How much will my bank lend me?

Question

I seem to get this question, or some variation of it, fairly often.  "Which is the best bank"?  "How much do I have to put down"?  "Do I need to buy it as a second home"?

The answer to all of these questions is, it depends.

In the "conforming loan" world, the bank doesn't have much say in what you do.  Banks A, B, and C will have to have the same guidelines.  A conforming loan refers to a type of mortgage that that aligns with the criteria set by the Federal Housing Finance Agency (FHFA). Meeting its standards makes these loans eligible to be purchased by either Fannie Mae or Freddie Mac. By buying mortgages, Fannie and Freddie reduce risk for lenders. This practice also frees up more money for lenders to use to fund additional mortgages.

In "non-conforming loan" world, anything goes. That is, anything goes that is OK with your bank.  For example, my bank will sign off on pretty much anything I want to buy with 10 percent down, with a fixed rate at prime, for 5 to 7 years, with a 30 year amortization schedule. That means that my payments are what they would be on a 30 year loan. At the end of the 5 or 7 years, if I keep the property that long, it's rinse, lather, and repeat.

Now, it took me many years and a lot of real estate trading to get to this place with my bank, but that is why I highly recommend that RE investors work hard and finding and nurturing a local banking relationship.  Because when a hot deal comes up and you need to close fast, that relationship can be the difference in scoring the deal.

Finally, certain banks are comfortable with certain kinds of customers. I am sure that there are folks out there with banking relationships where the banker would require zero down. For example, I know of a local bank that really likes doctors. If you are a doctor with proven income or a contract, the bank makes incredible deals that they wouldn't make for me.  That's just a niche of customer that they really feel comfortable taking risk with.

Some banks are actively looking for the non-conforming loans.  Banks (and credit unions) want to put their deposits to work making money as loans. Right now is a particularly good time.  Banks are hungry for loans.

So...if you are going to be investing in real estate beyond one house, find a good banker. Call around. Take a few to lunch and interview them.  Remember, you are the customer. You ultimately decide who YOU are going to work with.

Hope this helps.

Matt Devincenzo · Answer

I'll give you a great local example...I go to church with the bank president. The bank is here in San Diego and is Endeavor Bank. He and his partner have been in the SoCal business bank world for 40+ years, and entered it at a time when local banking was what businesses did. They both were up in the Glendale area for 15-20 years or more, and were very involved with the local business community. After living through the GFC and the shrinking market for local banks, they saw an opening in the market for what they call "consultative banking" like they had years before and decided to start a bank. This 'consultative' approach means their business clients come in talk through problems and they try to provide a bit of outside business 'coaching' if you will, or connect you with another client who can assist. They want to help your business grow so that their bank will grow with you.

The other component here is understanding the bank's business as well. Collin mentioned a local bank that is keen on having Dr.s as clients, Endeavor is a local SoCal business bank, others could be agricultural or manufacturing oriented...some in the news recently for failing were VC and crypto centric. The point is if you're a consumer banking customer you don't offer what their business model is designed for. So consider your banking offerings and then search for local banks that cater to that.

Collin Hays · Answer

I forgot to address another question..."what if I like my banker but I find that another bank is offering me a better deal?"

I tend to stick with my banker, unless the terms are way out of line. My banker needs to make a profit from me, he's in business, too. There is a lot to be said for having money at your immediate disposal when a cherry deal comes along. Do you have to pay a bit of a premium for that luxury?  Perhaps.

I recall a deal where I was offered a cabin for $230K cash. I knew the property was worth way more than that. I told the seller "I'll have you a check for $230K in two days."  We had to wait a few more days due to the title company needing to get documents together.  I called my banker, told him the deal, and he said "No problem. We will wire the $230K and worry about the rest after you close the deal."

After it was "done", I did refinance with my bank. I paid him the normal closing cost, a few $ grand in fees, and a slightly higher interest rate than I might could have gotten conventionally.  But that's not apples to apples. Had it not been for my bank, I wouldn't have scored that deal.

Because that property didn't quite fit my portfolio profile, I re-sold it 5 months later for $375,000.  So $145K profit in 5 months, plus around $12K in rents, minus my bank fees etc., all because I had a relationship with a banker that has trust in me.

Collin Hays · Answer

Buy them lunch at Panera. You'll score some points and show them you are for real.

Patrick Osterling · Answer

Thanks @Collin Hays! More favorable terms sounds great to me, and I've heard this strategy before, but I'm not sure I understand how it works in practical terms. Could you share an example or two how that actually works in practical terms? For example, I've used several banks for loans: Flagstar Bank, All Western Mortgage (a broker), PenFed Credit Union (HELOC), NewRez and probably a couple others I'm forgetting. None of which I never actually met in person. But are you saying to find a local bank branch and physically go in and develop a personal relationship with a banker? If so, how many deals/loans do we need to do before I can expect more favorable terms? How do you know which bank/banker to establish a relationship with? What if I like a banker but another bank is offering better terms on the first couple deals? I'm having a hard time wrapping my head around how to actually make this happen in today's world. Thank you!

Mike Grudzien · Answer

Awesomely written!Collin, you knocked it out of the park!

Patrick Osterling · Answer

Thanks, Matt! Makes sense. I'll look out for local banks in my community and start some conversations.

Jaycee Greene · Answer

I couldn't agree more, @Collin Hays. I wish there were more investors on the forum that had the same mindset about local banking relationships that you do!

And in my experience with my CFO clients, they tend to be loyal to the banker, not necessarily the bank. That banker becomes their "internal champion" at whatever bank they're at, going to bat for them to get them the best deal AND being upfront with them if there's a deal they can't do.

V.G Jason · Answer

Banks are hungry for loans, but only from a particular set of individuals/entities. For the most part, banks are not very friendly right now to your average Billy & Rachel.

Banks rejected 1 in every 5 mortgage applicants last year. And almost 50% of participants for any loan type product.

For me, personally, having relationships with credit unions has been excellent. I get great rates, depending on LTV I get no PG on it, portfolio loans with outs for individual property sales, etc. Developing a relationship with them is key. Whatever they ask from you as a safety net, do a bit more. You'll get great business this way.

Jaycee Greene · Answer

@Collin Hays I completely agree with your theme of building a local banking relationship, which should help someone build their real estate portfolio, but I have a couple of questions.

When I read "conforming" and "non-conforming" loans, I think of the loans being underwritten as consumer mortgages. Is that accurate? In my experience, these are also referred to as "QM" and "Non-QM" loans ("QM" = Qualifying Mortgage)

And as consumer mortgages, these loans are generally issued under the person's name with the underwriting based primarily on the borrower's DTI (Debt to Income) ratio. Are your investment property loans issued to you personally rather than under an LLC?

The pics of your rentals near Gatlinburg look great...makes me want to travel there!

How much will my bank lend me?

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