STR loan options in these times?

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STR loan options in these times?

Wesley Myers
Rental Property Investor · Inlet Beach, FL · Member since 2019 · 91 posts · 32 votes

We have a contract on our 2nd STR. Current approval from one bank is 30/yr at 6% with 20% down. Is this the norm these days with excellent credit? What about borrowing against a 401k or borrowing against our current STR that's fully owned? Any advice greatly appreciated!

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Raymond J. RodriguesBusiness Member
Lender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
4y

@Nicholas Covington, what you're saying is not true. Read the guidelines on what the requirements are for a second home.

It states that it must be occupied by the borrower for some portion of the year. Meaning the property cannot be rented out with an annual lease during the first year, not that it cannot be rented out. 

It goes on to state the following, " If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above)."

I've listed the guidelines down below so that you are aware of what you CAN and cannot do. Hopefully this helps your business knowing this now. 


✓Second Home Requirements
must be occupied by the borrower for some portion of the year
is restricted to one-unit dwellings
must be suitable for year-round occupancy
the borrower must have exclusive control over the property
must not be rental property or a timeshare arrangement1
cannot be subject to any agreements that give a management firm control over the occupancy of the property
must be underwritten in DU and receive an Approve/Eligible recommendation, with the exception of high LTV refinance loans required to be underwritten in accordance with the Alternative Qualification Path (see B5-7-03, High LTV Refinance Alternative Qualification Path).

1. If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).

[email protected]619-456-8311
Helm Mortgage Corp.5119 Reviews
WebsiteView Page
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  • Kevin Pillow
    Realtor · OK · Member since 2020 · 139 posts · 165 votes
    4y

    When I meet with other investors and lenders the idea of using ARMs is becoming more appealing. 5 or 7 year ARMs can get you in at a lower rate and if you don't plan on keeping the property beyond 7 years it may be something to consider. Since I'm down here in Destin I have my main lender who has a 10% down product for alot of STR folks looking to take advantage of the 2nd home loan product. Ask your agent if they know any investor friendly lenders.

    4Reply
  • Wesley Myers
    OP
    Rental Property Investor · Inlet Beach, FL · Member since 2019 · 91 posts · 32 votes
    4y
    Quote from @Kevin Pillow:

    When I meet with other investors and lenders the idea of using ARMs is becoming more appealing. 5 or 7 year ARMs can get you in at a lower rate and if you don't plan on keeping the property beyond 7 years it may be something to consider. Since I'm down here in Destin I have my main lender who has a 10% down product for alot of STR folks looking to take advantage of the 2nd home loan product. Ask your agent if they know any investor friendly lenders.

    Thanks Kevin will do. I’m over here in Panama City Beach. 
    0Reply
  • Raymond J. RodriguesBusiness Member
    Lender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
    4y

    @Wesley Myers are you buying this as a second home or investment property? You may be able to get better terms depending on the route you wish to take. 

    [email protected]619-456-8311
    Helm Mortgage Corp.5119 Reviews
    WebsiteView Page
    1Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    4y

    I don't think I could ever bring myself to get an ARM. I can't say if the 6% is fair or not right now, but with inflation on the rise, you can bet the Fed will have to raise interest rates to get it under control.

    1Reply
  • Jordan Murrell
    Las Vegas, NV · Member since 2020 · 162 posts · 113 votes
    4y

    As of right now with how the market is progressing. I would say that is fair. I have seen a few come in higher and a couple come in lower than what you're being told by the bank. You can borrow against your current investment property, it would save you a cash downpayment but the rates and fees may be higher. I would suggest that you shop around the current rate you're getting and see if other local banks can better the rate you're getting. 

    0Reply
  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    4y

    I used a 2nd home loan. The lender doesn't care if you rent it out on the side because that's pretty standard for a lot of second homes. APR was close to a standard 30 year owner occupied and only required 10% down. You are only allowed to carry 1 on your credit report at any given time.

