Whether you're looking to learn how to finance and buy your first rental property or are already a seasoned investor hoping to access future deals without paying a premium, this is the ultimate guide to investment property loans.
As you can imagine, how you choose to finance the purchase impacts multiple aspects of the process for real estate deals. With that in mind, here are the main topics we will teach you here to take your investing knowledge to the next level:
- Lender Selection Dos and Don'ts – The lender(s) you work with should be part of your dream team for real estate investing and likely not just selected for the cheapest price.
- PMI: Avoid or Okay? – PMI or private mortgage insurance can be required to qualify for certain loans. Should you dodge this cost or consider eating it?
- Nothing-Down Loan Options – Boom, now we're talkin'! Nothing quite says “deal accessibility” like these coveted nothing-down loan programs.
- FHA Loans – Who should go for an FHA loan instead of conventional? Find out if you can make FHA work for your portfolio and what you may want to be aware of upfront.
- Conventional Loans – The most common loan type out there is also routinely used by investors to acquire more rental properties. Learn the pros and cons of going this route.
- Portfolio Loans – If you have a few properties under your belt and can no longer get access to Conventional financing, this Nomad™-approved option is available.
- Commercial Loans – For 5+ unit deals, Commercial loans are available if you're looking to still work with a lender as an individual or borrow through an LLC.
- Other Financing Options – There are plenty of options to fund your deals, such as private money, hard money, partnerships, and more to consider as well.
- Plan Your Loans – If you're going to go with conventional financing, it's crucial to plan your loan slots in advance to ensure that you're not forced into creative financing early.
- Changing Rates – You can consider some options for higher or lower rates to help you access properties or mitigate some of your closing costs. Proceed cautiously!
- Picking Loans for Nomad™ – For those interested in our Nomad™ model of buying and moving every year for optimum rates and upfront investment, which loans are best?
- Accessing Equity in Properties – As James likes to say: “You can't eat equity.” So, how can you (and should you) access the equity in your portfolio without selling?
- Get Your Financial House in Order – If you're not sure where you stand from a DTI or credit score perspective, it's really tough to do proper deal analysis. Get on it!
- Screening Your Lenders – From pulling rates to getting the answers to the questions you may not even think of until it's too late, learn to screen for your ideal lending partner.
- Before You Write an Offer – By the time you go to write an offer, you will need to have a pre-approval letter and other financing aspects worked out.
- Closing With Your Loan – Reaching the finish line with your property requires a stretch and sprint. Do right by your lender and they'll return the favor again and again!
- Post-Closing Refinancing Tips – After you close on the loan and own the property a while, you may consider refinancing for many reasons. Know why and how to prepare.
Beyond Price: Lender Selection for Pros
Shopping around for price works in some aspects of life and doesn't always pan out in others. It can be easy to get wrapped up in thinking that any quotable, comparable price we encounter is as cut-and-dry as whoever can provide the lowest rate will win your business. When it comes to growing and managing your real estate investment portfolio, that is certainly not the case.
For instance, if you were to need a repair or replacement done on your property and contact multiple contractors for bids on the work, are you really okay with choosing someone that doesn't have the proper licensing, liability insurance, or relevant experience? What if they're the cheapest bid? By a lot?
The answer, of course, should still be “no,” you don't choose them.
Working with mortgage lenders may not seem as dramatic as licensed vs. unlicensed contractors, but it really can be.
After all, most deals primarily come to close only under the assumption that the financing option chosen by the buyer will also show up at closing. This is why we have things like earnest money and pay commissions to people such as real estate agents or brokers—getting the sale done requires the financing to come through.
We frequently reference the need for real estate investors to pull together their dream team to support them at every step of the investment property purchasing and owning experience. One or more awesome, investor-savvy mortgage lenders that understand and can actually help you reach your goals is a critical aspect of that team.
Who do you want advocating for you with underwriters as the final paperwork is reviewed? Someone completely unfamiliar with the lease-option purchasing agreement you've worked out or a seasoned, savvy mortgage pro that deserves every recommendation you painstakingly took the time to gather from your network? Exactly.
