Should I get pre-qualified now or later?

Question

I'm having a helluva time trying to get a few of the lenders that I have spoken to tell me how much exactly I can look to borrow for a conventional loan on a new residential multifamily purchase.  All I want to know is that I can borrow 'X' amount of dollars so that I can plan a strategy for when I start to look for property.  I've given tax returns, that included both regular W2 and my current rental's numbers.  Is this really a hard thing to ask?  Do I need to go through the process of getting pre-qualified to hear that exact amount?

Greg Downey · Answer

For MF purchases, you will not get a preapproval.  This is because the property is underwritten just as much as the borrower.  Here is a quick calculation for you though.  Expect to need 25% down (does 80% LTV exist yes, but don't expect it and you wont be dissapointed).  You will also need at least 3 month PITI 6 months in MUCH better.  That will help you understand how much $ property you should be able to tackle.  The trick is that a lender wont be able to hold up to a preapproval to YOU when they are lending on both YOU and the PROPERTY.

The next objection is how can you get under contract without a preapproval.  Any reasonable MF broker knows the expectations outlined above.  Simple proof of funds should be enough to get under contract.

Hope that helps.

Chris Mason · Answer

Hi Ryan,

I don't have any of your paperwork, so the below is speculation about common causes for this type of confusion.

- Lenders do not preapprove for loan amount, they preapprove for purchase price after validating that you have the necessary down payment, etc. Loan amount has zero impact on your property tax bill and minimal impact on your homeowner's insurance cost, purchase price primarily determines those two items.

- If you want lenders to include rental income from the property you are purchasing, then how much that rent is will impact how much you qualify for.

- Yes, they really need to see all your paperwork, etc, to preapprove you. That's what it means to 'apply' for something. You can't get a yes/no/how_much answer without first applying for it.

- Approximately zero point zero zero percent of REI know what numbers are on their Schedule E, so 'verbal prequals' aren't really a thing for folks with rental properties or otherwise self employed, that are buying rental properties. I've tried verbal prequals for REI, and since the numbers I'm verbally given are inaccurate 100% of the time, the number I come back with is also inaccurate 100% of the time - half the time it's too low ("oh then what's the point?" says the borrower), half the time it's too high (which sets the borrower up to be disappointed when the accurate number is lower than what I said).

Jeff Dulla · Answer

@Ryan Moore What are they saying to you? Are they literally not telling you anything or are they saying they don't know and it depends on the property?

Truth be told - you are really qualifying most times based on monthly debt to income. So rather than be approved for a set loan amount, you are really approved for a set monthly payment that includes taxes, insurance, etc. To exacerbate the problem with that equation further - you get credit for rent that will offset some of that debt.

Long story short, the full monthly payment, with taxes and insurance, net of the rent, is going to change from place to place. They should still be able to give you a ballpark but a good lender will help you vet the properties in advance as you are looking to make sure they are a fit before you get under contract.

Jeff Dulla · Answer

@Ryan Moore I think a prequal would help but really it comes down to the lender. Do you have someone you trust? Do you have someone that can consult through the process?

My best investment clients are ones that put their trust into me (not blindly) and for that I do a lot of work up front for them. There is a level of synergy that then exists and a mutual level of trust. I am a part of the whole search, vetting of the property, the offer, etc.

I would find someone you trust and see if you can get as much of this vetted out as possible. And then keep that partner throughout the process.

Good luck!

Brian Garrett · Answer

@Ryan Moore Lenders should be able to use 75% of your rental income to help your DTI.

Ryan Moore · Answer

Thanks all... I need to digest this information and come back with any questions :-)

Ryan Moore · Answer

I'm getting just some general estimations that don't give me a lot of confidence in what exactly I can purchase.  Last thing I want to do is put something under contract and find out I can't make the loan happen.  During my first MF purchase, it was pretty cut and dry on what I could afford because I was only going off of a W2.

Now, my DTI puts me at a place where it'll be close and I'm not sure how my current rental's income is factoring into adding anymore income for me.  That's why I was wondering if I did a prequal, maybe I could get a better idea of what they are saying I'm good for.

Dave Skow · Answer

Ryan - I would say  yes to the main question ...its  best to  start with using  hypothetical scenario  that is likely higher than you plan to use  ...ask the lender to  use these figures...provide them with all the  data they  request  ...ask them to fully underwrite and  approve the  file  ( versus just  providing a  " pre qualification "  opinion  based off a loan officer  reviewing the data ) ...getting a firm / formal  loan approval commitment  is free and  this should allow you to know  exacatly where you stand

Ryan Moore · Answer

Great thanks, PM sent

Should I get pre-qualified now or later?

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