Financing my first Multi-Family

[John M.]

I am in the process of loan shopping for my first real estate purchase (2-4 unit multi family). I have gone to a mortgage broker (1 month ago) who initially told me I can do 5% down on a conventional loan and we did pre approval at $200,000. However, the interest rate I was quoted seemed high at about 4.8%. I proceeded to contact Bank of America, and the mortgage professional I spoke to said that the lowest money down on a conventional loan I could get was 20% down on a 2 unit and 30% down on a 3 unit. I have read differently here, so I asked him if that was across the board, or just for me, and he said across the board. We proceeded to discuss FHA as that would be the only option where I could put low money down (3.5%). He provided me pre approval for $280,000 with an interest rate of 3.87% (30 years). However, mortgage insurance seemed awfully high at 1.35% annual fee. This would kill just about any cashflow potential. In addition to this, all of the fees/closing costs seemed so much higher than I expected. My APR came out to 5.4%. My inexperience shines here, but the fact that this is so different from my interest rate means I am paying a lot of fees, right? He even factored in a 2% concession from the seller at closing. Where should I head next? Is it a better option for me to pursue a loan through my mortgage broker, or should I request that the Bank of America officer look into conventional financing for me again?

[Patrick Britton]

OMG - there are clearly soooo many TERRIBLE loan officers out there.  not surprising with BoA though :)

Let me clear the air...with a non-portfolio lender (i'll get to them in a sec) you will need the following min down for an investment property:

15% for 1 unit (this has MI since down pay is less than 20%, but only a small amount)

25% for 2 - 4 units

That's right...25%.  This is a Fannie Mae guideline and since ALL lenders get their money from the same source and sell their loans back to the same source...the guidelines are going to be the same wherever you go.  

As for FHA, yes, it's 3.5%, but 1.75% UFMIP (upfront mortgage insurance premium) is sucky, as is the monthly MI of 1.3%.

Portfolio lenders don't sell their loans and maintain the entire risk that you will default.  Hence, their rates are much higher.  However, they are a little more flexible.  Portfolio lenders are worth "shopping" but finding a good "regular" lender shouldn't be. 

First, don't use a bank or credit union.  Use a mortgage broker or mortgage banker.  Second, don't aim for the lowest rate.  The lowest rate may not mean the lowest payment.  Third, closing costs and rates are inversely related.  If you want to have zero closing costs, either get some sort of seller contribution and/or lender credit.   How do you get a lender credit? It is a slightly higher rate than par and the lender will give you a credit that can be applied towards closing costs and other fees.  And last but not least it shouldn't be about finding a bank or credit union or even mortgage broker or banker but rather a loan officer. Every institution will have a wide range of loan officers, some skilled and some very unskilled. Who knows, you may find the highest skilled loan officer actually works for Bank of America! I doubt it but then again I've seen stranger things.

The following is a test you should use to choose your loan officer...Ask them the following question: if two people buy the exact same type of house, one right next to the other, both put down 5%, both have the exact same credit scores, the exact same debt to income ratios, how is it possible that the person who got 5% rate has a lower monthly payment than the person who got 4.75%?

The only answer is that the 5% guy used the higher rate to get a lender credit which paid for MI in one single premium.  There are no other possible answers.

If you find yourself a loan officer who answers this question correctly, he's your man.

Now little more about investment properties... The guidelines for conventional financing of investment properties are rather strict these days. Not only are you required to put down at least 15% for a single unit and 25% for two – four units, but also you have to be aware of what the reserve requirements are. For instance, let's say that your primary residence still has a mortgage balance on it. You wish to buy an investment property. Depending on various items such as your credit score, debt to income ratio, type of property, etc., You might need as much is six months' demonstrable reserves before you get loan approval. Meaning if the total monthly payment of your investment property is $2000, you may have to show that you have $12,000 sitting in a bank or IRA or somewhere relatively liquid in order to get loan approval. And it won't matter a dime how much rental income the property generates. So just be prepared to prove you have significant liquid assets that are actually yours and not borrowed.

Feel free to private message me if you have any other questions but be aware that I may not be able to help you to the extent that I can for those who live in Washington state.