Plus, the best lenders are the ones that will see around the corners for you and recognize that a good relationship with a real estate investor like you means repeat business for them. Even if they don't come in at the rock-bottom price, you can expect less hassle, headache, and hoops to jump through once you find the right partner.
Trust us here: You can always refinance later to improve cash flow; prioritize working with the mortgage lender that will help you get the deal done.
Traits of a Great Mortgage Lending Partner
So, what do you look for in a mortgage lender? For this portion, you'll want to leverage your network, pick up the phone, do some online digging, and ensure your dream team lenders:
- Are easy to get a hold of. Lenders that aren't responsive or seem annoyed when you call are tough for us to recommend. You should feel like you're their priority, not the other way around.
- Are able to articulate any Overlays or strict criteria that can make or break a loan. Every loan type and institution will have unique criteria that you may need to meet. Even if you like your loan officer personally, their company's policies may not work best for you.
- Are personally enjoyable to work with. If you plan to continue growing your business with new rental homes or investment properties, you should really like working with the people on your team. Trust your gut.
- Are willing to go that extra mile. This can be tough to gauge upfront, but you want to feel like your lender will have your back. If rates take a nosedive days after you lock in, is your lender going to fight to get you that lower rate?
- Are aware of the unique needs investors may have in a deal. If your investor meets all the above criteria, but doesn't understand the type of deal you're working next, we would suggest you find a different lender for that upcoming deal. This part matters that much.
Private Mortgage Insurance
Mortgage Insurance, often referred to as Private Mortgage Insurance or MI/PMI, is a contentious topic among real estate investors and financial talking heads. At surface value, it looks like something you should always avoid: A mandatory premium you need to pay on top of your mortgage payment that protects the lender in the event of you defaulting on your loan? Outrageous! Or is it?
What's more, PMI is typically only necessary on loans with a down payment less than 20% of the total purchase price or in certain mortgage loan programs by default. Seems simple enough, right? Just put down more than 20% and you're good; no need to worry about PMI.
It's not that simple, however. When you look at what > 20% looks like in many markets, it can be easy to imagine why millions of Americans choose to pay PMI to more quickly afford their home purchase and stop watching appreciation in their market outpace their savings.
And therein lies the secret: PMI unlocks loans for investors and homebuyers alike that would have otherwise required more upfront investment. For the real estate investor, this means that you can qualify for loans much faster and begin accumulating things like interest, tax benefits, and even rental income sooner by leveraging PMI.
Plus, with a conventional loan, you get to request your PMI payment get removed when the property is at 78% or less loan to value. So, if you're in an appreciating market and can hope to quickly see your PMI go away, it's definitely worth considering getting into the right property sooner with less of your money in the deal compared to saving up to avoid the PMI.
There's plenty more that goes into navigating when and how to utilize PMI for real estate investors based on multiple other factors. Get your questions answered with our Ultimate Guide to Private Mortgage Insurance.
Nothing-Down Financing Options
Currently, there are two Nomad™ approved nothing-down loan programs for borrowers to take advantage of. Before we jump into what those are and why you should care, one massive disclaimer:
Nothing-down is a great thing when it comes to real estate investing. While having the deal be 100% financed can hurt things like your monthly cash flow or risk tolerance for the amount that you're leveraged, there are some incredible benefits to having no cash in the deal that make nothing-down well worth taking advantage of in most cases.
So, what are these mythical nothing-down programs that come Nomad™-approved?
Veteran Affairs Loan (VA)
If you're a veteran with VA benefits, thank you for your service. Also, if you have not yet taken advantage of a VA mortgage loan yet, you're truly missing out on what is quite possibly the best financing deal in real estate investing. Get excited and get ready to start building your dream team.
What you need to know about VA loans:
- Generally restricted by the borrower (veterans) and less by the property
- There are certain eligibility requirements you must meet, as seen: https://www.va.gov/housing-assistance/home-loans/eligibility/
- Additionally, there are certain Funding Fees to be aware of, as seen: https://www.benefits.va.gov/HOMELOANS/documents/docs/funding_fee_table_01012020.pdf
- These fees are lowest for the first use of your VA benefit and do escalate slightly for subsequent uses
- Type of loan, the details of your military service, and other factors influence your rates. Talk with your lender for more information.
