How To: Find Real Estate Investor Friendly Lenders

[Andrew Postell]

When I first started in real estate investing I had multiple lenders tell me “no, you can’t lend on that”. And I took their word for it. I thought “If one or two say no, then they all must say no”. And that was completely wrong. There is a difference in lenders and sometimes the difference is pretty big.

Having great lenders can make you more profitable in real estate. Lenders take up 70%, 75%, 80%, or even more of our deals. And some of these loans are for 30 years – that’s longer than most businesses and longer than most marriages! So yes, having good lenders is somewhat important.

This post will focus on "buy and hold" real estate investors with residential (1-4 unit) properties and how to find good "investor friendly" lenders. Basically, if you are using the BRRRR method to keep a home to rent it – this post is for you.

We are going to hit 4 main areas in our discussion today:

1. Loan Types
2. Differences in Lenders
3. Questions to Ask Lenders
4. How to find the best “Investor Friendly” lenders

Let’s begin.

1. Loan Types

There are lots of lenders in the US most of what we will discuss today is how to separate lenders from each other. Many will say “sure, we can write a loan on an investment property” but that doesn't mean they are good at it. One of the main reasons that you hear different stories from lenders is because lenders might have different TYPES of loans. Generally speaking there are 2 main types of loans for investors. Now this is how I define them. If you go to a lender and ask “which one of the two loan types do you offer” they won’t know what you are talking about. These definitions are for you to understand the difference conceptually and why one lender will say one thing and another something totally different. I’ll call our two loan types “Conventional” and “Portfolio”.

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are 30 year fixed rate loans. They have the lowest rates and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans (more on those in a second)....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. These loans types are based on you personally. Your personal credit. Your personal income. Fannie/Freddie money = Fannie/Freddie rules. Which means that lenders don’t have much say in these loans – they have to follow the rules they are instructed to follow.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. Sometimes referred to as "non-QM" loans. Sometimes called "DSCR" loans. Whatever they call them, the loans come from the lender's own source of funds. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. These loans are easier to get but the terms are different. They usually don't care about your personal income but rather the income of the property. Even Hard Money is a form of "portfolio" lending. If the lender has control, it comes from their portfolio of funds. Thus the name. Since there are over 8,000 lenders in the US, that means that there is over 8,000 different portfolio loans. It can vary WIDELY between lenders some times with this type of lending.

Some other common differences between the two loans:

• Appraisals – Conventional loans will always go off of “sold comparable properties” (or comps). Portfolio loans could be based on that too but mostly they are based on the rental income method of evaluating the value of the property.
• Lending to an LLC – Conventional loans must close in your personal name. Even if you switch the title to your LLC after closing the loan will always be on your personal credit. Portfolio loans should be able to lend to your business in every situation and never report to your personal credit.
• Rates – Conventional loans are 30 year, fixed rate, no prepayment penalty, no balloon payment. It is very common to see a portfolio loan with a higher rate, a shorter term, and maybe even be an adjustable rate – and sometimes all 3 of those.
• Loan Structure – Conventional loans are based on 1 property. If you buy 4 separate properties…you will have 4 separate conventional loans. Many portfolio lenders will have a “blanket” option to go over multiple properties with one loan (Just lookout for that release clause).

And we could certainly keep going here. Keep in mind that I cannot speak for every single lender in the country. So could your local lender do something different that is not mentioned here? Yes, completely possible. But hopefully knowing the difference between lenders will help you understand what type of lender you are speaking to and what to expect.

1. Difference in Lenders

Since portfolio loans come from each individual lender there will be obvious differences between each lender. Comparatively, Fannie Mae and Freddie Mac dictate conventional lending rules which means that most lenders will be required to follow the same rules – mostly. The difference between lenders with conventional loans is almost unnoticeable if you aren’t a real estate investor. But if you are a real estate investor the differences can be DEVESTATING to your deals.