    1Reply
  • Nicholas Covington
    Mortgage Broker · Dallas, TX · Member since 2017 · 657 posts · 275 votes
    4y
    Quote from @Jon Martin:

    I used a 2nd home loan. The lender doesn't care if you rent it out on the side because that's pretty standard for a lot of second homes. APR was close to a standard 30 year owner occupied and only required 10% down. You are only allowed to carry 1 on your credit report at any given time.

    Actually, a lender does care if you rent it out. That is why Fannie Mae and Freddie Mac just made 2nd home loans way more expensive because so many people were committing occupancy fraud. So this is very bad advice.

    5Reply
  • Raymond J. RodriguesBusiness Member
    Lender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
    4y

    @Nicholas Covington, what you're saying is not true. Read the guidelines on what the requirements are for a second home.

    It states that it must be occupied by the borrower for some portion of the year. Meaning the property cannot be rented out with an annual lease during the first year, not that it cannot be rented out. 

    It goes on to state the following, " If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above)."

    I've listed the guidelines down below so that you are aware of what you CAN and cannot do. Hopefully this helps your business knowing this now. 


    ✓Second Home Requirements
    must be occupied by the borrower for some portion of the year
    is restricted to one-unit dwellings
    must be suitable for year-round occupancy
    the borrower must have exclusive control over the property
    must not be rental property or a timeshare arrangement1
    cannot be subject to any agreements that give a management firm control over the occupancy of the property
    must be underwritten in DU and receive an Approve/Eligible recommendation, with the exception of high LTV refinance loans required to be underwritten in accordance with the Alternative Qualification Path (see B5-7-03, High LTV Refinance Alternative Qualification Path).

    1. If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).

    [email protected]619-456-8311
    Helm Mortgage Corp.5119 Reviews
    WebsiteView Page
    5Reply
  • Wesley Myers
    OP
    Rental Property Investor · Inlet Beach, FL · Member since 2019 · 91 posts · 32 votes
    4y

    Thank you all. Interesting responses. I will tell you that due to my current career we don’t currently have a mortgage or a 2nd home loan. We live on site at a state park and housing is provided. Could we claim this mortgage as our primary residence even though it would be a rental? The 2nd home sounds intriguing as well. 

    0Reply
  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    4y
    Quote from @Nicholas Covington:
    Quote from @Jon Martin:

    I used a 2nd home loan. The lender doesn't care if you rent it out on the side because that's pretty standard for a lot of second homes. APR was close to a standard 30 year owner occupied and only required 10% down. You are only allowed to carry 1 on your credit report at any given time.

    Actually, a lender does care if you rent it out. That is why Fannie Mae and Freddie Mac just made 2nd home loans way more expensive because so many people were committing occupancy fraud. So this is very bad advice.

    Well, if that’s true then I stand corrected. I was honest with the lender about my intentions so I guess this one is on them if that’s the case. 

    0Reply
  • Nicholas Covington
    Mortgage Broker · Dallas, TX · Member since 2017 · 657 posts · 275 votes
    4y
    Quote from @Raymond J. Rodrigues:

    @Nicholas Covington, what you're saying is not true. Read the guidelines on what the requirements are for a second home.

    It states that it must be occupied by the borrower for some portion of the year. Meaning the property cannot be rented out with an annual lease during the first year, not that it cannot be rented out. 

    It goes on to state the following, " If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above)."

    I've listed the guidelines down below so that you are aware of what you CAN and cannot do. Hopefully this helps your business knowing this now. 


    ✓Second Home Requirements
    must be occupied by the borrower for some portion of the year
    is restricted to one-unit dwellings
    must be suitable for year-round occupancy
    the borrower must have exclusive control over the property
    must not be rental property or a timeshare arrangement1
    cannot be subject to any agreements that give a management firm control over the occupancy of the property
    must be underwritten in DU and receive an Approve/Eligible recommendation, with the exception of high LTV refinance loans required to be underwritten in accordance with the Alternative Qualification Path (see B5-7-03, High LTV Refinance Alternative Qualification Path).