- Typically, we see these fees get rolled into the loan, so you may not need to come out of pocket for these costs and they're generally more-than offset by the other benefits VA loans offer.
- You can use VA benefits on 1-4 unit properties, which is phenomenal. As a real estate investor, why not immediately take advantage of a duplex, triplex, or fourplex?
- There is often a stricter or longer appraisal involved to ensure the property passes certain health and safety standards
- Seller concessions are capped at 4% of purchase price
- Fixed-rate loan and no Private Mortgage Insurance!
- 100%+ financing available (including fees)
US Department of Agriculture Loan (USDA)
Unlike VA loans, USDA loans are based more around where the property is located. Generally, USDA loans are available for certain rural and agricultural communities. Since these loans are open to most borrowers, this can be a great program for the right real estate investor to take advantage of.
What you need to know about USDA loans:
- Typically these are rural properties only. Although, “rural” can be surprising in some cases. Ask your real estate agent or lender if there are any markets you're considering that qualify.
- 100% financing available
- Fixed-rate with PMI as applicable
- You must owner-occupy the property
- There are some income restrictions
- Seller concessions are capped at 6%
- Use the USDA mapping tool to verify the property qualifies, as seen: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do
- Don't take the listing agent's word for it. Many properties are listed in the MLS as qualifying for all loan types, but USDA may not always be the case or represented appropriately.
Federal Housing Authority Loans (FHA)
FHA loans are widely used by many Americans to access homes they may not have otherwise been able to. Whether you've seen it firsthand or not, FHA loans are incredibly important for the overall market.
Without getting into how real estate can cause a cascading effect in terms of generational wealth and how FHA loans play such a major role in allowing Americans to enter into homeownership here, it is important to ask: Is FHA also for investors?
Well, first off, you won't build a portfolio on FHA loans alone. Most often, except in very rare circumstances, you can only have a single FHA loan to your name at any given time.
Still, it can definitely help to get your start if you're looking to buy your first investment property and this loan program is Nomad™ approved.
Here's what you need to know about FHA loans:
- 3.5% down payment
- Fixed-rate loan with PMI that cannot be canceled unless you refinance out of FHA altogether
- Available for lower credit scores than traditional financing. Often, a score of 640 is enough to qualify and there are some cases where as low as 580 can work
- This is the primary draw to FHA loans; if your credit score is a limiting factor in your investing, you can get started with FHA
- Any bankruptcy causes a 2-year wait
- Any foreclosure causes a 3-year wait
- You must owner-occupy the property to qualify
- Eligible for 1-4 units
- This is a major draw to FHA for some investors. If given the choice between a 5% down Conventional loan on a single-family home or a 3.5% down loan on a fourplex, which rental property would you rather start with?
- FHA 203k essentially allows you to owner-occupy a fixer-upper and inhabit the property plus have contractors come in and renovate the property as part of the loan.
- There are some down payment assistance programs that can work with FHA loans
- Seller concessions are capped at 6% of purchase price
Conventional Loans with Fannie and Freddie
Anyone that has entered into a Conventional mortgage loan gains 1 or 2 new best friends and partners in their ownership experience: Fannie Mae and Freddie Mac. Don't be fooled by their names, as these companies were created by the US Congress to boost the housing market by purchasing loan agreements from loan originators.
In plain English, shortly after your loan closes, it's likely that it actually gets serviced by a Fannie or Freddie organization which may not necessarily be the lender you selected. In fact, the lending criteria your loan officer provides you with is often derived from Fannie and Freddie purchasing parameters. This is referred to as a “conforming” loan, as it generally conforms to the standards of Fannie and/or Freddie.
This matters quite a bit, as it turns out, because any loan not guaranteed or insured by the Federal Government (such as FHA, VA, and USDA) is considered a “Conventional” loan and in almost all cases conforms to the guidelines of Fannie or Freddie.
So, as we mentioned, you'll really want to become best friends with one or both of them if you want to use Conventional mortgage financing.
