let’s talk : MORTGAGE LIMITS
Alright guys, let’s talk about real world investor problems #4: how can I make sure that I continue to qualify for investment property mortgage loans? There is no doubt that there are SO MANY good properties out there to invest in, however the financing is never easy. Fannie Mae allows a max of 10 investment loans per person, and most banks will cap you out around 4-5 loans. These rules are a bit different for residential and commercial investments, however a lot of the same principles do overlap. Because of that, one problem is constantly on my mind as we continue to grow; what will we do once we “max out” our credit limit? How do we avoid this?
So, as we do, let’s talk Real Estate, let’s talk MORTGAGE LIMITS…
What do we need to provide to lenders in order to keep the money flowing?
Okay 2 of these bullets are semi-obvious (W-2 &1099), but the 3rd bullet here was totally NOT obvious to me and can be super helpful to keep in mind when you’re looking for your next deal…
- W2 (Salaried income)
- 1099 (Independent income)
- NEW PROPERTY RENTAL INCOME : This is SUPER important for commercial investment loans where the mortgage is actually lent based more so on the rental income than the borrower. Whether or not you are doing a commercial deal make sure the lender is aware of this income – it will help! If the property is already rented, the lenders will count 75 % of that rental income towards the mortgage payment.
- So, let’s say the mortgage payment is $1,000/month and the rent is $1,500/month, the bank will count 75% of $1,500 aka $1,125. $1,125(75% of rental income)-$1,000 (your P&I payment)=$125/month towards your annual income – woo!
MAINTAIN A LOW DEBT TO INCOME RATIO
Again, probably sounds obvious here BUT as an FYI banks typically look for a debt to income ratio of <~43%. Keep in mind though, if you are acquiring cash flowing properties, that rental income will be accounted for in your debt to income ratio to hopefully help you at least maintain that <~43% balance.
GOOD CREDIT SCORE
..but like, how good does it need to be?
Remember, Fannie Mae allows each investor to have up to 10 loans, but these loans are assessed differently…
- Loans 1-4 : Requires a credit score of at least 630
- Loans 5-10 : Requires a credit score of at least 720
Most banks will require you to have 6 months of mortgage payment in reserves. Furthermore, as you take on more loans from them, you will have to put more and more down with each new mortgage. You can typically expect…
Single Family Homes…
- Loans 1-4 (Single family) : 20% down
- Loans 5-10 (Single family) : 25% down
- Loans 1-10 (Multi-family) : 25 – 30% down
I’m talking experience on both sides of the deal here…
- Investor Experience: If you are looking for an investment property loan, the banks like to see that you have been a landlord before. If you already have cash flowing properties the bank may have more faith that you know what you’re doing.
- Lender Experience: Work with a lender that has lent to real estate investors before. Try to work with smaller, community banks as they typically have more niched employees. Walk the bank through your long-term goals to ensure that you can continue to work with them as you expand your portfolio. Before you get in too deep with them you may find it helpful to ask them the following;
- Do you currently work with any active investors?
- How many loans can you offer to any one investor?
- Do you personally own any rental property?
If they do have investor experience – awesome! You will want to move on to the next step..
- Try to pick a lender and stick with them for the long haul
- Do not focus on shopping around for rates once you find an investor friendly lender
- If you stick with one lender, they will hold your information on file so that every time you acquire a new property they know you and can easily underwrite your loan. They will already have your tax returns, and personal info, all you have to do is send them updated pay stubs, bank statements, and info on the new property!
Create a loan portfolio so that you can quickly share all pertinent personal financial information every time you apply for a loan. Your portfolio should probably, at the minimum, consist of…
- Company related docs:
- LLC Operating Agreement (if applicable)
- Property Manager Information (if applicable)
- Business Tax Returns (3 years)
- Personal related docs:
- Personal Tax Returns for each member of the business (3 years)
- Personal Financial Statements for each member of the business
- Property related docs:
- Purchase Contract
- Leases (if applicable)
Now, ALL that being said guys, I want you to know that I have NOT yet had to be financially “creative”. We have not hit our threshold just yet – but I do not think we are far off AND I am a nervous Nelly so I am ALWAYS thinking about it. What ways have you all found to obtain “creative” mortgages?
Feel free to comment on the blog post HERE and let us know what YOU think!
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