Buy and Hold Financing?

Question

We just got a SFH under contract. We will be putting 20% down. We need to secure financing, and have talked to several lenders with varying options from ARMs to conventional mortgages. we've purchased several homes as primary residences, but this is our first investment property and I want to make sure we're not screwing up here.

One loan we got a quote on was a 10 year balloon, 5 year fixed, with an adjustment after 5 years and then locked in again until year 10. It was amortized over 25 years. It was an "investor purchase" loan and I don't think it required an appraisal. Is this the same as a "portfolio" loan? I'm intrigued by this option, but also the word "balloon" gives me heartburn, although I know from reading on here that it can be a valuable tool. We had thought of using this option for a BRRR, but I don't know that it's a good enough deal to be able to refi in less than a year into a conventional mortgage. We might need to hold it a few years before refinancing and with rates on the rise, I worry that we'd get locked into a loan with a higher rate.

Had another bank quote us on an investor type loan at 5.25% over 20 years with a 5 year lock. Not sure if that's a good rate or not if we went that direction.

My father in law has encouraged us to go ahead and lock into a conventional mortgage, but my concern there is the appraisal, as the house in its current condition may not appraise for the sale price. I also don't know what other restrictions we might run into around a conventional mortgage on a second home.

I appreciate you're advice!

Andrew Postell · Answer

@Jon Mason nice to meet a fellow Tennessean.  I actually went to Franklin High School.  Lot's to your post but let's tackle it one item at a time...

• Loans Quoted - I would call these "portfolio" loans.  Portfolio loans are sometimes called "commercial" loans but most lenders use portfolio because they come from the bank's own portfolio of money.  It's their money.  So they make the call.  I would be VERY surprised if any of these don't require an appraisal. Since each bank makes the call on how they lend their own money the terms and conditions can very greatly.  But those terms are pretty normal. With any "acquisition" money strategy that you use you should ALWAYS be prequalified  with your next lender (conventional).  That way you know that the balloon payment won't come into play.  Being prequalified should be 100% free.
• Conventional Loan - yes, a conventional loan will 100% require an appraisal.  When I use the term conventional I really mean a conventional, conforming loan (A Fannie Mae/Freddie Mac loan).  Now if the property is in disrepair, you won't be able to get a "standard" conventional loan, meaning you would need a conventional renovation loan.  Not every bank offers that loan type but it is out there.  The biggest area of these loans when acquiring a property is their closing time.  That is normally 30 days.  So if your portfolio lenders can close quicker, and your seller HAS to have a quick closing because they are facing foreclosure....or whatever....then portfolio is your only option.  Also, in theory a good portfolio lender will lend you X% of the ARV.  So if you purchase and rehab below X% then you will not have anything out of pocket...I mean, you'll have closing costs and whatever...but it will be lower than the conventional option which will require 15% down no matter what.  So there's some math to know which option is better for you.

I also put some questions below to ask your conventional lender as well but feel free to tag me and ask any other questions.  Thanks!

Questions for Lenders

• When do you start using rental income to help me qualify? (the      answer needs to be immediately)
• How long do you need me to be on title to refinance? (this is      important if you do need a short term loan to purchase then refinance out      - and the answer should be 1 day...very important that it is 1 day on      title is all that is needed to refinance)
• What is my minimum down payment required? (not so important but if      they only require 15% down on a single family home that is usually a      good sign that you are working with a flexible lender)
• Can I change title to my LLC?
• Do you sell your mortgages?
• Can you explain to me what your reserve requirements are?

Jon Mason · Answer

@Andrew Postell Wow! Small world! I graduated from FHS in 2000. I grew up in Cottonwood. One of the few natives around here these days.

Thanks for much for the info!  I'm guessing with all the requirements around a conventional mortgage, and the condition of the house, we might need to do a portfolio loan, and then refi into a conventional mortage down the road. That's excellent advice about pre-qualifying. It wasn't really on my radar.