CW 571 – FINANCING FAQS YOU NEED TO KNOW, WHY THE WORLD LOOKS TO U.S. REAL ESTATE TO CREATE THEIR WEALTH

Welcome to episode 571 of Creating Wealth Real Estate Investing. If you’re here it’s because you’re interested in creating or growing your wealth through real estate investing. And today’s episode is the perfect vehicle to help you do that.

One of our experts, Joe, joins us to give the down and dirty details of what it takes to get the best financing deal and the specifications you need to qualify for up to 20 properties. We also talk about whether or not you need an attorney to close a loan, the differences between technical refinancing and cash out refinancing as well as how many months’ of reserves you need.

Because financing is such a complicated subject we brought on our finance guru Joe for a lightning round of questions. He gives straightforward answers to help you make better investment decisions. Here’s what he had to say:

Q: How many properties can I finance and can I finance them all at the same time?

A: You can finance up to 10 properties PER spouse through Fannie Mae; with one lender you can finance them all at the same time if you purchase them all at the same time under different contracts. That means a qualifying couple could finance up to 20 properties with normal agency loans, there are creative financing options available after that.

Q: What is the required down payment for each property and how are the interest rates affected depending on the down payment?

A: The first four properties you have financed the minimum down payment is 20%. Properties 5 through 10 would be a minimum of 25% down. There’s a 1/4 point differential in rate between 20% and 25% down on a 30 yr fixed. If you’re willing to put 5% more down you can reduce the rate by a quarter of a point. It represents lower risk to the lender – it’s a stronger file with the larger down payments making it more attractive to the lender.

Q: Can I finance properties inside of an LLC?

A: Not through residential financing, your properties must be financed in your individual name and credit. There are however ways you can deed them over to a single member LLC later, some minor risks in doing so.

Q: Is it possible to take one loan out for multiple properties? A blanket loan, blanket financing?

A: As a direct lender Joe doesn’t deal with these types of situations. It is possible but individual loans offer the most desirable types of financing, with the lowest rates longest terms and the maximum leverage. This is the most desirable option, you can do more creative stuff with hard money, hedgefunds, etc.

Q: How is the borrower’s credit score effected by multiple applications on multiple properties?

A: If you have multiple applications with multiple lenders each lender is going to make an inquiry on your credit score, which can impact the score over time. When Joe does multiple deals for one client he will pull their score no more than 3x in a year, each time that score is pulled it’s good for 120 days. And each inquiry on that credit report reduces the FICO score because lenders don’t like to see inquiries. It can hurt you if you do this every month.

Q: If I finance properties in my own name can I quick claim them to the LLC?

A: See LLC question. If you change the title into your LLC post-closing and change the insurance then the insurance company will notify the lender and the due on sale close could come into effect. f you put your properties into an entity like an LLC don’t forget to change your insurance! That is the owner who needs to be insured.

Q: Can I use a power of attorney?

A: Domestically we can send a notary to sign documents. For borrowers out of the country or travelling a power of attorney may be required for someone to sign on your behalf. You can do this.

Q: Do I need an attorney or can I just have the title company close my loan?

A: If you have legal questions get an attorney to answer your questions. Mechanically speaking you don’t have to have an attorney to go to the title company and close the deal. It’s not required, some will have their attorney review the documents in advance.

Q: Do I have to have landlord experience to use rental income to offset the payment on the mortgage or the debt service on the property?

A: Fannie Mae Direct and Freddy Mac Direct have differing guidelines regarding customers purchasing their first investment property. Fannie Mae you don’t need to have 2 yrs of landlord experience to use rental income to offset payment. But with Freddie Mac you have to.

Q: What is minimum credit score requirement?

A: For your first 4 properites you can finance with minimum 620 or better. Once you get to 5-10 the minimum there is 720. If you manage the first 4 well over a bit of time that will help raise your score. Paying on time and payment history are crucial to your score.

Q: Can I do cash out refinancing on my investment properties?

A: Yes with a caveat – you can cash out if you have less than 5 financed properties. Once you go above 4 you are ineligible for cash out refinancing.

Q: If I have 10 investment properties financed can I also finance a primary residence later?

A: Yes you can always finance a primary residence regardless of how many other properties you have financed. Your primary residence has different guidelines regarding credit and down payment: you don’t need 720 when financing property even if you have more than 4 financed investment properties.

Q: How many months of cash reserves are required by the lender?

A: With investment property financing you need 6 months reserves on the subject property and 6 months reserve for each investment property. One month’s reserve = 1 month’s mortgage payment including insurance, taxes.

