Ready to invest in property in 30days but running into red flags.

[Richard Moore]

I'm new to biggerpockets.com and iv'e been watching bigger pockets podcasts since Feb 1, 2017, gathering information on investing in rental property. I have a mortgage broker that's helping me obtain my first rental, but something isn't sitting right with me. Let me explain. I found a foreclosed home priced at $40,000.00. My broker tells me that I need to have 25% ($10,000.00) in order for the lender/bank to give me a loan to purchase and rehab this property. These are the problems that i'm running into.

1. We haven't looked at the property to view any damages and what the rehab cost will be.

2. The topic of Contractors and appraisal hasn't come up AT ALL.

3. He's telling me that I will have to pay the closing cost that is 12.5% of the cost of the home ($5,000.00). Which means I need $15,000.00 at closing or no deal

4. He advise me NOT to offer to buy the property lower than $40,000.00. Due to other investors possible bids.

5. The loan will only be enough to purchase and rehab the property. No extra funds for extra costs during the rehab,  loan payments until property is ready to rent and rented, and invest in another property months later.

This doesn't seem right to me, and I don't want to lose money on my first deal. Am I over thinking this or is there a really big problem? Please help, any advise is welcomed. 

[Jeff Dulla]

@Richard Moore As a lender, this honestly doesn't sound odd to me at all. I will address each question/comment below:

1. This part should be done by you, your realtor and probably a general contractor. The lender wouldn't really be involved until the appraisal.

2. I would think this would be up to you to bring up/find contractors.

3. The percentage of the closing costs make not difference. I wouldn't  look at it that way. There are set costs involved in a purchase transaction - appraisal, credit, title charges, recording fees, transfer stamp taxes. Very often, the cost  of buying anything in Chicago will be $5,000+. That could be barely over 1% if you were buying a $400,000+ place and it is the same/similar cost buying a $40,000 place. Beyond that, most companies make money off the loan based on risk premium, rate and yield spreads based on loan size. It is harder for the bank to make money based on that loan size. So more often than not, you may have to pay points, above and beyond the costs you are talking about in order to do a loan of this size. 

4. I would let a realtor advise you on this. Not a lender. 

5. That sounds normally and I wouldn't expect funds on top of that.