Home style renovation loans vs Brrrr refi

[April Eilers]

We are getting ready to start our brrrr portfolio! We just spoke with our lender, and walked him through the strategy. He said whoever developed/uses this strategy isn’t up to speed with the latest products out there, and that there are ways to do the same thing with no/little initial investment. Our lender’s recommendation was a product called home style renovation mortgage. What are your thoughts on this product? The initial investment required is unclear to us, and we are not sure if it is possible to build a portfolio in the same way as the brrrr strategy. Does anyone know whether whether homestyle renovation loans require downpayments? If so, I think this would be a reason brrrr is better in the long run for those that don’t have a large stash of cash?

[Andrew Postell]

@April Eilers I think the lender you spoke with isn't up to speed on what INVESTORS need from their lenders.  It is hard to find investor friendly lenders but keep searching and I'll put some pointers below on how to quiz them on if they are flexible enough to work with us.

The Fannie Mae HomeStyle loan is a pretty good loan.  It's 1/2 the costs and 1/2 the rate of Hard Money and it's a 30 year, fixed rate loan.  So you never have to refinance.  But you hit it right on the head with ONE of the issues with this loan and that it requires a down payment.  15% down is the minimum.  Not bad...but in theory, Hard Money could lend you money with 0% down...in theory at least.  So the advantage to HomeStyle on cost and rate...but the down payment is a really big area of need for us.

The SECOND area of need is that we sometimes need to close quickly to buy a property.  That HomeStyle loan needs a MINIMUM of 30 days...and that's if your lender is good at navigating all the paperwork your contractors have to complete.  If we find a home that's a great property...but the owner is being foreclosed upon next Friday.  HomeStyle is OUT.  And it's normally out for that reason.  It just takes too long to close in most scenarios.  

The THIRD reason is that HomeStyle cannot renovate a 2-4 unit property. In the investment world we target 2-4 unit properties first in many cases.  Not having an option for me to renovate a duplex is no bueno.  

Again, a good loan to know about and keep in your toolbox but know the other items too.

Most of the time we must use either HML or some other type of acquisition strategy and refinance out later on. That's just the crux of the world we live in as investors.

If you are out there interviewing lenders later on ask these questions to see if they are the type of lender that we need as investors:

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. 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)
3. What is my minimum down payment required? (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)
4. Can I change title to my LLC?
5. Do you sell your mortgages?
6. What is your loan minimum?
7. Can you explain to me what your reserve requirements are?

Good luck out there!