Q: Can I use projected rental income on property to offset projected mortgage payment? In other words are you bringing rental income to the table (doesn’t exist yet) to qualify for financing on a loan that doesn’t exist until we close?

A: Fannie Mae allows you to take comparable rental market and use 75% of the average rental market to offset the projected mortgage payment on property. So the property doesn’t need to be tenant-occupied and leased out for Fannie Mae to use projected rent in the market to offset projected payments. If you project to receive 1,000 in rent when you own it and rent it, they’ll only allow you a credit of 750 per month.

Q: Rent-loss insurance: Joe’s thoughts.

A: If there’s damage to the property and you had to do a lot of work to bring it back up to par rent-loss insurance is beneficial. It’s insurance meant to cover a situation in which you have to move tenant out and you’d lose rental income when you do.

If you’re using projected rental income to offset projected payment Fannie Mae would need to have rent-loss insurance added to the homeowners insurance premium because if the house were vacant or if you had to move tenant out for awhile then you could claim the insurance to help offset the loss of rent.

Q: Cash out refinances vs. technical refinance.

A: delayed finance or technical refinance is for those people who purchase the property with cash quickly and then come back within 6 months and take cash out to do a cash out refinance to leverage the property.

Technical refinance is sometimes called a delayed finance, it allows you to cash out of the property if you’ve purchased it with cash. But you must do it within 6 months of purchasing home. Note this is not the same as earlier question about 10 financed properties. When using technical refinance it’s important to note you’ll get up to 75% of the purchase price back in cash.

Think about this for a minute – it’s why I love real estate so much – what other asset allows you to still get your money out of the asset and still OWN the asset?!

Q: What type of insurance is out there – cash value, replacement cost – and what type of insurance is required to get the desirable financing?

A: Fannie and Freddy require you have replacement cost insurance up to 100% of the loan amount. Cash value may be cheaper option but it isn’t acceptable for Freddy and Fannie.

Q: How many months of reserves are required on 1-4 and 5-10?

A: If you have more than 4 properties you’ll need 6 months’ reserves on each. If you have less than 4 properties you’ll need 6 months’ reserves for the subject property but only 2 months’ reserves for the other 2-3 properties. Joe recommends 6 months’ reserves on all of your properties and you’ll be good.

And that was our lightning round with Joe, one of our brilliant financiers. Special thank you to him for an incredibly valuable, educational interview. Enjoy the content and we’ll see you back here on the next episode of Creating Wealth Real Estate Investing!

EPISODE RESOURCES

(These are in addition to the links already on the show notes page for this episode)

* Episode 578 – Orlando Market Profile

* Ric Edelman’s 11 Great Reasons to Carry a Big Long Mortgage

* Subscribe to Creating Wealth Real Estate Investing Podcast 

* Write a Review on iTunes

Key Takeaways:

Jason’s Editorial:

[1:23] Lender Lightning Round show

[1:58] The great Facebook debate

[4:29] Commandment #3 – Thou shalt maintain control

[9:28] Ric Edelman’s – 10 great reasons to keep a long term mortgage and never pay it off

[11:07] The supply chain of financial advisors

[15:40] It’s an amazing time to be alive

[16:18] The Chinese Government makes it easier to buy overseas assets

[18:40] Newport Rhode Island trip for Venture Alliance members and guests

[19:51] CW – 565 is now the Orlando market profile

Financing Lightning Round with Joe:

[21:30] Inflation induced debt destruction

[22:15] Financing 10 properties per spouse through Fannie Mae

[22:53] Down payments vary – 5% down reduces your rate

[23:43] Financing through an LLC

[24:24] 1 loan, 1 property with vanilla residential financing

[25:45] Multiple inquiries about your credit score can lower it over time

[27:00] A LLC needs different insurance

[27:47] Is a power of attorney be sufficient to close the loan

[28:29] An attorney is not needed to close the loan

[29:57] A 2 year landlord history – Fannie Mae no, Freddie Mac yes

[30:56] The minimum credit score is 620 for the first 4 properties, 720 for 5-10

[31:50] Cash out refinancing on investment properties

[33:05] You can always finance your primary residence but different guidelines may apply

[34:21] Lenders need 6 months of reserves

[35:37] Offsetting the mortgage payment based on possible rental income

[37:42] Rental income loss

[38:38] Technical refinance or delayed financing

[40:22] 100% replacement cost needed in homeowners insurance

[44:37] Do your due diligence but beware of multiple credit checks

Mentions:

JasonHartman.com

Fruitcake Fraud

Financial Survival Show

VentureAllianceMastermind.com