    1. If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).

    I would go back and read what I wrote. I said the lender does care if it's rented, but if you would like for me to change "if" to "how" then so be it. What I said was not incorrect and most definitely IS the reason why Fannie/Freddie added higher LLPAs for 2nd homes. Many were cheating this system for 10% on investment properties. Now regarding the case of this specific comment saying lenders don't care, I don't know how he was holding the property. If it was also just a short-term rental then I apologize for not being clear with my comment. But stating they don't care is incorrect. 

    I am familiar with the guidelines thank you.




    0Reply
  • Nicholas Covington
    Mortgage Broker · Dallas, TX · Member since 2017 · 657 posts · 275 votes
    4y
    Quote from @Wesley Myers:

    Thank you all. Interesting responses. I will tell you that due to my current career we don’t currently have a mortgage or a 2nd home loan. We live on site at a state park and housing is provided. Could we claim this mortgage as our primary residence even though it would be a rental? The 2nd home sounds intriguing as well. 

    If you are not going to be living in the property, you cannot claim the mortgage as a primary residence. This is occupancy fraud.

    As Raymond has kindly pointed out you are able to have this property as 2nd home if and only if it's going to just be a STR and you plan to occupy it some timeout of the year. A lease cannot be present as you cannot have any restrictions that prevent you from occupying the property at any time.

    Today, 2nd home rates will be higher than investment property rates anyways, so the only benefit now is just the 10% down.

    2Reply
  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    4y
    Quote from @Nicholas Covington:
    Quote from @Wesley Myers:

    Thank you all. Interesting responses. I will tell you that due to my current career we don’t currently have a mortgage or a 2nd home loan. We live on site at a state park and housing is provided. Could we claim this mortgage as our primary residence even though it would be a rental? The 2nd home sounds intriguing as well. 

    If you are not going to be living in the property, you cannot claim the mortgage as a primary residence. This is occupancy fraud.
    If you plan to rent it long-term (a lease agreement on the property), you cannot claim the mortgage as a 2nd home. This is also fraud.
    As Raymond has kindly pointed out you are able to have this property as 2nd home if and only if it's going to just be a STR and you plan to occupy it some timeout of the year. A lease cannot be present as you cannot have any restrictions that prevent you from occupying the property at any time.

    Today 2nd homes rates will be higher than investment property rates anyways so they only benefit now is just the 10% down.


    OK then this makes sense. I do plan to use it (even if it is sparingly), although it will mostly be rented out as STR.

    0Reply
  • Kevin Pillow
    Realtor · OK · Member since 2020 · 139 posts · 165 votes
    4y

    This thread is getting spicy 🌶 !

    3Reply
  • Demon S Rogers
    Member since 2021 · 61 posts · 14 votes
    4y

    @Jonathan W. Can you clarify what you mean by carrying one on your credit at any time?

    0Reply
  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    4y
    Quote from @Demon S Rogers:

    @Jonathan W. Can you clarify what you mean by carrying one on your credit at any time?


    From what I understand you can not apply for an additional second home loan. You would have to refinance into another loan type, at which point you can apply for it again. IIRC 

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y

    if you borrow against 401k, the interest rate is still 5.5% for 5 years, and can borrow up to 50k only. I agree with one of the comments above to use 7/1 or 10/1 ARM. In fact, I always use this strategy regardless of interest rate as you pay your principal much faster. You will do refinance at a later point anyway.

    0Reply
  • Wesley Myers
    OP
    Rental Property Investor · Inlet Beach, FL · Member since 2019 · 91 posts · 32 votes
    4y

    Very helpful info everyone. What about putting 10% down vs 20%? Keeping more of my cash now vs greater cash flow over time?

    0Reply
  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    4y
    Quote from @Wesley Myers:

    Very helpful info everyone. What about putting 10% down vs 20%? Keeping more of my cash now vs greater cash flow over time?


