A little history lesson.
Before the real estate bubble took it’s last breath, most national lenders would give you, the “Average Joe”, up to 10 mortgages before you were finally considered “non-conforming” in the eyes of federally backed mortgage insurers. After the bust, it’s down to 4. But don’t worry, you can still create that rental empire you’ve been dreaming of. Most people already have a primary house with a mortgage, so now your down to just 3 slots to fill with rental houses. Who sets these limits? Fannie Mae and Freddie Mac. But even when the limit increases, lenders are not required to raise their own guidelines. Usually, only when the limits get more restrictive, do lenders adjust their own internal guidelines to match.
National Lenders vs. Local Banks
Using national lenders like Bank of America, Chase, or Wells Fargo, can be a great choice. The drawbacks are; you have to play by their rules, and they won’t tell you what the rules of the game are until your already deep into the underwriting process. That means you have already committed your own money to least an appraisal and an application fee. Try asking your bank for their lending guidelines in writing, or even to speak with an underwriter, and you’ll get a quick cold shoulder. Also with national banks, there are no exceptions. If you don’t fit the mold for their ideal buyer that happens to be written in their policy, be prepared to pay even more fees\points and even worse… get denied. This is where local banks and credit unions can be very useful. Typically you can drive to your local bank and find a warm body to bounce your financing ideas off of. You may pay a slightly higher price, but knowing your loan officer and underwriting staff personally can really boost your ability to complete multiple transactions. Tell your lender up front that you plan on adding multiple new investment homes and work out a financing plan for all of them ahead of time.
Who are Fannie Mae and Freddie Mac? And what do they have to do with me?
Fannie and Freddie are two separate but very similar Government Sponsored Enterprises (GSE). Their job is not to make loans, but rather to buy loans from regular banks after the buyer has closed, and then do one of two things. 1.) Guarantee the loans and resell them in packages to other investors (in the form of mortgage backed securities). Or 2.) Keep the loans in their own investment portfolio. This process allows the original bank to clear the loans off their own books, and subsequently free the bank to make even more loans to other people.
Sooo.. why do I care, you ask?
Well, because both Fannie and Freddie have a set of guidelines for the types of loans that they are willing to buy from banks. For example, they only want loans where the buyer has a certain minimum credit score, certain amount of cash assets, etc… People who meet these minimum requirements are referred to as “Conforming”. As you can probably see, banks are very interested in making “Conforming” loans because they already know that Fannie or Freddie will buy these loans from them later. Thus, freeing the bank up to charge another buyer an origination fee, points, application fees. (aka do more loans \ make more money). Remember that 10 loan limit that changed to 4? That was Fannie and Freddie deciding that investors with that many loans were too risky, so they changed their guidelines.
What is a Portfolio Lender?
Portfolio Lenders are banks that choose not to resell their loans to Fannie and Freddie. Instead, they make a conscious choice to make their money from you, the buyer. Not only do they make the customary points and fees upfront, but they get to profit every month when you make your principal and interest payments. There are some risks of course for the portfolio lender, when a mortgage goes bad, they get stuck holding the bag if there wasn’t any mortgage insurance purchased in the beginning.
Why would I want to use a portfolio lender?
This is an easy one. Because they make their own rules and they could care less when Fannie or Freddie decide to make a guideline change (which by the way, can be many times in a given month). Typically, if you can present a good business plan and the knowledge and assets to prove you can do it, you’ll have a good fighting chance to get a loan. Here’s another great benefit – YOU CAN GET A MORTGAGE IN THE NAME OF YOUR LLC! Go ask Bank of America to give you that type of loan and you’ll be quickly escorted out the door. Here’s some guidelines from a regional portfolio lender that we work with in Arizona - 30% down, very low fees, and 6.8% for a loan in the name of your LLC. Yes, you will still need to personally guarantee your loan, but that loan doesn’t show up on your personal credit report. As long as you can keep demonstrating that you can make more money with each rental purchase, you can theoretically buy as many as you have time to manage. If your interested in checking out our lender, drop us an email and we’ll send you our contact at the bank. They will take care of you, guaranteed.