Fixed vs "first responder" Adjustable rate mortgage.

[Nate Jenks]

Hello all. This is my first post on Bigger Pockets as I get going into my real estate journey. I'm currently in the market to purchase my first home (currently in an apartment). I'm looking to acquire my first BRRR. I'm a firefighter, and a family member recently showed me a "First responder loan" offered by a local credit union. I wanted to see if I could get some input on it since I had assumed a 30-year fixed would be the way to go. I posted the loan details from the CU's website below.

Are there any pros or cons when looking to pull out equity in a year or so to go on to the next project? It seems the initial APR may be lower than fixed, is that correct? The major pros that I note is a 1% downpayment with no PMI. any insight would be greatly appreciated.

Summary: Portfolio product with 1% minimum down payment and no PMI requirement designed to benefit those heroes who serve and protect our communities. Financing provided through this program is only available for properties located in Michigan or Florida.

Available Product Type: SOFR 7/6 ARM, SOFR 10/6 ARM

Loan Amount: $766,550 Maximum

LTV: Purchase and No Cash Out Refinance - Maximum 99%

Prepayment Penalty: None

Loan Assumption: None

Eligible Properties: 1-unit dwellings, attached and detached condominiums, PUDs

Escrow: An escrow account must be established for property taxes, and flood insurance, if required

Underwriting

• No Private Mortgage Insurance
• Occupancy – Primary residences
• Minimum Credit Score - 700
• DTI – Max 43% (UW/Mgmt exceptions up to 50% with minimum 3 documented compensating factors)
• Student Loans – If in deferment, no qualifying payment required
• Down payment of 1% must be borrower’s own funds, while closing costs and prepaids may be gift funds
• Attached condominiums require a 10% down payment
• Eligible Borrowers – Protect and serve heroes are defined as employees of public or private education institutions, employees of medical and healthcare organizations, all first responders, and active or former military personnel.

Servicing: Retained

[Dan Sundberg]

Hi Nate - It'd be worth asking the lender for a detailed breakdown of closing costs for this program, as well as an estimate of the interest rate you'd get with today's rates (they'll probably need to pull your credit to do this). Then compare that with your normal 30-year fixed. Often low down payment/no PMI programs have those costs built in elsewhere in the loan.

Also, make sure there aren't additional restrictions on the property condition, compared to a conventional loan. 

It'd certainly be nice to keep all your cash on hand for property rehab to make the BRRRR work. Also be aware that your cash-out refi will likely need to be 75% - 80% LTV, not 99% like the initial financing when you run your numbers.

Credit unions often have great programs, so hopefully this is one of them!

Good luck!

[Andrew Postell]

@Nate Jenks one thing to keep in mind here that it would be pretty hard to take any equity out of this property after a year.  The usual max for cash out loans on your primary home is 80% and that would take many years to acquire when putting 1% down.

[Patrick Roberts]

Definitely check into the terms and restrictions of the specialty loan. Most of those specialty programs (first responder loans, downpayment assistance, etc) are based on local state/county grant programs that back the loan. These programs very commonly involve restrictions and conditions on use, refinance, or resale of the property. 

For instance, lenders in SC can offer a downpayment assistance (and a related first responder/veteran loan) program through SC Housing Authority. The program is really beneficial, but the assistance comes in the form of a forgivable 2nd mortgage. If you move out of the house or sell it within 15 years, you have to repay all of the assistance funds. This includes converting it to a rental property or refinancing into a different kind of loan. 

[Nate Jenks]

Quote from @Dan Sundberg:

Hi Nate - It'd be worth asking the lender for a detailed breakdown of closing costs for this program, as well as an estimate of the interest rate you'd get with today's rates (they'll probably need to pull your credit to do this). Then compare that with your normal 30-year fixed. Often low down payment/no PMI programs have those costs built in elsewhere in the loan.

Also, make sure there aren't additional restrictions on the property condition, compared to a conventional loan. 

It'd certainly be nice to keep all your cash on hand for property rehab to make the BRRRR work. Also be aware that your cash-out refi will likely need to be 75% - 80% LTV, not 99% like the initial financing when you run your numbers.

Credit unions often have great programs, so hopefully this is one of them!

Good luck!

 Hi Dan, thanks for your response. It is important to consider the closing costs. That slipped my mind when reading the details. 

I have also been questioning the cash-out refinance rate. I've been trying to determine if the 1% down payment would hurt me in a BRRR (higher monthly mortgage rate and theoretically less to pull out in refinance). Do you find that lower down makes it harder for a successful BRRR? In recent episodes, it seems that BRRRs have become harder and harder to pull off with narrow margins.

[Nate Jenks]

Quote from @Andrew Postell:

@Nate Jenks one thing to keep in mind here that it would be pretty hard to take any equity out of this property after a year.  The usual max for cash out loans on your primary home is 80% and that would take many years to acquire when putting 1% down.