Here is what you need to know about Conventional financing:
- Typically has to conform to Fannie or Freddie standards
- Most banking institutions and many other lenders are out there in-person and online
- Interest rate can be fixed or adjustable
- Often 30-year amortization, but can do 10, 15, 20, 25, etc.
- 740+ credit score for best interest rate
- Financing for owner-occupant can be as low as 3-5% with PMI or 20+% without PMI
- For non-owner-occupants, it's often 15% down with PMI and 20-25% without PMI
- Expect to add 5% to down payment requirements for 2-4 units
- Often, these loans are available until an individual has 10 loans with up to 4 units each
- Typically, non-owner-occupants will need to put 25% down for loans beyond the fourth
- Fannie Mae: Can do cash-out refinances up to four financed 1-4 unit properties
- For Freddie Mac, it's up to 6
- Seller concessions are often capped at between 2-9% depending on owner-occupant vs. investor loans and other down payment factors
- 15% down investor loans is an option on up to 10 properties financed
If you're at the stage of needing a portfolio loan, it's likely that you have a dream team to support you and recommend what would work best for your situation. Talk with your network and determine if portfolio loans are truly the best option for your situation or not.
Here is what you need to know about portfolio loans:
- While it may be surprising, Portfolio loans are Nomad™ approved as they can still be used for owner-occupied homes but usually only if Conventional financing isn't available
- Often considered the next stop after conventional loan spots are used up
- Typically a 3, 5, or 7-year adjustable-rate mortgage (ARM)
- Usually a 30-year amortization and generally functions as a 30-year loan
- Since this is obviously an interest rate risk when speculating against the future, there's a substantial amount of “balloon” risk
- There's no limit on the number of portfolio loans you can do, but you have to be able to qualify
- One benefit is fast underwriting (sometimes even as low as 24 hours), although this still depends on property debt-service coverage ratio (DSCR)
- Bigger purchases tend to go to Loan Committee where a higher-up at your lending institution will have to look it over and approve the loan
- Relationship with the bank or institution helps a lot. If you have healthy accounts there, they're probably more likely to do the loan
We've arrived at the first type of loan that isn't Nomad™ approved. That being said, there's nothing wrong with ending up in the Commercial game after starting with the owner-occupant, buy-and-hold route or pursuing both simultaneously.
As the name implies, Commercial loans are typically used for commercially-zoned properties, such as 5+ unit residential buildings, office buildings, and more. It is also important to note that we're referencing lender financing here, not necessarily partnership or private commercial real estate financing.
Here's what you need to know about Commercial real estate financing:
- Not a Nomad™ lending option
- Typically 5+ units for residential
- Some banks push for commercial loans on 2-4 unit properties also
- Does not count against the 10 financed properties for Conventional
- Well-established LLCs can borrow, likely with at least one personal signature
- Loan programs vary wildly and constantly change
- Relationship with the bank and deposits are helpful to preserve the relationship
- Most loans are not 30-year financing. Often, you're looking at balloon payments.
- Underwriting depends on guarantor and the property
- Other requirements may apply, such as providing financial statements to the bank annually
Other Financing Options to Consider
While we don't usually use non-conventional financing options for Nomad™ deals, it can still compliment your investing strategy to look into deals in situations when the normal routes don't apply. After all, what good is a dream team if you're not going to consider partnerships and private lending options when the opportunities arise?
There are a few options to consider here and tons of information to cover for each one, so be sure check out our Creative Financing classes.
Now, let's check out the overview of a few different unconventional financing options:
- Friends and family are the most common source of private funding
- There are other private lenders out there that you can leverage as well
- Often much more flexible than banks and can be faster to close also
- Relationships and trust are everything here
- May still require a good financial statement but screening may be easier
- Depending on your relationship, you can expect the interest rate to really be anywhere on the spectrum.
