of properties so long as you have umbrella coverage for liabilities and such but then others say the opposite. I know it's off topic but are there any resources I can look at to weigh out the pros and cons