Down Payment Downer

21 Replies

Been investing a while, but new to BP.

I am looking for another property, I don't have a preference if its single family or a quad.  Both fit into my strategy.  My current dilemma  is that every bank & lender that I have spoken with wants 30% down.  I understand their position on wanting to make sure that I have some skin in the game, but this has severely slowed down my rate of purchase.

With the exception of a few ups and downs and a little learning curve, everything that I have purchased so far is cash flowing well.  Just trying to figure a way around high down payments, or find lenders who are open to lower DP's, ie 10-20%.

Thanks,

Jesse

@Jesse Waters  ,

Why are they asking for 30% down? DTI too high? Bad credit score?

I assume you don't qualify for conventional financing? Or is the loan balance too small? Too many loans? 

Homepath.com loans allows 10% downpayment for investors.. check there. Or get your ratios/stats right for conventional financing!  You can also check b2r if you have too many loans.

More details helps. Good luck!

@J Martin

Thanks for the reply.

No issues with my credit score, or DTI. I clear the hurdles they throw my way, 6 months reserve cash, DTI is good, Credit score (770-ish). Most of my debt is real estate and cash flowing.

I have been doing all my investing through conventional financing/lending.  We had to go to 30% on my 5th property.  The lender I had been using was more than happy to loan, and is still more than willing to do business with me.  They said part of the high DP is to get around some Fannie rules, the other part is to allow the estimated rents to be applied to my income for under-writing.  

I'll give home-path a look and see what I can come up with through them.  

I'm currently in the same situation you. I don't have the answer, but I'm looking forward to seeing what others have to say. Good luck to you!!

I gave Home Path a look, seems pretty straight forward.  I'm out of the country, so I'll call their suggested lender next week when I get back to the states.  Seems like it might be a good way to go.

As soon as you hit four mortgaged properties, the minimum down payments jump to 25% for the next one for a conventional loan.  Not sure why they're bumping you up to 30%.  But 10% down isn't going to happen.  Even 20% is unlikely if you already have four mortgaged properties.  You'll need to look for owner carried financing if you want that.

Find a local portfolio lender...take one of their VP's of lending out to lunch.

I agree with @Jon Holdman  on this issue. I'm from Canada, and things are obviously different in many ways, but similar as well. Every investor hits a ceiling with conventional lenders at some point. For some people like myself, it was 2 mortgages despite positive cash flows, very little debt, relatively small mortgages and a well paying Federal Government job. When I asked why I hit my maxed out, they said they calculate their risk on me based on: if both properties are vacant, I max out both my credit cards and my line of credit, does my income support the debt payments? Obviously not, but that's why they said I was turned down.

For other people like yourself, your ceiling seems to be 5 units. That's pretty good in my opinion!! Some conventional lenders set an actual unit limit per investor, regardless of the financials. That limit is typically in the 4-5 unit range.

I now use other people's money who want the returns from investing in real estate, but don't know much about it or don't want to do any work. It can be a standard joint venture or it can be set up as a private money loan. I'm not sure if this would be a path you're willing to explore, but from my experience, it's what many professional investors do to grow their portfolio faster.

We are at 5+ properties and the best I can find is 25% down. Unfortunately I am find that this is part of being an investor. The one way around it that I found is personal property. If you are willing to live in one of your units for a year you can put 5% down and have a personal property interest rate too.

@Tyler Smiarowski  has the right idea.  You're going to have to get away from the bigger institutions and the standard insured mortgages. 

Call every local lender in your market.  Focus on the smaller ones...small, local banks & credit unions.  Ask to speak to their Commercial Lending area.  You need to find one that does portfolio lending...not your portfolio...theirs!  You're looking for a lender that keeps the loans they make on their own portfolio & services them.  These guys have much different criteria for underwriting, because they are not looking to grade loans, then group them by grade & sell off portfolios of those loans to institutional investors. 

These small, portfolio lenders can take rental income into the equation, before it's been income for 2 years, etc.

That's what you need to find. Once you find 1, 2 or 3 that do that kind of lending, set up an appointment (or lunch) to talk to a commercial lender in person. Be prepared and professional, but not desperate. Take your own portfolio package with you...a personal financial statement, your business information (if you're doing business as an LLC or similar), references (including your atty), information on the properties you currently hold (including rental agreements, mortgages and current valuations). If you did rehabs on those properties, include before & after pictures. If you have a business plan, include that in your package...areas of focus, acquisition strategies, marketing strategies, exit strategies. If you've already got your next deal lined up, include the details on that property (including your entry/exit strategy) and details on the comps for the property.