Things like not using rental income, limiting the number of properties, not offering cash out loans, loan minimums and seasoning are all different items you will face when interviewing conventional lenders. For example – Fannie Mae and Freddie Mac do NOT have a loan minimum. So why do so many lenders have a loan minimum if Fannie/Freddie don’t? The answer here is with the nature of what we do – we are real estate investors. Investment properties foreclose at a higher rate than primary homes. By default, they are “riskier”. So if I am a lender, maybe I want to limit my risk to investment properties. And if I am a publicly traded company – then maybe even my shareholders want me to limit my risk to investment properties. Shareholders have rights too. And this is why we don’t work with large, national, publicly traded lenders. They have too many restrictions to investors. We speak about smaller, local lenders for a reason. They have less “OVERLAYS”. Overlays are the rules that lenders put OVER the Fannie/Freddie rules to limit their risk to us…well, our properties. Fannie Mae and Freddie Mac say that using an overlay is totally allowable. If you want your credit score minimum to be 680, even though Fannie/Freddie minimum is 620, then go ahead. You cannot be LESS conservative though. You still have to follow Fannie/Freddie guidelines. Some common OVERLAYS are:

• Credit Score
• Not using Rental Income
• Seasoning
• Loan Minimums
• Making us have more downpayment than needed
• Not using “After Repair Value”
• Limiting the number of loans
• Requiring more reserves than needed
• And plenty of others too

So imagine you are trying to use the BRRRR method on a property and your lender states "We can't use the ARV until after 12 months, we can't refinance until after 12 months, we can't use rental income until it is on your tax returns, your loan amount can't be below $100,000, and we will require you to have 30% equity in your property".

If that was the case we couldn't do the BRRRR method - ever! And I’m using that example above because those are all examples of OVERLAYS that we have heard. Except no one probably told you they were overlays before. You can absolutely find conventional lenders with no loan minimums, no seasoning, using rental income immediately, and so forth. You just have to know how to find them.

1. Questions to Ask Lenders

So how are we supposed to find good, investor friendly lenders with all of these differences? I have put together a list of questions for you to ask your lenders as you interview them. You can certainly ask other questions if you like, but this post is for us "buy and hold" investors. You MUST ask these questions as a part of your interview process to make the BRRRR method (and other "buy and hold" methods) work.

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. When do you start using “After Repair Value” on my property? (also needs to be immediately)
3. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
4. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
5. How many loans can I have with you?
6. Can I change title to my LLC?
7. Do you sell your mortgages?
8. What is your loan minimum?
9. Can you explain to me what your reserve requirements are?

These questions are more for the “Conventional” Style loan. So if you ask these to a “portfolio” style of lender you may only get 25% downpayment minimum. But with Fannie/Freddie, their guidelines say 15%....and no seasoning….and using rental income immediately….and loan minimum…and so forth. We KNOW what their rules are, we just need to find a lender who follows their rules with as few of overlays as possible.

So what if the lender you are interviewing answers all of these questions except #8 they say $75k? That means 2 things:

1. Just make sure your ARV will never have a loan amount below their threshold.
2. But it also means that they might have some other small overlays somewhere else.

Fannie Mae’s guidelines are over 1200 pages long. Freddie Mac’s are over 2000 pages. It would be impossible to provide you with every question to every scenario to get answers to everything. So there’s one more technique to know on how to find good lender.

        How to Find “Investor Friendly” Lenders

We now know what the differences are; we know what to ask; so how to we find them? The best way is to lean on other real estate investors! They’ve already done all the hard work of finding good lenders (hopefully) so put on your networking cap and start making friends!

Here's my 3 suggestions:

1. Post in the Bigger Pockets STATE forum that you are looking in. There are usually some good, local investors that monitor those forums. Maybe they already have a suggestion or recommendation for you? Certainly try there.
2. Visit your local REI groups. There are many groups that meet across the country. Obviously things are a bit different right now but many are meeting virtually. Some post here on the Bigger Pockets Marketplace. Many post on meetup.com. Networking is always a great practice and you never know who you might meet there and what good information they have to share. Would certainly recommend visiting if one is close to you.
3. Calling - and then there's this option. You can certainly just google search lenders and call each one. Which is what I have had to do many times...it stinks. Try to other two first.

*WHEW* I know that was a lot but hopefully this helps in some way on how to find “Investor Friendly” lenders. This certainly isn’t designed to be all-encompassing but maybe with some good luck and hard work you will have a great partner for years to come. The assignment from here – 4 lenders. If you are just beginning your assignment is to have 4 lenders at a minimum. You don’t want to find a great property that can’t get financing. Make sure you have multiples and you will have a significantly higher chance of success. 

Thanks for reading!