- If you're approaching someone for a loan, it's likely you'll have to pitch a worthwhile rate
- Grandma will probably give you a good deal; a seasoned private investor may come in higher than the bank would
- Most commonly used for short-term ownership or loan duration, such as in:
- Fix-and-flip deals
- Buy, fix up, refi strategies (such as BRRRR)
- Property is very important for the lender and they'll want to ensure it supports the loan
- Borrower will be screened thoroughly, especially first-time borrowers
- These are typically much higher in terms of interest rate and can require multiple points (cash) to close
- As mentioned, these loans are often only used for deals where you get in and out quick
- Partnership deals come in many forms and can combine multiple avenues for financing, which makes them tough to define individually
- We have multiple classes on securing and structuring partnership deals
- Often, 1 or more of the Partners are signing for the loan and that will count as a loan slot
Home Equity Loans / Lines of Credit (HELOC)
- While HELOCs are frequently used by homeowners for lifestyle or improvement costs, investors can use them to secure financing for deals
- We recommend using this method only when and if you need it
- This will eat into your equity and can land you in hot water if not done carefully
- Often used as part of the BRRRR strategy
- This can also be used as part of a strategy to pay off properties you've already acquired faster as well
- If you're interested in using HELOC and other credit options to their maximum potential, check out our Ultimate Guide to Lines of Credit
- This can be some of the best types of financing if you can get it
- In order for owner financing to be viable, it's likely that you're purchasing from someone in a very unique situation and that tends to mean an off-market deal, so don't expect to find these regularly
- Lender can typically offer more than the house is actually worth in the right situation
- Will not count as a loan slot, as this is essentially a uniquely-formatted private loan
- This is pretty straightforward. Pay cash.
- Very easy to secure these deals if you have the funds, but being entirely “in” on the property can have some unique drawbacks to consider
- You can buy a house on a lease option or lease purchase as a portion of your business
- More often, real estate investors are using lease options to exit the property, not enter it, as typically the terms are more favorable for the party in ownership of the home
- Regardless of which side of the equation you're looking at, you'll have to find someone else to get this deal done with and a lender that supports it
- Needs to be done with Wrap financing—talk with an attorney for details
- You're taking over a loan for an existing homeowner, often to avoid foreclosure
- Sometimes property condition and other factors can be unknowns
- These are not part of the Nomad™ model
- Finding these deals can be tough, as you're only as successful as the market allows and you'll be competing against other investors if your market sees a lot of these
- Must factor in the time and money costs to find these deals
CRAZY CHARTS ON SLIDES 21, 22, and 29 HERE????? 29 could go below with Nomad™
Advanced Strategy: Plan Your Loans
If you're wondering how to avoid needing creative financing with balloon payments, adjustable-rate mortgages, or borrowing money from grandma, then it is crucial to strategize your loans in advance before committing.
At every stage, you should consider whether or not a deal is going to enrich your portfolio long-term, what your exit strategy is (if any), and whether or not you should be on that loan at all.
Typically, you can get Fannie/Freddie loans on up to 10 financed properties, assuming you can continue to qualify. If we include your personal residence as one, that's a max of 9 investment properties. Is that enough to hit your goals? Maybe it is, maybe it isn't.
If you want to go beyond that, your options are portfolio or creative financing or planning to split loans with your spouse or a partner. If you alternate loans and each purchase one property as the sole buyer every other year, you can actually Nomad™ into up to 20 properties in as many years!
The moral of the story is this: Use your first 10 loan spots wisely. If you're already past that point, consider a lease-option or other exit from those properties that are weighing you down and free up their slots for investment properties that are going to help you hit your goals.
Advanced Strategy: Changing Rates
Sometimes, what you need to secure a deal and arrive at closing with the right amount in the bank or have enough in reserves to secure another deal shortly thereafter is to have some creativity with your rates and closing costs.
Lenders are often more than happy to pay some or all of your closing costs in exchange for a higher interest rate. Many things, in fact, are negotiable in terms of rate adjustments and credits to-and-from the lender. Just like you can buy down interest rates, you can essentially “buy up” interest rates for closing or even cash-at-closing credits.
One thing to consider is whether it's better to improve cash flow or have less money in the deal. How likely are you to refi this property or exit soon? Should you prepay mortgage insurance, take the PMI, or put more down and dodge it altogether? This all depends on the situation and only scratches the surface on possible negotiations with your lender.
