Difference between banks and brokers? Need Mortgage 101 help!

[Catherine Peters]

There has got to be a wealth of information on BP about this subject but I can't find it! I am interested in the BRRRR strategy and also out of state investing using conventional mortgages but want to get the best terms possible, and know that I an working with a lender who will refi when the time is right (after new ARV, seasoning, etc). Whenever folks talk about the BRRRR strategy, they just kind of gloss over how they are getting the financing piece done. How do you find lenders that understand and agree to this strategy? Are you using brokers? Are you cold calling banks? From the yellow pages or Google or what? Who do you ask for? What are you saying? What are you asking? I have NO idea how to do this and am really looking for some step by step guidance. Also, if I'm looking to invest out of state, do I need to be calling banks in that area?

Also, we just refinanced our house from an FHA to a conventional loan so we could potentially house hack with a new FHA on our next property, and we did this through a broker. Do you have success with brokers or should I always go direct to banks?

If there are posts or articles or books that address these questions, I would really appreciate the links. And of course, any direct advice would be much appreciated!

Cat

[Jared Bouzek]

@Catherine Peters In full disclosure, I am a broker so I'll put that out first so you know my bias. From reading comments by @Chris Mason in the past I know he has done both brokering and direct lending, so he is a good source of information on the subject. 

As Chris mentioned, any lender can have overlays and many of them do to varying degrees. The difference in working with a direct lender is that they are set in their guidelines and deal with their own overlays. They also have their set of loan products to work with and it can be difficult if you need something that they don't offer. Their advantage is having in-house underwriting which gives a slight advantage in processing time although I like to think I can hold my own in processing timeline.

As a broker, I work with several different lenders, so I know their guidelines and which scenarios they handle well and which they don't. For instance, when working with investors, I immediately screen down to the set of lenders I know work well in REI scenarios. Basically I take each specific scenario and tailor it to the lender that is going to offer the best deal given what we have to work with. Also, I really don't have a limit to what programs I can offer. All I have to do is find the lender that offers that product. So I have access to lenders who have some overlays as well as lenders who have virtually no overlays but each has their place and offers something unique to certain scenarios.

I will say that I see Loan Estimates from other loan officers once in a while, both broker and direct, and I see very little distinction in rates and costs between the two. About 95% of the loans I do my compensation is paid by the lender. It's only in rare instances that I do otherwise and typically that is to the advantage of the borrower for one reason or another. The key advantage to brokers is the flexibility that they have.

On the subject of BRRR, the real question is what model you want to follow for your investing. If you're trying to do a velocity model which involves purchasing the property, rehabbing, pulling your cash out, and immediately starting on the next property rinse and repeat within a 2-3 month timeframe, you're going to need a lender who can work outside of Conventional guidelines except for very specific scenarios. That is where having a portolio lender is to your advantage. Like with many things in lending, there is a trade-off that goes along with this. Because a portfolio lender manages their own portfolio of loans and thus sets their own guidelines, you can get your cash out in less than the six month timeframe if you find the right one. The trade-off is that their rates and terms can be less ideal than if you could work with a conventional loan. If you're not as concerned about immediately stepping from property to property in a short time window, you're better off working with a conventional lender who can get your cash out after six months and have the better rates and terms that are associated.

The last thing I will say is something I harp on a little bit on these forums, and that is that I wish more investors would search for a loan officer rather than a lender. Within the same lending institution you're going to find varying qualities of loan officers in how they handle their business and how well they know their guidelines. This is especially important in REI which is a little bit of a niche area within mortgage lending that requires a certain knowledge, attention to detail, and mindset. The best thing you can do is find the loan officer who specializes in REI and can offer you the best programs, rates, and terms to match your specific case.

I hope that's helpful to you.