Conventional Financing Needed (Rental Property)

Looks like the bank may have accepted my offer on a foreclosure I found.

I’m looking for some financing now. I had to get an LSR through Wells Fargo to put an offer on the house. My scores were 700, 709, 709. I’ve been at my current job for 5 years, I make 48k/year. My debt to income is decent.

I’m buying the house for 43k and the house will easily appraise for more. House and myself are located in Mesa, AZ.

Is there anyway I can avoid putting the 20% down? That’s what WF requires. If its unavoidable I can come up with the $ but won’t be able to show it seasoned in an account as I keep mattress money around. Will this prove to be an issue?

Lastly, I’m looking for someone that knows what they are doing and preferably someone well respected on this forum. Obviously I’m also looking for a good deal too :biggrin

Thanks for the help everyone. Please let me know if you need more info.

Are you buying for yourself or a flip?

It’s going to be a rental property.

My suggestion is to get away from the corporate bank and find a local bank instead. The large banks are tied to whatever their stated loan programs are. If WF reps say you need 20% down, you’re going to have to come up with 20% down. There’s virtually no flexibility and a lot of the bigger banks have 8 levels of supervisors before anyone can make a decision. I had a larger bank tell me they wouldn’t do a NOO loan for under 50k.
If this is your first rental and you have no prior experience with them, you may have a hard time negotiating for a very low down payment just because the bank is still going to want to see you have some skin in the game on a NOO property. I think you should go bank shopping. We did that and found some local banks weren’t interested in doing NOO loans, others wanted 30% down, but we finally found a banker who was willing to look at the deal rather than just saying he wanted 20 or 30% down for each deal. We developed a great relationship and now we basically get no money down deals with repair money if needed because he knows we’re buying low and cash-flowing.
You could also try borrowing part or all of the down payment if they’ll allow it.

If you decide to go bank shopping, I strongly suggest you put together a good binder of information to show people. We put in our last 3 yrs of tax returns, several months of pay statements, personal financial statement, as well as our rental property portfolio. Lay it all out there. Don’t have anything where the banker has to ask for more info. Our banker admits he normally doesn’t even do rental property loans this…it was because of our character and being forthright with all of our information.

Justin0409,

Thanks for the info! It sounds like you have a great thing going with your banker. I would love to have a relationship like that someday, I know that’s going to take some time.

There are a few credit unions specific to AZ but I can’t think of any “mom and pop” type places off the top of my head. I live in PHX.

I like the idea of having a binder with all the info you mentioned. Do you also include a credit report? I know the bank is going to run one regardless but maybe it would help to include it.

Do you have any suggestions as to what my criteria should be while I’m looking for a smaller bank to do business with?

Thanks for the help.

Casey

Keep in mind that when I mention “local bank” I’m not talking about a bank that only has a single location. You may have a bank chain there that has 6 or 7 locations (or more) in PHX, but they’re not nation-wide or anywhere close to it. The larger bank you go to, the more tied they are to their policies. I did not have a credit report in my binder. That would be a good idea though. I figured they were going to find all the information matched my personal financial statement so I was just corroborating what they’d find anyway.
The first thing I think you should consider with bank shopping is your business model. Our business model is to find properties as cheap as possible (definitely under 30k) and shoot for target rent of $500-650. By knowing my market, I realize that if we paid 50k for a house here we would still probably only get about $700-750. The difference in purchase price is not worth the small amount of rent increase. I also realize most people in my town can’t afford $750 or more per month in rent. $500 or so is much easier to get as there are more people looking in that price range. Now you can see why I wasn’t interested in doing business with a bank whose minimum loan amount was 50k.
You should also consider how much down each bank is going to want for their loans. If you can find someone who will lend more based on the quality of the deal rather than just saying “we require 25% down no matter the purchase price”, you’ll keep from running out of cash. As long as I make good deals, I get at least the purchase price so I’m not spending a bunch of my own cash. Therefore our acquisition rate is really only limited by how quickly I can rehab and find the next deal.
In my opinion, I would not sweat the interest rate too much. If you’re looking at properties in the 20-50k price range, an interest rate increase from 6% to 8% isn’t going to hurt that much. I would personally rather do business with a bank that wants less money down, but may charge 2% higher interest.
Another thing to consider is how long the bank is willing to amortize the loan. Expect that many places are going to try and hold you to 10 or 15 yr ams on the smaller loans. Be prepared for that.
My last suggestion is that you throw on some decent looking clothes and take your binder to these banks in person. Don’t call around. It’s too easy to be told no on the phone. Take the time to meet with a loan officer and show them your financials and plan. Your chance of success will be much better in person. My banker has told me numerous times he was willing to give us a shot based on our character. He could see we were sincere and that we had all the information right there in front of him. He wouldn’t be able to see that over the phone.
Remember there are still some quality institutions out there that never got caught up in the bubble loans where they loaned to anyone who can fog a mirror. Show yourself to be responsible and start to establish a good track record.