Banking Refinance Question

[George Smith]

I am looking to purchase another rental and want to make sure I know where I stand with my refinance options after I rehab and rent it out from an initial cash purchase. 

There are the following questions I plan on asking banks. Am I missing anything? 

Rate?

Min ltv?

% of rental income used in calculation?

Season requirements?

Is the refinanced based on appraised amount? 

Closing costs? 

[Andrew Postell]

@George Smith yikes, I am glad I stumbled on this post.  First, thanks for posting.  As an investor, our lenders are likely our biggest partners.  They take up 70%-85% of our deal.  That makes finding the right lender VERY important.

Secondly, investment properties foreclose at a higher rate than primary homes.  This means that some lenders won't want to write investment properties as friendly as other lenders.  So you might hear different stories about lending too.  So a quick summary and then my suggestions:

1. You can absolutely go up to 85% LTV on a single family home.
2. You should NEVER work with a lender that requires you to be on title for ANY amount of time.
3. You should also be able to recognize the difference between the TWO main loan types we have as options as investors.
4. And knowing how to structure your deals.

Ok, so maybe I came down pretty hard with those.  I mean, you can work with whomever you want.  But there are plenty of lenders that will help us be successful and that's really what we need as a partner.  Lot's to know so let's begin.

LOAN TYPES

Generally speaking there are 2 main types of loans for investors: “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 all 30 year fixed rate loans. They have the lowest rates we can find 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....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. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. 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. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.

Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders. Portfolio loans can run the gambit. Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs. A mortgage broker will help with this some…but even the best mortgage brokers don’t have access to ALL portfolio loans out there.

So if the "portfolio" style loans are easier to get - why do we even try for the Fannie/Freddie route?  And it comes down to the "terms" of the loan.  A 20 year loan at 4% would have a higher payment than a 30 year loan at 4%.  And having more cash flow would make me look more lendable to future banks.  And that's why we try the Fannie/Freddie route.  But there are PLENTY of investors that NEVER use Fannie/Freddie money and are extremely successful.  

But you should certainly know the difference and know what loan type your potential lender is talking to you about.  That will help you make a better decision.

QUESTIONS

Let's say you have a lender in mind. Now it's time to interview THEM.  A lender should always be able to tell you what the rate and payment would look like in theory, without pulling credit, but we need to know MORE.  

The upfront questions you should be asking your potential lenders are as follows:

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?

Now, notice I didn't say anything about rate yet. That's because if they don't fulfill those requirements above....their rate doesn't matter. Now once I get those questions complete, then we can talk about rates/fee/closing times/etc. Those questions are really important for us investors - ESPECIALLY if I am using the BRRRR method on a home.

STRUCTURING

Structuring your BRRRR method properly is really important. And it gets even more important if you buy with cash. I wrote an entire post on this topic for Bigger Pockets that you can find HERE.  Let me know if you have any questions on it.

OTHER INVESTORS

Chances are, there are already investors in your area that know good lenders.  All we have to do is find fellow investors.

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. Some post here on the Bigger Pockets Marketplace. Many post on meetup.com. And yes, I realize they may not be meeting in person right now...but they might be meeting virtually. Or have a facebook page. Do some digging. I bet you can find some
3. Calling - and then there's this option. Which is what I had to do. I had to call about 200 lenders (no exaggeration) to learn of good lenders  and I have some tips. First, when calling banks target the smallest most community based banks you can first. If you have never heard of them, and they have one location - that's a good candidate. No big, national, publicly traded banks will do what we need. Second, ask for the COMMERCIAL division to learn about the portfolio loans. That's the section of the bank we want. Now, most of these smaller banks may only have 12 employees or so. So don't get frustrated if they don't return your call or aren't in the office. Just call back and be friendly. Maybe play dumb a little "I don't know if I'm in the right place..." "I'm sorry to disturb you, you may not be the right person for this....", etc. Maybe someone can get you to the right person. Again, be prepared to call A LOT.

*WHEW*  I know that was a lot.  So feel free to ask anything additional that you may need. Thanks!