Conventional Financing

[Todd Bayer]

Hello everyone! Today, I'm looking for someone who can do conventional purchase financing on a non-owner oc triplex in Southern California. Here's the catch, the purchaser has 4 mortgages currently and is hitting a wall because we're being told the banks won't allow more than 4 -- but Fannie Mae says 10, can anybody refer us somewhere or do this loan? Thanks!

[David Beard]

I've since found out that US Bank will go to 6 financed properties, at least in my area, and I have a loan in process with them.

Here's a few more pieces of info I've picked up lately:

If you want to use any of the rental income for qualifying in debt ratio calcs, you'll need the following with US Bank (they follow Freddie Mac guidelines, I believe Fannie Mae is very similar so this should be generally accurate across the board):

* 2 years experience owning 1-4 unit properties as documented on Sch. E of tax return
* Signed leases
* An income appraisal
* 6 mths rent loss insurance
* A detailed operating income statement pro-forma of expenses and replacement reserves that must be signed off by appraiser and underwriter. This backs out assumed expenses for prop mgmt and maint/repairs even if you do this work yourself.

If you don't adhere to this, the rental income won't count, and the PITI of the property (and potentially operating expenses as well) will be added to your obligations (numerator) in the debt ratio, which is very punitive. If you do meet these guidelines, then any positive net rental income (NOI minus vacancy factor minus replacement reserves minus PITI) is netted in your income (denominator).

The experience item is one that you either have or don't. Community bank portfolio lenders can be more flexible in recognizing compensating factors, but unfortunately the conventional loan "bullets" have to be used first, as the financed property limits apply to ALL loans you have on 1-4 properties, and only conventional financing will get you the 20-30 year fixed rate terms that most investors would love to get at thist time.

One caveat is that commercial loans on 5+ unit properties do not count toward these financed property limits.

Once you get beyond the 4th loan, they'll look for a 740 credit score, 6 mths cash reserves for PITI on your subject property plus all other rental properties owned, and max LTV falls from 75% to 70%. You can use your 401-K account to support cash reserves (they may make a tax-related adjustment )

Organize your data in a professional manner when submitting to underwriters, as this will help and there is some subjectivity involved, such as if you're trying to explain why a large repair bill on your Sch. E should be adjusted out as an exception item, or if you had large vacancies for a particular reason.

If anyone disagrees with any of this, please let me know and I'll happily stand corrected, but I tried to gather this data in order to map out financing strategy and loan sequencing for building a buy-and-hold portfolio. Of course, once you hit loan #10 on 1-4 unit properties, you're clearly done with the conventional route but should have excellent documentation on your portfolio properties to work effectively with your community bank lender.