There are many lenders around the country who have the ability to underwrite loans for investors. However, I have found that most lenders who attempt investment loans get tripped up along the way and are unable to close these loans. Having coordinated hundreds of loans over the last several years, I have learned how to screen potential lenders for investment loans.
Here are 3 Criteria I look for when screening a potential lender for an investment loan:
1.) Direct and/or Correspondent Lenders vs. Brokers: Simply put, a direct lender is a lender who not only interfaces with the borrower, but actually funds the loan. This would be in contrast to a mortgage broker who simply qualifies the borrower and assists in processing the loan, but ultimately relies on the lender for final approval and funding of the loan. Brokers typically have very little control or authority when it comes to approving and closing a loan. I have found that it’s much easier for loans to fall apart and/or drag on when working through brokers.
Additionally, I like to work with mortgage companies where the loan officer has a close working relationship with their underwriter. In most companies, loan officers submit loans to underwriters who work in other offices and have very little contact with them. I have found that borderline loans have a better chance of getting approved when the Loan officer has a good relationship with an in-house underwriter that is willing to work through the issues.
2.) Guidelines: One of the first questions I ask when talking to a lender is if they plan on selling the loan (as would be the case with a correspondent lender) and if so, who they plan to sell it to. This is important because different lenders (i.e. Wells Fargo, Chase, GMAC, etc.) have slight differences in their guidelines. While Fannie Mae and Freddie Mac set the standard in terms of guidelines, other banks and institutions that are also buying these loans may have other “overlay” guidelines that may differ from Fannie or Freddie.
A good example of this is the guideline that limits the number of properties that can be financed. The Fannie Mae guidelines currently allow up to 10 financed properties, but many of the banks buying these loans have an overlay guideline limiting the number of financed properties to 4. Because different lenders have different nuances in their guidelines, it’s important that your loan officer and mortgage company have a handle on any potential guideline problems before starting the process.
3.) Appraisals: The appraisal industry has changed so much by legislation in recent years, that this has become one of the most important components in the financing equation. With the enactment of the HVCC guidelines, loan officers no longer have the ability to interact with appraisers nor have any involvement in the selection of appraisers. In fact, mechanisms are now required such that appraisers are to be selected at random from an existing pool of appraisers.
To conform to these new rules, many lenders have subscribed to third party appraisal companies that manage this selection process. The problem I have found with this type of arrangement is that the pool of appraisers varies widely from one to the next. In addition, it’s not uncommon for appraisers to be assigned to properties that do not fall in their geographic areas of expertise. As a result, their lack of local knowledge leads to subpar appraisals.
Thus, I prefer to work with lenders who have a small pool of local appraisers. For example, this may be 5 approved appraisers who have a good history with the mortgage company and whose rotation is managed from within. While this is not a guarantee that you will not experience appraisal issues, I have found that this type of arrangement does lend itself to less hassle when it comes to appraisals.
With financing as tricky as it is right now, I try not to get hung up on who has the best interest rate or who can get the loan done the fastest. To me, the better question is who can actually get my loan done. The last thing an investor wants to deal with is a loan denial because of a bad appraisal or technicality in the guidelines. I truly believe that investing in real estate requires a team approach and finding a good lender to work with is an integral part to building the right team.