All Forum Posts by: Patrick Roberts

An attorney would be able to advise on risk mitigation via insurance vs an entity + commercial loan. I have consulted with a few attorneys over the past couple years regarding this and have determined that for my own personal situation, umbrella insurance provides sufficient risk mitigation for my situation at this time. I have a plan in place to use entities once I reach a particular number of properties, but the additional protection is marginal at this point. That being said, the only way to get a competent answer on this is through a consultation with an attorney that looks at YOUR particular situation, not a generic, theoretic one. 

Yep - your lender will be using an undisclosed debt notification service until after the loan closes. If your credit is pulled for any reason, you will have to complete a letter of explanation and possibly provide more documents to show that no new debt was incurred. If you do take on new debt or collections during this time, the lender will see and it will require that it be accounted for in your DTI (unless this is a DSCR loan).

The LLC wont do anything special for lending. If you plan to use Conventional loans, the LLC is off the table. DSCR loans allow lending to LLC's, but the LLC members will likely need to personally guarantee the loan. At the end of the day, you'll still need good credit, income (rental income from the property will suffice for DSCR loans), and cash to close, including a downpayment (likely 20%+).

If you're asking how to get a general purpose loan to the LLC, then that's not going to happen without several years of operating history and organized financials for a CRE lender to underwrite.

Not trying to rain on your parade, but this is much more complicated than just forming an entity and getting a loan. I recommend you consult with a lender with expertise in investing, preferably someone local to you, to discuss the lending options best suited for your goals, strategy, and tactics. This will provide clarity regarding what matters and what does not, as well as what's realistically available to you. 

 Yeah, insurance is likely more than sufficient for most investors. In my opinion, the marginal protection benefit doesn't justify the extra costs and worse financing terms.

Not sure whether you're referring to a VA purchase or assumption. In a purchase, it's declared by the borrower on the application. If the borrower lies about that to get an investment property loan by claiming it's for a primary residence when it's not, then that's straight up mortgage fraud, which is a felony punishable by a fine up to $1m and 30 years in prison. A prominent MLO in the northeast was recently charged and stripped of his license for playing this game with his borrowers.

Also, everything is reviewed by underwriting. If the circumstances don't match what the borrower is claiming, the loan will likely be denied. VA loans, like FHA and USDA, can only be for primary residence purposes. These loans are not allowed in non-owner occupied scenarios.

For an assumption, the Servicer handles processing and execution. My understanding is that the buyer assuming the loan has to meet the same credit/underwriting criteria as the original borrower, but this is not my area of expertise - lenders are typically not involved in assumptions.

I'd at least get a quote for Conventional. That will probably be your best deal. 

VA assumptions do not require the borrower assuming the loan to be a veteran, but I'm not sure if it can be assumed for an investment purchase. My guess is that it would need to be a househack-type situation, as VA loans can only be used for primary residences. I suspect this will be very difficult to accomplish for an investment use case. The other thing about VA assumptions is that the seller's (veteran) VA entitlement will remain encumbered unless the new borrower is also an eligible veteran with sufficient entitlement on their COE.

You cannot use an LLC for either FHA or Conventional loans. FHA vs Conventional will largely come down to your credit score, downpayment, use, income/DTI, and future plans. If you have good credit and plan to refinance if rates ever drop significantly, I would lean toward Conventional.

FHA loans will have permanent mortgage insurance unless you put down 10%, at which case the mortgage insurance can be cancelled after 11 years. FHA loans also have UFMIP, which is the equivalent of paying points (likely to be 1.75% of the loan). Where FHA tends to shine is with credit below 680-700 and/or higher DTI's (over 43%).

Also, whether you use an entity (such as an LLC) is largely irrelevant on your return, whether cash on cash or any other metric. Entities are primarily used for protection from liability.

This is going to be very hard to finance. Boarder income/rent by the room is frowned upon by most lenders. It would likely be just as easy to get a commercial loan for a motel/condotel for what you're trying to do. As someone else mentioned, you'll likely need a no ratio DSCR, which will not be pretty.

One last word of advice - watch your concentration risk. If you invest heavily into building a portfolio of these and then something happens that downsizes/closes the shipyard, things could go from great to horrible very quickly. Make sure you have a plan B and build resiliency into the portfolio. 

Here is a link to the FNMA guidebook. They're publicly available via a quick google search. Also, keep in mind that some lender may have overlays that are more restrictive than the FNMA/HUD guidelines, meaning the lender's internal condo guidelines require more than FNMA/HUD. This typically comes into play with big banks (Chase, etc) who are buying the loans to place them on their balance sheet. I know for a fact that Chase has an internal condo approval process for all loans being sold/brokered to them.

https://selling-guide.fanniemae.com/sel/b7-3-03/master-prope...

For FHA, the guidelines are FHA 4000.1.

Also, this: https://www.hud.gov/press/press_releases_media_advisories/hu...

Long story short, condos are becoming increasingly difficult to finance. I just had to fight tooth and nail to close a VA condo purchase for a client with a POA that was actually fairly well run, relatively speaking. As insurance woes grow over the next couple of years, I dont see this improving.