For two different takes on the idea of manipulating your interest rate and how it can impact you both directions, check out these classes:
- Improving Cash Flow by Buying Down Interest Rates
- Strategies to Get the Lowest Monthly Payment When Buying
Nomad™ Loan Basics and Pick Priority
We've mentioned Nomad™ approved loan types multiple times here. If you're confused as to what we mean by that or want to know more about our owner-occupant buy-and-hold investing model, don't hesitate to learn all about the Nomad™ real estate investing strategy.
If you're interested in putting little down, having great long-term returns, and securing your financial freedom or achieving FIRE (financial independence, retire early) and aren't entirely adverse to moving, then Nomad™ is definitely for you.
For those interested in Nomad™, this is the best loan options available in terms of priority:
- Multi-family VA – if you find a 2-4 unit deal and have VA benefits, this is the best start. Single-family VA works perfectly fine and is better than waiting around for a multi-family deal if there are none in your market. Remember, you may be able to use VA benefits multiple times and each VA loan you can secure is the #1 option for Nomad™.
- Multi-family FHA loan – FHA loans are usually only worth considering for two reasons: Low credit score or access to little-down multi-family deals. In this case, if you don't need the credit score flexibility for a single-family, do not go with FHA. However, this loan program is great for landing a multi-family deal with little down, but be advised your lender may question your motives if you already own a single-family home in some capacity.
- Conventional financing – If you've achieved one or both of the above, aren't a veteran, or couldn't find a multi-family deal to kick-off your FHA slot with, then Conventional is your road from here on out. Until you get past 10 loans and need portfolio or creative financing, you'll likely remain fast friends with Fannie and Freddie.
As one important note: Do not intend to fake or cheat the moving-in portion of Nomad™ with any of the above options. You need to move into the property! If you sign the loan as owner-occupant, you must move into the property and usually inhabit it for 12 months. There are exceptions that can get you around this, but definitely do not count on them. Please don't commit loan fraud; just live in the property for a year and then it's yours to convert to a rental and achieve your goals!
Accessing Equity in Properties
We covered a bit about equity access in the HELOC section above. In addition to pursuing a home-equity line of credit, you can take advantage of the following to access the equity in your portfolio:
- Cash-Out Refinance
- Sometimes can be a win/win if you have access to a lower interest rate. If you can secure a lower rate or more favorable term, you can get cash out and keep your monthly cash flow looking good
- Banks don't always like to give out a cash-out refinance, especially for newer loans
- One workaround can be to get a second lien and then refinance both of them into a new 1st lien
- Check with your banking institution before moving forward with either option
- Have a partner invest
- If you are willing to give up a portion of ownership, you can have a partner invest in the property to get instant cash out
- Using this cash infusion to purchase another property could be a net gain
- Sell the property
- Consider a 1031 exchange or lease-option exit
- In both of these cases, you're able to dodge some of the common seller costs
- If you sell it the traditional way, factor in real estate agent commissions and possible capital gains tax
Get Your Financial House in Order
In order to ensure you're able to qualify for your next loan or deal, it's very important that you have your financial house in order. When it comes to securing loans, this means:
- Knowing your credit reports and score from all three credit agencies
- TransUnion, Equifax, and Experian all have different proprietary methods of tracking your credit history.
- You can pull each report for free once per year at https://www.annualcreditreport.com/
- Your middle score typically gets used by lenders, so don't just consider the high or low of the three agencies
- Talk to your lender before you do anything crazy to influence your credit, especially when you're under contract
- Resolve any negatives on your credit report
- If you plan to sign with a spouse, know that the lender will likely only base your rates and other terms on the whoever has the lower middling score
- Understand your debt-to-income ratio or DTI
- Lenders will care about this a lot. Failure to plan here can cost you the loan
- If you don't know what your DTI should be, you could get rejected in error
- The lower this number is, the better
- Get organized now and digitize documents if you haven't already
- Find out what your lender needs in advance to have those things ready
- Real estate deals often end up going to those who move swiftly
- Also, remember, you want to build a dream team, so respect your lender's time and make it easy for them to love working with you
- Be honest and fair with the IRS at tax time, especially if you're self-employed
- Don't overstate expenses to minimize taxes with the IRS or this will come to bite you when you give over your tax documents for a loan
- Two years of returns are always needed by the lender, so accurate record-keeping is essential for anyone looking to get a loan
- Finally, budget and save for down payment
- Even if you're going with a 0% loan program, you'll need moving costs, maintenance costs, repairs, etc.
