Loan fees higher after four conventional loans?

[James Kim]

Hello,

I've heard the 10 mortgage cap on conventional loans but today I was told by a friend that after 4 conventional loans under your name the fees or cost of conventional loans increases. Is that true?

When I questioned it he said it happened to him so he had to consolidate 2 loans to avoid the higher fees. My friend is in CA but I cannot imagine it to be a CA thing.

Thank you in advance!

James

[Jay Hurst]

Quote from @Robin Simon:

Quote from @Doug Smith:

That's news to me, but as you add more and more conventional loans, a trick of math starts to take place. Conventional loans are "full documentation", meaning they look at all of your expenses and income using "Debt to Income" ratio for cash flow. The numbers will be silly here, but it illustrates my point. Let's say you make $1000/month in income at your job and your current bills total $430... DTI = $430/$1000 = 43%. Now let's say you find a great rental property making a monthly rent of $1000. You're new mortgage, taxes, insurance, and hoa will equal $800, so you'll have a positive $200 cash flow each month. It sounds great, but if you're using conventional financing, your new DTI = (Old debts of $430 + plus new payments of $800) / ($1000 old income + $1000 new rent) = $1230 / $2000 = 61.5%, You just went from qualifying to not qualifying. Perhaps your friend ran into this limitation of using conventional financing and had to covert to the popular DSCR loan which only focuses on the property. That would explain the higher fees. DSCRs have a bit higher rate and fee structure than conventional financing, but it allows a prolific landlord to scale. I'm not saying that's what happened, but I suspect it is. Your friend likely finally ran into that math trick. I will say...getting 4 deals under their belt before hitting it is really pretty good. Most people hit it after 1 or 2. Good luck to you!

This is most likely exactly what is going on - the 10 cap is rarely ever hit because the metrics, hassle and complications of qualifying often becomes too much (which also ticks up towards worse overall terms which can include fees) - the math makes a lot of people to move towards Non-QM/DSCR right about this exact point (I generally always point to "property number 5" which looks like you situation to a tee)

 But that math is incorrect. In the above scenario the new rental income would only cost 50 dollars a month because the 1000 rental income would be credited at 75% so 750 dollars a month. The all in payment is 800 so all but 50 dollars covers the new payment. So, now the monthly expenses are essentially 430-50+480. 480/1000 is 48% not 61.5%.