[Andrew Postell]

@Kade Lucero I feel this will depend on the part of the country you are investing in.  There are lots of good lenders it just takes some time to find them.  I would recommend starting with 4 lenders in your network and as your real estate empire grows you'll need more.  But 4 is a good start.  Thanks!

[Evan C.]

@Andrew Postell, wonderful post, thank you! Well organized and particularly useful to those with only a few conventionally financed deals.

[Alexei Semenov]

@Andrew Postell Thank you for a great posts!!

Very detailed!!!

[Andrew Postell]

Thanks @Evan C. and @Alexei Semenov greatly appreciated!

[James Austin]

@Andrew Postell

@Andrew Postell I own SF rental property free and clear in San Antonio, TX 78258.  I finally got a delinquent renter out of the home with eviction.  Needless to say the house needs some serious rehab to get for ready for sale or rent.

The valuation of the home is approx. $267K.  My question is what is my best option to get equity out of the property to do the rehab and do you have any lenders you would recommend.

Thanks for your valuable time.

Regards,

James Austin

Houston, TX

[Andrew Postell]

@James Austin if you are here in Texas then you will have lots of options on what to do here.  I'll drop you a Private Message here so we can talk about specifics.  Thanks!

[Sara Walters]

@Andrew Postell - piggybacking off of Aditya's question above, is this the best route to take for cash investors who DON'T qualify for conventional mortgages (i.e., buy with cash, then use the rental income of the rehabbed property to qualify for the portfolio loan)? It seems like the general Bigger Pockets advice for people BRRRRing properties is to begin the entire process by getting preapproved first (even if planning to make an all-cash offer) to ensure there won't be delays or headaches during the refinancing step. From what I'm gathering on this thread, though, it seems like there wouldn't be anything to "preapprove" if the intent is to use a portfolio loan; you'd have to have a performing asset in place in order to demonstrate an ability for the investor or LLC holding the property to pay back the loan, and you'd run the risk of leaving all your capital tied up in the property if you were ultimately unable to get approved for that portfolio loan when the time came. Am I thinking about this correctly? Or is there such a thing as a preapproval for a portfolio loan before a property has even been identified/acquired?

[Andrew Postell]

@Sara Walters sorry I missed this response here but you can absolutely get prequalified with a portfolio style loan.  Absolutely.  Even with a Fannie/Freddie loan you don't have a property identified when you get prequalified.  So this is pretty normal with any loan type that you use.  But 100% get prequalified first.  Hope that helps!

[Tracey Marzich]

This is a fantastic post! We have done our borrowing with the local credit union. They are a hybrid of conventional and portfolio. They definitely have overlays but they keep all of the loans in house including owner occupant mortgages. We have 20 year 4.5% loans 75% ltv but they are based on appraisals and I often find the appraising to be ridiculously conservative. 

They have been great to work with from a relationships standpoint but from an equity stripping and growth standpoint we must branch out. We are in Ohio.


Does anyone have any experience with accredited investing at super low interest rates (sub 2%) using properties as collateral. This may be the wrong forum to ask.

Great info! Thanks so much 🙏

[Matthew Jones]

@Andrew Postell

Thanks for the post, the "Questions for Lenders" are very helpful. I used them when I called local banks/credit unions in my area. Would you mind sharing what you believe to be the 'ideal' answers for each of the questions? Or what would be deal breakers if the lender answered a certain way?

[Andrew Postell]

@Matthew Jones so those answers are in the parentheses that are besides the questions. Those are the mandatory answers that are needed and are deal breakers if they don't provide that answer. I cannot have seasoning requirements on BRRRR transactions. Cannot have it. But on the questions with no answers in parentheses then those aren't as strict. So if someone says "we sell our loans"....that's not a deal breaker to me.  But I want to know.  And also, these questions are testing the loan officer you are speaking with.  If they keep answering "I don't know, let me go ask someone"...that's not a good sign at all.  Hope all of that makes sense.

[Matthew Jones]

@Andrew Postell

Thank you for your response. A few follow up questions:

1. I have been framing the questions around Fannie/Freddie loans. Should I expect or want the same answers with the questions framed around conventional loans versus portfolio loans?

2. If I have a full time job that has a W2, then how important is the response being 'immediate' for question 1 regarding using rental income to help qualify? I assumed this question was for self-employed full time investors who have no other form of income outside their rental income. Or is there another angle I am missing?