- Owning properties will force you to budget an emergency fund—get started now!
Shopping around for rates is crucial to getting a good deal in real estate investing. If you end up going with a lender that has significantly-higher interest rates and fees, you're going to pay that cost for the entire life of the loan. While it's important to not only consider price, you do want to do your due diligence.
The main things you'll want to do are the following:
- Have the lenders you're considering pull rates on the same day using the same basic hypothetical criteria
- Ex: Assume purchase price of 350k, 720 credit score, no points, pull on Friday
- Be clear about this: Do not have them pull your credit score yet!!
- Find someone you communicate well with. Consider this as an audition to be on your dream team. Something can come up or they can be on vacation once, but if you routinely can't get through to them or don't enjoy talking to them, is it worth working with them?
- Will they go the extra mile to get you approved? You want a lender that will fight for you if underwriting pushes back on the loan, not someone that's just in it for a commission
- Likely best to avoid the huge online sites. We're not doing only the most straightforward loans and need to form a relationship and bring a lender into our dream team, which is likely impossible to do with a call center
Questions to Ask Your Lender
Here are some questions you can take directly to your lender before committing; note, however, that you may not want to just copy/paste this whole list into an email if you want to build a great relationship:
- What expertise do you offer for putting the financing together?
- Do you know specifically about financing programs for Nomads™?
- What are the current rates for owner-occupant loans?
- How many loans can an investor get in their own name?
- What type of documentation will I need to process my loan?
- What kind of down payment will I need to buy a property?
- How do I pay you for your services – is it a fee on loans that are closed and what is the fee?
- Is there any upfront fee?
- Is there a minimum fee percentage and/or dollar amount? What is it?
- What happens if I end up not doing a loan with you?
- Do you have any assistants or staff that work with you that will be interacting with?
- What would I be dealing with you directly on and what would I be dealing with them on?
- What percentage of your business is from new clients? Repeat business?
- What percentage is referred from existing clients?
- Do you have a few existing clients that I can call as references?
- What would be the most common complaint I would get about working with you if I asked?
- Have you worked with real estate investors that have invested as I intend to? Can I call any of them for a reference?
- When do I go through underwriting and what does your pre-approval process look like?
- What kind of relationship or clout do you have with your underwriting?
- Any follow-up questions as necessary.
Before Writing an Offer
One common mistake that new investors make is assuming that financing will come through quickly or on their terms. Even if you've done this before, don't forget the basics of working with your lender.
If you have your financial house and documents in order, have screened your lender, and feel confident on moving forward, it's time to work swiftly on pre-approval and beyond.
Pre-approval letters are actually the bare minimum needed to write an offer. In some cases, it's better to actually be part-way through under-writing to ensure that your deal can close when you need it to. In fact, some lenders are moving toward including underwriting closer to the beginning in conjunction or shortly after pre-approval to ensure more of their deals go through. Be ready for this possibility and know what to expect by asking great questions from your lender.
Get pre-approved for the max, even if that's ridiculously higher than the purchase price you have your eye on. It's fine to be over in terms of pre-approval, but you do not want to attach a pre-approval under the value attached to an offer. Often, if possible, your agent may look to have the letter adjusted to match the offer exactly to help with negotiations; if they know you're pre-approved for way over the price you offered, it strengthens their position.
Do not wait until the last minute on this. If you look at a property on a Saturday afternoon and it checks all the boxes, how can you get a pre-approval letter from a bank that doesn't open until Monday morning? That day-and-a-half could easily cost you the deal. In fact, some deals could be gone overnight if you're not pre-approved before a 5pm showing on a weeknight.
This all depends on your market and a little bit on your luck (some call it timing), but being prepared is the best medicine.
