Buying first house - Minneapolis Area

[Matt Cecil]

My fiance and I are starting to take our first steps in buying a home (non-investment). We know we want to invest in rental properties down the road and want to start with our first house we buy. Our goal is to put some forced equity into the home and be out in 2 years. Hoping that we will have enough saved for a DP on our next property.

We are starting to reach out to possible lenders, so, what kind of questions should I be asking or what should I specifically be looking for? Are there certain types of loans that make it more difficult to rent? I've heard some loans require you to live there at least a year, it has to be your primary residence, etc....

Currently, I feel good about what types of property to look for in our market, it's the financing part I have the most questions about. 

I don't want to get "stuck" in a house because I didn't set us up right from the beginning.

Thank you for your help and any other advice you guys want to throw our way!!!

Matt

[Marc Jolicoeur]

@Matt Cecil Probably 90% of conventional loans offered by banks and by mortgage brokers are all the same under the covers. They are underwritten by using Fannie Mae and/or Freddie Mac standards so that the bank has the option to sell the note to the secondary market.   

Some local banks and credit unions may keep the loan in house and if they do that it is called a "portfolio" loan.   Portfolio loans are not as good as they may have a term shorter than 30 years or may have a bit higher interest rate.

Other big banks may keep the loans in house (like US Bank) but they may also decide 1 month, 1 year, or 10 years from now to sell the note on the secondary market.   

When loans are underwitten to Fannie or Freddie standards, then the note can be sold by the origniation bank to Fannie or Freddie.  They will then take that note and put it into a Mortgage Backed Security.    

My main point is that 90% of the 30-year-fixed loan offers you will see by loan officers are all the same thing under the covers.  They are a commodity.   You can and should shop around and get the best rate quotes and lowest origination fees.

Ask the banker if they do portfolio loans and if they offer the same rates and fees. Likely they do not compete as well.  However, using a small bank or Credit Union may be your preference if you think you will be buying a lot of property some day.  Relationships with bankers really help when you start buying multiple properties.

FHA is a different product and I do not recommend it for your strategy. It allows a low DP but needs to be insured with Mortgage Insurance forever. Even if you get to 20% equity through rehab or appreciation you cannot cancel the PMI. So, I would not recommend it unless its going to be a foreever house.

Sometimes you will see a listing asking for cash only. That just means they will prioritize offers where the buyer has all cash and the deal is not contingent on any financing. Often a seller with a house in tough condition will say cash only because he knows the house will not qualify for FHA financing or Conventional financing. For example if plumbing is not working or if there is no stove to cook on, the house is not livable and will not qualify for any FHA or conventional financing. Also if there is a lot of mold or other environmental issues.

Many small banks and credit unions will offer renovation loans to allow you to fix up a distressed property.      These loans are not conventional loans - they are more like portfolio loans and can have a very short term like 1 yr which means you are effectively using getting two loans.  One to fix and one refinance after the fix.   

If it says FHA or rehab loans that does not preclude you from using a Conventional loan or a different kind of renovation loab but it does mean that the seller thinks the house will qualify for an FHA loan or for an FHA rehab loan.

Anyway since you will avoid FHA loans for your strategy I would simply start a conversation with multiple lenders and ask the following questions:

- Do you offer low down payment 30 yr fixed loans for Owner Occupants? (3.5%, 5%, 10%)

- What is the difference in interest rates or loan fees for low down vs higher down payment?

- What is cost of PMI?

- When can I cancel PMI and what steps are needed in order to cancel it?

- Are these loans kept in house or sold on the secondary market?  (doesn't really matter but nice to know)

- What sort of rehab or renovation loans do you offer?   And what does the property need to qualify for these?

- What do you need from me to provide a pre-approval letter so I can make offers? Will you pull credit?

Explain to the Loan officer that you intend to improve the property to force appreciation.  Also that you may move out in 2-3 yrs and keep it as a rental.   Good Loan Officers will help you through and consult with you on what your best options are.