 Hi Andrew, thanks for your reply. I think this is what I was inadvertently concerned about (super newbie). Just to confirm, does this mean I can only pull out 80% of the equity that is available after the rehab? With putting down 1%, I would have less of the downpayment going towards equity, so less downpayment being able to be pulled back out?

This is a major holdup in thought for me. I'm planning to do a 3.5% FHA on this first single-family, I'm not sure if that would make a major difference than the 1% down when it comes to equity after 1 year.

[Nate Jenks]

Quote from @Patrick Roberts:

Definitely check into the terms and restrictions of the specialty loan. Most of those specialty programs (first responder loans, downpayment assistance, etc) are based on local state/county grant programs that back the loan. These programs very commonly involve restrictions and conditions on use, refinance, or resale of the property. 

For instance, lenders in SC can offer a downpayment assistance (and a related first responder/veteran loan) program through SC Housing Authority. The program is really beneficial, but the assistance comes in the form of a forgivable 2nd mortgage. If you move out of the house or sell it within 15 years, you have to repay all of the assistance funds. This includes converting it to a rental property or refinancing into a different kind of loan. 

 Hi Patrick, thanks for the message. That is very helpful. I hadn't thought about additonal terms that could lead to complications when turning the home into a rental. Thanks!

[Andrew Postell]

@Nate Jenks no problem, here to help and clarify.

When we speak to "cash out" loans in lending the maximum loan amount is usually 80% LTV on a primary home. Meaning, 80% of the total value.

So, if the value of your home is $775,000, then 80% = $620,000.

That's first.

That $620,000 represents the MAXIMUM mortgage amount.  So, if you owe $725,000...then you owe more than the MAXIMUM possible loan is that you could get on a "cash out" mortgage.

In order to do a cash out loan...you would need to owe LESS than 80% of the value of your primary home.  And that will be hard in short amount of time.

Hope that makes more sense...but certainly feel free to just call me if you want to talk anything through.  Thanks!

[Nate Jenks]

Quote from @Andrew Postell:

@Nate Jenks no problem, here to help and clarify.

When we speak to "cash out" loans in lending the maximum loan amount is usually 80% LTV on a primary home. Meaning, 80% of the total value.

So, if the value of your home is $775,000, then 80% = $620,000.

That's first.

That $620,000 represents the MAXIMUM mortgage amount.  So, if you owe $725,000...then you owe more than the MAXIMUM possible loan is that you could get on a "cash out" mortgage.

In order to do a cash out loan...you would need to owe LESS than 80% of the value of your primary home.  And that will be hard in short amount of time.

Hope that makes more sense...but certainly feel free to just call me if you want to talk anything through.  Thanks!

 Wow. Yes, that makes a lot of sense now. Thank you very much for the breakdown. That helped immensely and will be a major consideration for me!

[Dan Sundberg]

@Nate Jenks - @Andrew Postell did a great job clarifying the big challenge you'd run into pulling cash out with such a low down payment. 

The question to think about is - is that such a bad thing? BRRRRs are a useful tool for the right scenario, but it sounds like you have the opportunity to buy a house with basically no cash in, and with probably some of the cheapest financing available. If you can buy something habitable, and rehab it over time while you live there, that could be a home run of an investment when you look at your return on investment, especially if you house hack.

Sure you may leave cash in the deal, but if you buy right, it could still be an extremely profitable and low-barrier to entry way to get into real estate. I'm on my 3rd house doing just this, and it's been great. That said, I'm looking to BRRRR this upcoming year, but that's only because the first 3 properties allowed us to build up enough capital for this strategy to make sense.

[Nate Jenks]

Quote from @Dan Sundberg:

@Nate Jenks - @Andrew Postell did a great job clarifying the big challenge you'd run into pulling cash out with such a low down payment. 

The question to think about is - is that such a bad thing? BRRRRs are a useful tool for the right scenario, but it sounds like you have the opportunity to buy a house with basically no cash in, and with probably some of the cheapest financing available. If you can buy something habitable, and rehab it over time while you live there, that could be a home run of an investment when you look at your return on investment, especially if you house hack.

Sure you may leave cash in the deal, but if you buy right, it could still be an extremely profitable and low-barrier to entry way to get into real estate. I'm on my 3rd house doing just this, and it's been great. That said, I'm looking to BRRRR this upcoming year, but that's only because the first 3 properties allowed us to build up enough capital for this strategy to make sense.

That is a very good point, and it would be using it in that same advantage. The house I am looking at is a private sale from an older family friend moving into senior living (discounted). The home has great bones, but needs a cosmetic flip. I’m planning to live in it, and fix it up over a year or so. May be worth the extra cash on hand and leaving it in the deal.