3. What is the reason(s) for the immediate need on using ARV for the property?

[Andrew Postell]

@Matthew Jones thanks for the follow up. And yes, I did mention this some in the post - a portfolio style loan may only have 75% or 80% max LTV in your market. This is one of the main reasons to network with other people. Your market might be different than mine. Fannie/Freddie will be the same everywhere but the portfolio/commercial loans will be different depending on your market.

There are actually dozens and DOZENS of "overlays" that lenders can put on loans.  For me to type out 200 questions would take forever and for you to ask one lender 200 questions it probably wouldn't go very well.  So those 9 are the most important ones.  If they aren't answering those questions right...that is usually a sign that they have OTHER overlays that will affect our deals.  Even if you don't need that rental income, make sure you are using a lender that allows it to be used.

And if you dump thousands of dollars into a property to improve the value....but that lender isn't using the ARV...then why even use them? I can't have a lender not use my ARV for 12 months or something. I need that improved value right away so I can get my money back out of the house and go to the next one. That's the whole point to the BRRRR. Must have ARV day 1. No waiting. No seasoning. Got to have it.

Hope all of that makes sense.

[Kimberley Parsons]

@Andrew Postell Thank you for your post. This has been very informative as I am a newbie starting in the process.  Up until now, I've bought houses for my residence so I know the loan process from that perspective. But your post helps me think through so many different aspects from the investor perspective.  The points you made about overlays is fabulous.  Thanks. 

[Tyson Thurman]

@Andrew Postell Hi Andrew, Thank you so much for this informative post. Do the Questions for Lenders apply to just the lenders we will be contacting for the Refinancing step? Or can some of these questions apply to the HML we will be using in the Buy step? Are there any other specific questions we should be asking HML when we interview them?

[Andrew Postell]

@Tyson Thurman good point here. Maybe I should put together some basic questions for Hard Money Lenders (HML). The post itself is mainly for the REFINANCE step but it can certainly be applied to other lenders. 5 years ago most hard money lenders were pretty close to being similar but now there seems to be VERY different conditions especially with more "national" types of HML. So here's some questions (and answers) that I would recommend for Hard Money Lenders.

1. What is your "Loan to Value"? - I would HIGHLY recommend using a HML that uses 75% of the After Repair Value (ARV). None of this "90% Loan to Cost" or whatever stuff. I need as little out of my pocket as possible here. 75% of ARV is the industry standard. The only exception I would accept here is that if it's your first time....or maybe the property is in a rural area...then there would be some allowance to the lender. If it's your first time - then look for 70% LTV. If it's rural - you might be on your own a bit since the best HML are local and sometimes there just is no "local" HML in some of these small towns. But lean on your fellow investors (that networking piece) to who they would suggest first if it is rural.
2. How quickly can you close? - 10 days is what I want. Faster is better but once you have clear title, then the HML should be able to close...that is, as long as your contract can have their bids to the lender, and you have provided everything as well.
3. Would you NOT lend to me if it's a bad deal? - Hopefully they say "yes" to this.  If you are new, sometimes you need someone who can let you know if there's danger in a certain property.
4. How long is your loan good for?
5. Do you have an extension option if my rehab goes long?  If so, how much is that?
6. What is your draw process like?
7. What is the inspection process like?

And I think that would be a good start for Hard Money Lenders.  Hope that helps!

[Tyson Thurman]

@Andrew Postell thanks so much as always. I’ve noted these questions and answers and look forward to putting them to work.

[Symone Gordon]

No disrespect but dude, you're definitely the GOAT. I read one of your replies to someone else's inquiry and visited your page directly after. Your threads are a wealth of information - I learned more here in 10 minutes then Google in an hour ahah!

I have a question: A portfolio loan is based on the income of the property rather than that of the borrower - I assume the requirements would then be different for a portfolio loan? More money down? Etc?

[Andrew Postell]

@Symone Gordon I certainly wouldn't take offense to being called the GOAT...but I'm not where near that.  It gets frustrating to me that after all this time I STILL learn new things!  Why can't I just know it all yet?  But that's just part of it I guess.  So thanks for the kind words.

Now a portfolio loan could be based on just about anything.  Some will base it on the property...but some lenders will base it on other things.  Some might just lend to you if you have a bunch of money with them.  I've seen it plenty of times.  But for the average person we want lenders to give us a 30 year fixed rate on that portfolio loan....whatever they base it on.  Some will have prepayment penalties some might be adjustable rate loans.  So DEFINATELY look to locals on this one too.  Seek out 30 year fixed rate loans if you need this option.  Hope all of that makes sense.

