Is this as good as he makes it sound?

Question

Hello, I am trying to purchase a 3 unit rental, and I asked the broker for a 20% down, 30 year mortgage, since I want to save some money (instead of 25% down) and fix the roof. This was his reply:

The bank is offering a loan for $xxx,000 or 75% of the purchase price with a 4.5% interest rate.

This would be a 10 year loan with monthly payments based on a 25 year amortization. If interest rates go up, the rate would be reset with a maximum bump of 2.75% (max 7.25%) based on a commonly used measure of interest rates.

The interest rate is about mid range, the 1/2% origination fee is typical; the 25 year amortization and 75% LTV are favorable (many banks would be at 20 years and 70% LTV). Though we might be able to get 4.25% ($xx less/month than 4.5%), the savings would very possibly be offset by higher closing costs or conditions. The closing costs offered are less than most banks.

The bank would also require you to deposit the rents into an account at their bank; and auto deduct the mortgage payments (fairly typical).

I asked about rolling the repairs into the loan to get the extra 5% borrowed. That would make it a construction/term loan for this bank - higher origination fee, higher interest rate on the construction money and harder to approve internally. But after closing, you could apply for a home equity loan - which would be a less expensive, less complicated way to go. All in all, it is a good offer. Call me to discuss any questions you may have. And let me know if you want to go with this. Is he telling the truth? Is this a fair deal or a good rate currently? Thanks!

Matthew Brenner · Answer

Personally, there is no way I world accept this loan. Having just worked with a broker on standard investment loans, I could put 25% down on a triplex and get 4.25% on a 30 year fixed. That's with no points and no requirements on where I do my banking. If you can qualify for a standard mortgage, I suggest you shop around for those.

Chris Mason · Answer

If it's a 3-unit... why are you looking at exotic/commercial financing?

Chris Mason · Answer

Worst case, your DTI might go down until one tax year concludes and you file.Make sure your schedule E is accurate.One time expenses, keep receipts/invoices describing what was done you can prove they were one-time expenses.Schedule E, make sure fair rental days near the top right is accurate. Don't own it for 4 months but report 365 days.Depreciate the heck out of it; it reduces your tax bill without harming your purchase power.

Edis Baftjari · Answer

Thanks for your replies. I will look at conventional financing. I can get approved for a mortgage, I just mistakenly thought a commercial loan is better for my DTI ratio for future loans. That's why I like this site, every time I log in I learn something new.

Bryan O. · Answer

@Edis Baftjari it is fairly clear that you are not familiar with the types of loans out there or the reasons to get them. I recommend to either learn much more about lending and then make an informed decision, or get traditional 30-year fixed loans until you understand if there is any reason why you wouldn't want to use it.

Joel Owens · Answer

Anything 4 units and under you should be able to find 30 year fixed money. There are programs 20% down instead of 25% down but the rate tends to be higher.Sometimes you can do a 1/4 point rate buy down on the loan. You would have to calculate the savings from a quarter point off versus the buy down fee upfront and how long it would take you to break even to see if it was worth it or not.With higher interest rates in the future having the loan have an assumption option is important as well down the road when you sell.

Mike Hanneman · Answer

Don't look at a commercial loan, you won't benefit from one yet.Go to diffent lenders that offer standard residential loans and compare those. Apples to Apples.Try smaller banks as well.

Chris Mason · Answer

@Edis Baftjari re-read what @Matthew Brenner. You shouldn't be bothering with commercial lenders. re: your concern about qualifying for future mortgages... as long as you buy good investment properties and are honest when you file your taxes, your DTI will go down with each property you purchase.It's people that lie to the IRS that have investment properties dinging their calculated DTI.

Edis Baftjari · Answer

By the way the interest rate adjusts at the end of 10 years, that is what he verbally told me on the phone.

Edis Baftjari · Answer

Hi Chris, I was not looking at commercial lending per se, I just wanted an investment loan. So I am in the process of getting quotes from a regular mortgage broker (who has not responded yet), and the other one who deals with commercial lending, whose reply is posted above. The reason I was considering a commercial loan was because I was led to believe that if I did a commercial loan, then the loan would not be counted against my income if I wanted to acquire another property in the future. However, this is where I am a little skeptic because I thought at long as it is an investment property (regardless if it is a commercial or conventional loan) and it cash flows positive, I should be able to free up my income to get another property and so on. I do not have to get a commercial loan correct? I own my home and a condo, and what I am trying to do is break through that glass ceiling where the banks say you have to able to carry all the mortgages on your income alone, that is why I am trying to get an investment loan. As Jerry W. pointed out, this guy may not necessarily be taking advantage of me, but do I really need to get a commercial loan for a 3 unit rental and pay higher costs & interest rate? Jerry W. I think the roof repair is badly needed and it might take a year plus to recoup the costs. Thanks for your input guys!