I am an investor that currently owns five mutli-family properties and have fallen victim to Fannie and Freddie’s new guidelines. I also have one of my properties financed through FHA. The days of conventional financing are gone for me unless I get a blanket loan, etc… My question is what should I expect when dealing with a credit union and/or local bank? Are rates typically a bit higher? Are 30 year fixed terms still available? Do they calculate DTI the same retarded way most banks do? Any info/advice is appreciated!
Credit Unions and banks will have commercial loans for the rental properties. These are normally 20yr amortization with 3,5, or 7 yr balloons. Rates usually a bit higher than the 30yr conventional rates. Most will not care how many properties you own or if they are seasoned. They typically like to see ltvs at 70-75% but have heard a few bankers say they can do 80% if the property still debt services.
Debt to income ratio is not calculated exactly like conventional financing. Debt service ratio is used instead. The property debt service ratio is looked at individually along with the global debt service ratio (your over all income and liabilities). Debt service ratio for the subject is calculated as Net Operating Income divided by expected principal & interest payment of the property. Net operating income can be determined by the appraisal but many banks come up with this figure by different methods. Some will simply just use 50-60% of the gross rent. So for examles: If NOI is $1,000 per month and principal/interest payment is $1,000 per month the debt service ratio is 1.0. The higher the debt service ratio # the better, usually banks like to see 1.2+. If your NOI was $1,300 and p&i $1,000 you’d be at 1.3. Anthing under 1.0 usually means negative cash flow and probably wont work.
Global debt service ratio is a little tougher to explain. It requires knowledge of how many properties you own and how long you’ve held them. Tax returns are used for properties owned over 12 months while lease income is used for recent acquisitions. Tax returns are also used to calculate over income including all business income.
Sometimes investors like to get coached on this before submitting deals to banks and credit union. Having an accurate package to send to bankers is important. Find a mortgage consultant who can help you with this.
Great. Thanks for the info. What should I do if I want to buy a single family home as I currently live in one of my five multi-family investment properties? Credit unions and local banks do 30 year fixed loans on primary residences, right? Another thought that may take a little more time is getting all my loans in my LLC’s name. I plan on possibly doing this through the credit union/local bank along with a personal guarantee (which I am sure is required). I have a good feeling that my debt service ratio will be over 1.2 (need to find out how the credit union or bank determines NOI), and this will solve mutliple problems at the same time. I will again qualify for conventional financing under Fannie and Freddie guidelines, my DTI as calculated by many banks will improve dramatically, and my personal credit score will rise due to the reduced amount of debt. How should I put together the package for the credit union? Do I need any lengthy relationship with the institution before I approach them for financing?Any other thoughts or suggestions?
You can still use conventional financing for a primary property even if you’re over the 4 financed limit.
You can either have a broker help you find local banks and credit unions along with consulting with you on how to structure (including ratios) or go at it on your own.
Not every bank requires an existing relationship but in today’s lending environment some are starting to become more selective. They will probably want you to have have business/rent deposits made into their institution.
The more professional you present yourself and your business, the better. We just got loans for 4 SFHs thru a local bank. My wife went in there with our last 3 personal tax returns (last year’s included our business from when we started it), a Profit & Loss statement from Jan. 1 - Oct. 20, 2008 for our business, personal financial statements on both of us, LLC Operating Agreement, Articles of Organization, existing promissory notes from us to our business (arms length transactions to loan the business money for acquisitions), 5 months worth of pay statements from my job, and before/after pictures of our apartment building showing why we spent so much money on rehab & repairs over the past year and a half. The banker was impressed with our honesty and being forth-right with all our information. He said normally it’s like pulling teeth trying to get people to submit everything they need. We gave him everything up front. The result is we’re expanding our business and moving forward!
The problem I have run into is when customers in one state want to purchase property in another state. The local banks in their home state are hesitant to loan on a property on the other side of the country, and the local banks in the area of the property are hesitant to loan to borrowers on the other side of the country. It has turned into a big catch 22.
Christopher,
We ran into some of that too. The banks where my wife is now didn’t want to do anything about 100 miles away because it was out of their area. Then the banks in the area we’re moving to didn’t want to talk to her on the phone. So she had to go down there for a day and shop around. It worked out for us, but it would be much different if we were talking about somewhere several hundred miles away. Maybe going with a big corp bank w/ branches all over would be different, but we had more luck w/ the local banks.
I have pretty easily already found a few local banks willing to do a 5 year balloon with a 20 year amortization. The VP of the bank I talked to said at the end of 5 years it would be a simple modification agreement to extend the loan. She said she would lend up to 75% ltv and even do a rate/term refi out of a hard money loan.
Thank God, we are finding money outside of FNMA. I would much rather build a few relationships at local banks to take care of all my financing needs in the future. I got soooo tired of FNMA changing their guidelines and banks doing the same. It just became so tiring and irritating dealing with them and never knowing if your loan was going to get approved.
Now I can go to the source and deal directly with the lender. Nice.
Happy Investing.
I have not yet found the local bank or credit union that wants my money. I am waiting to hear back from two banks, one which I have had a relationship with for many years. Anyways, I have a question in regards to refinancing my properties into my LLC with a personal guarantee. Does the lender care about the LTV if I am going commercial (blanket loan most likely), or do they just care that the Debt Service Ratio meets their guidelines? The reason I ask is, due to the current market, one or two of my properties may come in around 80-85%LTV. The others I have are around 60-75%, so maybe taken together they will average 75% LTV. Just wondering if this even matters when refinancing these conventional mortgages held in my name into a commercial product in my LLC’s name.
Did you ever hear back from those 2 banks?