Put all of it together in a professional, organized package that you can leave with the lender.  What you want to do is make him want your business, so that he is willing to get creative in how they can structure a loan to get your business.  You want him to want to take your package and put it in the underwriter's hands saying, "We really need to figure out how to do this deal."  This is you going in to interview the lender and see if this is who you want to partner up with to take your business to the next level.  This is not you begging for a loan.  

Don't lie and don't oversell your position, but remember, banks don't make money unless they lend money.  They need your business. 

Portfolio lenders will get you past the Fannie/Freddie limits on number of loans, but are still going to want 20-30% down. 

@Jesse Waters I don't know how many properties you already have or what kind of equity you have in those. However, if you have some equity, one of the options for reducing the down payment required may be a "blanket" LOC secured by the equity in the other properties. Just a thought.

over the forth property they want 25 percent down.  it's the government rule.  and 6 months reserve on every property.  and a score of 720. I know...  I have 12.

commercial is the also 29 percent down. 

The portfolio lender I use does not require 20 to 40% down. They actually will loan 85% LTV and this is actually on the appraised value of the property and not the purchase price. So if I buy a 4plex and it appraises for 130k..but I buy it for say 115k...I basically have no out of pocket expense (130x.85=110.5k)...once you factor in proration of taxes, rents, etc my down payment ends up being very small or nothing at all. I currently have 7 mortgages thru this bank...I also have 1 construction loan for a flip I am working on that I have zero out of pocket expense...here are the details:

Purchase: 53k

ARV (based on appraisal): 100k

The bank on the construction loan will loan me up to 80% of the ARV for the flip...at the closing after all the closing costs, etc...the bank gave me 10k for my rehab costs and when I need more I just send them an email and they deposit what I need in my account. I basically just showed up to closing, signed the papers, and the gave me a check for 10k and said good luck. As of right now the bank will provide me 2 construction loans at the same time as long as they are each under 100k.

@Jesse Waters  I've had the exact same experience with the 1-4 unit loans. They went from 20% to 25% after 2008, and then last October they jumped me to 30% down based upon Fannie requirements. 

I am actively working with some lenders now on commercial (5+ unit loans) who are willing to go as low as 20% as long as the debt service ratio works, but the rate spread changes dramatically. You might consider looking at larger properties if that fits your profile.

@George P.  

There is no federal requirement on non-insured loans.  It's an underwriting decision.  Banks who sell their loans in packages to investors have more stringent underwriting criteria, because they grade out the individual notes, package those notes together by grade and sell them.  Lenders who keep the loans they originate inside their own portfolio have a great deal of latitude around their underwriting criteria.  That's how you get "relationship lending", once someone has done business with the same lender long enough.

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@Jesse Waters

 Jesse,

What type of property are you buying?  I routinely work on commercial loans with 20-25% down.  Down payment is usually determined by the quality of the property and the return on investment.  We have a good question when a deal first comes in.  Would I loan money on this property if I were a billionaire and loaning my money?

Mark

Thanks all for the pointers.  I think I have come up with a few potential strategies that I am going to explore further to see which one is the most viable for my situation.

1) Blanket loan for the existing properties, hopefully to my LLC to clear my credit then I can explore home path at 10%.

2) Blanket loan and use my extra equity towards the purchase of another block of apartments, making the whole thing commercial.

3) Suck up the 25% DP's for the time being.  And do some fix-n-flips in between to do some extra fund raising.

Thanks again.  Happy investing to all.

@Mark Creason  

I have a two part plan. 

1-SFH's because they seem to appreciate faster, which, gives me more equity that I could pull out (re-fi, LOC or roll into another loan) and they are easier to sell should the situation arise.

2- Multi Family properties.  every thing is under one roof, more or less and I get a much higher cash on cash return.  However, they aren't as easy to sell, and have higher turn over.

I always try to buy something that I wouldn't mind living in, and as cheesy as it sounds, I have my wife take a look at a property before I make an offer to get her opinion, since in most familes the wife holds a lot of power over housing (happy wife, happy life.)  Perhaps those are words to live by.

I have explored commercial lending and found the terms reasonable, but most want a minimum financed amount of $300k or $500k+ with 5+ units, reasonable, but I am still playing in the minor leagues, $130k purchase price on my largest property.

@Jesse Waters  you are dealing with the wrong lender!

Are you talking to a business banker or a commercial lender?

@Jimmy Moncrief  It depends on the property type that I am looking at.  For anything 4 units or less I have been going with a residential lender.  For things larger than 4 units I have been talking with a commercial lender.

Would love to hear any ideas that you have.

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