[Symone Gordon]

@Andrew Postell I’d look more to the person who is open to learning even with years of experience vs someone who says they know it all so respect ✊🏾

What would you suggest to refinance my current loan: FHA on a duplex $250K, 3.75%, 50k equity as of right now - purchased 01/2021.

[Andrew Postell]

@Symone Gordon I would certainly call your Loan Officer to see if there are any options. Your state might be a little different then mine (Texas doesn't even allow FHA cash out loans) and a local person would probably give you better info for your specific scenario. I would suggest that any time you review refinancing that you examine it will a 3 year "break even" threshold. Meaning, if it takes you longer than 3 years to recoup the costs of refinancing...then I might suggest not doing it. Everyone is different of course but if your payback is 12 months, that's a pretty easy decision. 3 years...the whole world might change again so just look at it differently if it takes that long to recoup. Hope all of that makes sense. Thanks!

[Therese V.]

@Andrew Postell Thank you so much for a well written post explaining this terminology!

I have a few questions. For a 7 unit, it would be portfolio/commercial loan territory and I would need an LLC for the loan? Could I get the usual conventional loan?

When you say you use HML to purchase the BRRRR property is the HML funding the entire price or just the down payment plus you are getting a commercial loan? I work better with numbers for examples, so let's say a property is $1.5M, the HML would provide the 20% (or would you need 30% if 7 unit?) and then a commercial lender the rest of the loan to purchase? Or the HML would provide the entire $1.5M? It is only for the period of time that you need to acquire the regular commercial loan and pay back the HML, what are usual terms and rates for HML?

[David M.]

@Therese V.

Conventional loans are conforming residential loans. Residential property is 1-4 family units. So, your 7 unit property would not qualify. Also, you LLC would disqualify you from using a residential loan since legal entities are not eligible for conforming residential loans.

Usually, a HML would pay for a percentage of the acquisition and a same or different percentage of the reno. if you want numbers, lets say the HMl will cover 75% of the acquisition and 80% of the reno. Lets say your purchase price is $1mil and reno is $200k. Then, at purchase the lender will provide $750k and you have to cover the rest. For reno, you can draw $160k from the lender and you have to come up with the rest. Please note that hml are short term loans. So, after 6,12, maybe 18 months you will have have to get another loan, assumably a long term type loan. In your case, that would still be some sort of commercial loan.

For first timers, HML will usually charge 10% or more interest plus 1-2 points as I understand. Also, the LTV are lower. As you are able to show more history of successfully doing deals, the rates will lower to under 10% and the LTV's will increase.

I hope that helps.  Good luck.

[Therese V.]

@David M. Thank you for your response. I don't have an LLC for rental properties, I was wondering if I need one in order to purchase a 7 unit property.

As to HML, we already have 4 single family LTR properties. We started in the fall of 2013 and pretty much have all the same tenants from when each property was purchased (1 property the people moved out but then called to move back in but we had already rented to someone else). Is that a good enough history to get better HML?

Does one only get HML for properties that need major work? I'm trying to navigate purchasing a much higher priced property where it will require a large down payment compared to cash on hand. We could cash out refi the rentals to acquire all of the DP needed. Multifamily is all new to me.

[David M.]

@Therese V.

not sure if we are hijacking this thread...

Nothing says you have to use a LLC to purchase a 7 unit property, but once you break the "threshhold" and are commercial, its generally more advisable "Residential rules" no longer apply and you have to deal with all the commercial rules. I believe there is more liability.

Your history might be. THe best would be to find some HML lenders in your area and find out what they do. I don't think its necessarily cut in stone, especially since they aren't conforming loans so its basically unregulated. Its whatever they want for their business model.

Since the Hml isn't a conforming loan, the house doesn't have to be "functional/livable." So, yes, the hml is generally for those properties in really bad condition. For example, a normal residential loan would expect a roof, functioning utilities, etc. You might get it anyway because that is part of the way you are structuring your deal. They are interest only, albeit a high interest rate usually. But, you can also borrow the renovation costs. You can do that with a conforming loan (i.e. conventional with reno option or FHA with 203k option) but they are much more restrictive. For one, you have to hire a licenced contractor other than yourself.