    I would always vote to hold on to cash in reserve or use to deploy for the next investment. Cash is king  

    2Reply
  • Kyle DeutschmannPro Member
    Investor · Washington, DC · Member since 2017 · 428 posts · 205 votes
    4y
    Quote from @Jon Martin:
    Quote from @Demon S Rogers:

    @Jonathan W. Can you clarify what you mean by carrying one on your credit at any time?


    From what I understand you can not apply for an additional second home loan. You would have to refinance into another loan type, at which point you can apply for it again. IIRC 

    As far as I know you can have multiple second home loans. I just had a client buy a second home in both the Smokey Mountains and Joshua Tree CA and used a 10% down conventional and 10.01% down jumbo loan for the second one and had no issue. As long as you intend to occupy the home for some portion of the year and do not already own a home within 100 miles you could likely get multiple second home loans. That being said, if you have thee second homes that generate rental income on your taxes I’m sure an underwriter may eventually flag and make you jump through hoops to prove you’re actually going to occupy it some portion of the year. 
    [email protected]
    0Reply
  • Kyle DeutschmannPro Member
    Investor · Washington, DC · Member since 2017 · 428 posts · 205 votes
    4y
    Quote from @Kevin Pillow:

    When I meet with other investors and lenders the idea of using ARMs is becoming more appealing. 5 or 7 year ARMs can get you in at a lower rate and if you don't plan on keeping the property beyond 7 years it may be something to consider. Since I'm down here in Destin I have my main lender who has a 10% down product for alot of STR folks looking to take advantage of the 2nd home loan product. Ask your agent if they know any investor friendly lenders.

    This is the first time in probably a decade where ARMs are starting to make sense. I had a client get almost 1% lower on a 5/1 ARM vs fixed. However it depends on the scenario and type of loan - it’s not that much better in every situation. 
    [email protected]
    1Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    @Wesley Myers

    Rates are on the rise and 6% doesn't sound unreasonable for an investment property. If you feel rates will be back down in the coming years you could always start buying these properties with 2+1 bridge loans. This is a 2 year interest only loan with an option for a 1 year extension. 2-3 years down the line, the properties would be fully stabilized & seasoning requirements for every bank would be met so you could refinance with just about anyone at that point. 

    [email protected]413-348-8346
    Freedom Capital Funding, LLC523 Reviews
    WebsiteView Page
    1Reply
  • Kevin Pillow
    Realtor · OK · Member since 2020 · 139 posts · 165 votes
    4y
    Quote from @Matthew Crivelli:

    @Wesley Myers

    Rates are on the rise and 6% doesn't sound unreasonable for an investment property. If you feel rates will be back down in the coming years you could always start buying these properties with 2+1 bridge loans. This is a 2 year interest only loan with an option for a 1 year extension. 2-3 years down the line, the properties would be fully stabilized & seasoning requirements for every bank would be met so you could refinance with just about anyone at that point. 


     Is this type of loan something most LOs feel comfortable or even know how to do?

    0Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    4y
    Quote from @Kevin Pillow:
    Quote from @Matthew Crivelli:

    @Wesley Myers

    Rates are on the rise and 6% doesn't sound unreasonable for an investment property. If you feel rates will be back down in the coming years you could always start buying these properties with 2+1 bridge loans. This is a 2 year interest only loan with an option for a 1 year extension. 2-3 years down the line, the properties would be fully stabilized & seasoning requirements for every bank would be met so you could refinance with just about anyone at that point. 


     Is this type of loan something most LOs feel comfortable or even know how to do?

    The 2+1 bridge loan is usually offered by hard money / private money lenders. It is a product that is meant specifically for stabilized short term rental purchases. You are correct when you say most people don't know it is even an option. @Kevin Pillow

    [email protected]413-348-8346
    Freedom Capital Funding, LLC523 Reviews
    WebsiteView Page
    1Reply
  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    4y

    If this were for a conventional owner occupied that would sound high, but for an investment property that doesn’t sound unusual these days. 

    0Reply
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