Is this normal?

Question

Looking for some insight as a newcomer to the short term rental world. We are in the process of buying our first STR. We opted to use a mortgage agent that we were referred to for investors. The process has been bumpier than I thought. We have purchased 5 homes in the past and have never had any issues with the mortgage. We are purchasing a luxury condo in HI, however our combined income is still about 2.5x the purchase price. My husband recently switched jobs and currently has corporate housing until he gets an apt in NYC. We were told because of this we could not get a standard loan and would need a DSCR loan. This was 4 weeks before scheduled close. Rates and down payment would be the same. Now, 2 weeks before the close we are told that the numbers for rental income will not cover the mortgage ($300 under per month estimated) so the down payment and rates will need to be increased. This is bc we plan to rehab the condo and therefore get higher rent. I can’t help but think I have been duped here. They have all of our financials so can see that we have the cash. If the lender is worried about us covering the mortgage I can understand raising the down payment, but then raising the rate doesn’t make sense. And it’s now 2 weeks before closing and they are changing the terms. Does this happen in the investment property world or am I being duped?

Laura Winters · Answer

Have you heard about Bait and Switch?

It is even in a dictionary!

Finding a good/honest lender is so crucial

Bryan Vukelich · Answer

Aloha @Caitlin Fawcett and as always, big mahalo @Andrew Steffens for the shout out.

Caitlin, regret to read about your financing issues - know how frustrating that can be.  I will message you directly the contact info for three lenders I work with that are very investor friendly.  I recommend you get their input. And if I understand the situation correctly, you would likely be able to switch to a different lender if the seller agrees.   However, please note - switching lenders and delaying closing, carries some risks - much depends on seller's attitude.   In the end it may be best just to get the deal closed.   Never hesitate to contact me if I can be of service.

Andrew Steffens · Answer

This unfortunately happens more often than it should and in my opinion your lender should have considered this before you pressed on with the process.  @Bryan Vukelich do you know any good lenders in HI that may be able to help?

Caitlin Fawcett · Answer

Thank you all so much for your input. This makes me feel better. I don’t think the seller will go for a delayed close and we are fine putting more down. I think this time around we are stuck but now I know better. I was warned away from my bank bc it’s an investment property in an LLC, but I have a meeting with them tomorrow to discuss options in the future. Now that I am over my initial anger, I can move forward thinking clearly. Thank you again!

Bill B. · Answer

1) I assume you’ve checked to make sure STR haven’t been or aren’t about to be outlawed in the area you’re considering. (I know there’s been a bunch of noise about outlawing it.)

2) can you just put enough more as a downpayment so you rent will cover it> the interest savings along should make it pay for itself.

Even at 7% another $45k would drop your payment $300 and make you qualify. It might be a rare situation where taking Roth withdrawals or savings spending would make sense.

Erik Estrada · Answer

None of this is your fault,

This is just a case of a bad Loan Officer/Lending Company. All of these hiccups you mentioned should have been addressed before submitting any offer.

1. DSCR loans are for turnkey ready properties only. (If the property needs minor rehab, be prepared for a haircut in market value along with rental income) These loans emphasize value and rents a lot more than your traditional full doc loan.

2. Typically most DSCR lenders want to see experience operating a short term rental. There are some cases where you can get an exception if the property has 12 months of income collected, you own several long-term rentals, or if you have a great FICO/High Reserves.

Yes, this happens very often! There are many unqualified Loan Officers that will bait you with low rates/low points and not be able to close on their promise. Unfortunately there is very little recourse on these loans since it is a business purpose loan and does not fall under any TRID/RESPA protections. Much like a commercial loan.

Collin Hays · Answer

I am not an expert in lending, so hopefully others will chime in. My understanding is that, if the loan is "conforming", the rules are tight, and your lender has no flexibility.  Conforming loans are mortgages that meet the criteria set by the Federal Housing Finance Agency (FHFA). They’re eligible to be purchased by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.  These loans have set limits and guidelines for borrower credit profiles, loan amounts, down payments and property types. My experience has been that these limits and guidelines are "non-negotiables."

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Is this normal?

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