Closing with Your Loan
Once your offer is accepted thanks to the verification of your loan eligibility, all that's left for you and your financing is to ensure that you secure that loan. There are some things to do and many things to not do as you approach final underwriting and the closing table.
Here are the tips you need to cross the finish line:
- Follow your lender's instructions to a “T”. They may ask for some seemingly wacky stuff, but remember that they're convincing Fannie and Freddie to cosign you as a great buyer and could need everything and the kitchen sink to get that done.
- Make it really easy for them (again). If you've been a Nomad™ before, hopefully you kept some record of the things you need and have excellent bookkeeping habits on your existing properties to make accommodating your lender a breeze.
- Check out our fan-favorite Bookkeeping and Accounting for Real Estate Investors classes.
- Respond quickly and efficiently to your lender's request and aim to be a model client. While most buyers can shrug this process off with ignorance and move on with life, we want to work with this dream team again and again! Be great and receive greatness.
- Ask questions and engage your team whenever anything seems “off” or derailed.
- It goes without saying, but the quality of your real estate agent should shine through in this process as well. If your agent is on top of it and encourages you to get or give X, Y, or Z to/from your lender to ensure you're closing with the best situation, that's a really good sign.
We talked a bit about refinancing options above to help with access to down payments or outright buying additional properties above, but that's not the only reason you could want to refinance down the road.
Here are the basic refinancing options and when or why you may want to consider them:
- Rate/Term Refinance
- This is your standard refinance, usually done to lower your payment
- Work with the existing loan and change the rate and/or term
- Usually, you're only going to want to do this to improve cash flow by extending the loan term and/or accessing a lower interest rate
- It is likely you'll need a new appraisal done for the property
- Often, closing and origination costs or fees are rolled into the new loan
- Cash Out Refinance
- New loan includes the old loan plus cash that you are paid at closing
- LTV (loan-to-value ratio) allowed is typically 75% or lower for a single-unit or sub-70% for multi-unit
- New appraisal will almost certainly be required
- This strategy is used for BRRRR
- Your goal here is often to get money out of the property. As James says, “you can't eat equity.”
- It's possible that other than the “cash out” aspect, this functions as a rate/term refinance, so you could also see a favorable term or interest rate change as well
- Some lenders require seasoning of the property up to 12 months, meaning that you can't get a cash out refi within the first year of the loan regardless of terms
- Note that refinancing with owner-occupant rates could require you to inhabit the property for another 12 months. This is important for Nomads™ that have converted the property to a rental to remember.
Learn More and Build Your Team
We hope you enjoyed this dive into financing for real estate investors! There is plenty to know and learn beyond even this, but we hope this serves as a strong reference for you to utilize as you grow your portfolio.
For those in the Northern Colorado area looking to learn more about what makes buying rental properties unique in this market, be sure to check out our Northern Colorado Real Estate Investor Group.
Also, you can work with James and Tammy Orr for your next Northern Colorado real estate deal by connecting with them here.
In January, 2016 James taught our very first version of Financing 101 that discussed financing investment properties including financing properties using the Nomad™ strategy. The info would also be helpful to owner-occupants as well. Check out the video recording here:
We consider this to be classes on financing, but if you'd like a list of other classes on topics related to financing rental properties, check out these other resources as well.
Getting Started in Real Estate Investing
Being able to finance properties is just one of the many topics related to getting started investing in real estate that we have. Check out these other resources related to getting started in real estate investing.
- Buying Your First Rental Property
- Financial Mindset and Overcoming Fear
- Get Your First Deal Done - 2017 Edition
- Getting Your First Deal Done - 2016 Edition
- How to Acquire a Multi-Million Dollar Real Estate Portfolio Starting with Just $3,000
- How to Be the Ideal Client That Realtors Call First with the Best Deals
- How to Choose a Real Estate Agent
- How to Find the Perfect Investment Property
- How to Get Your First Deal Done - 2019 Update
- How to Make a Real Estate Investment Plan
- Real Estate Bookkeeping
- The Ultimate Guide to Buy-and-Hold Investing
- The Ultimate Guide to House Hacking
- The Ultimate Guide to Nomad™ Investing
- The Ultimate Guide to the BRRRR Strategy