Investor · Bristol Borough, PA · Member since 2016 · 135 posts · 53 votes
I've been thinking about the future and when the time comes where I will no longer be able to get a conventional loan from a bank. The following potential situation leaves me with some questions.
When I can no longer get a conventional loan, I have the options of using hard money, cash, private lending, etc. However, what is my exit strategy? I know I can (and would like to) refinance out. But since I can't get conventional lending, how would I get approved to refinance through a bank?
For example, if I buy a property with hard money (because I cannot get a conventional loan), how can I refinance? My DTI wouldn't have gotten any better. Or is this where the "seasoning" period comes in?
Same thing if I used a private lender, how would the lender get his investment/profits back?
If someone could explain this I would appreciate it.
@Marc Izquierdo The 10 conventional loans refers to having ten loans insured thru a GSE - either Fannie Mae or Freddie Mac. Keep in mind, this includes your primary home loan too and also there are additional credit and income requirements for 5+ loans to qualify. Now there are conventional financing options that are non-GSE backed. These will tend to have a little higher rate but they will allow you to amass many more properties and leverage your position. The other option is to dive into commercial financing. The benefit of commercial loans are you run them thru your business (normally with a personal guarantee) there is no personal debt to income used just the properties DSCR and they don't show up on your personal credit either because the loan is in the name of your company.
To me, I believe that if someone is looking to amass a large portfolio commercial financing makes the most sense.
Hope this helps a little! Let me know if you have nay other questions!
So once I'm maxed out (conventionally), the only way to refinance out of hard money, cash, or a short term private lender is through a commercial lender or portfolio lender?
For example, I'm reading "The Book on Rental Property Investing" by BP. I just read this:
Previously in the book, @Brandon Turner says that he has been maxed out from conventional financing for some time. How can he refinance into a traditional 30 year mortgage? Is being maxed out sort of "forgiven" if you have the property go through the "seasoning" period?
@Marc Izquierdo I'm not sure how old that book is nor do I know what the writer means by "traditional" - he might mean something else entirely than "conventional". When you reach 10 conventional loans, you can get more if you are moving into your own residence but no extra's towards investment properties. 10 is the max with conventional investment properties. I would encourage you to approach every property from 1 of 5 angles:
Can I wholesale this property
Can I flip this property
Can I have the seller owner finance this property
Can I "subject to" this property
Can I buy and hold this property
When you are investing, it may be better to do one of the above strategies than the other. And you can even combine a couple of those (subject to....in order to "buy and hold").
When you do get to your conventional limit it will be a really good problem to have. But you should have more than 10 properties at that point too...most successful investors have more than 10 properties when they hit their 10th conventional mortgage. If you do need portfolio lending at that point then you won't have "seasoning" requirement. And truthfully, you should not have "seasoning" requirement on conventional loans either. Portfolio lending will be easier to qualify for.
I hope I didn't ramble too much but feel free to ask more questions here if you need. Thanks!
@Andrew Postell Thank you for your response! Good information there.
In a hypothetical scenario, say I was maxed out of conventional loans. Now, if I purchased a property with cash, rehabbed it, got it rented, and now want to refinance to take my cash out, I wouldn't be able to refinance into a conventional loan, right? The way I read that passage in the book makes it seem like I would be able to despite being maxed out as long as the "seasoning" period has passed. Is that the case?
While I'm maxed out, I know that I would not be able to get conventional financing to originally finance the property (that's when I would look into portfolio lenders). My question arises when talking about a refinance. Can I refinance into a conventional loan, despite being maxed out?
@Marc Izquierdo The 10 conventional loans refers to having ten loans insured thru a GSE - either Fannie Mae or Freddie Mac. Keep in mind, this includes your primary home loan too and also there are additional credit and income requirements for 5+ loans to qualify. Now there are conventional financing options that are non-GSE backed. These will tend to have a little higher rate but they will allow you to amass many more properties and leverage your position. The other option is to dive into commercial financing. The benefit of commercial loans are you run them thru your business (normally with a personal guarantee) there is no personal debt to income used just the properties DSCR and they don't show up on your personal credit either because the loan is in the name of your company.
To me, I believe that if someone is looking to amass a large portfolio commercial financing makes the most sense.
Hope this helps a little! Let me know if you have nay other questions!
@Marc Izquierdo this is where it might get a little confusing. Conventional loans are governed by Fannie Mae and Freddie Mac. So they call the shots on conventional loans. The bank does not. HOWEVER, the bank does have the option to put more rules on top of conventional lending rules. It sounds weird but a bank could choose to be MORE strict than what is already in place. Those extra rules are called "overlays". The larger the bank, usually, the more the overlays. For example, some banks will only lend to 6 mortgages...even though the limit is 10. That's an overlay. Some banks will require you to show rental income on your tax returns before they count the income...also an overlay. If a bank references "seasoning"...that is an overlay. There is no seasoning to do a "rate and term" refinance (meaning, no cash out)....if a bank says they require a seasoning period then you should look for a different bank. Usually a smaller to mid-sized bank will have no, or few, overlays.
If you purchased a home, that was an investment property, and you were personally obligated on 10 mortgages (not properties), then you could not receive another conventional loan. If you owned 15 properties, had 9 mortgages, then you could do another mortgage....that is unless the bank had some type of overlay. I hope this answers your question but feel free to ask more if you need. Thanks!
Andrew Postell and Jason Million you guys answered my question great. I did not know those details about commercial loans. That definitely opens up more options.
Thanks a lot!