Before you look for a quality mortgage broker or lender, it’s important to know the difference between the two.
A mortgage broker arranges the loan. They don’t lend you the money directly. They, theoretically, shop your loan request around to get you the best deal.
A broker finds the loan for you while a lender provides the money
A lender makes the loan to you. The loan can be kept “in-house,” meaning they don’t sell off your loan, or they can sell your loan to another lender.
Before we make a deep-dive into what to look for, let me tell you why I care a lot about this issue!
My true story:
Over a decade ago, I was a partner at a hedge fund and always wanted to buy a multifamily building. An investor had just bought a triplex out of probate court and was trying to flip it without doing anything to it. He got such a good deal that the price was very fair. We had a contract!
Because of my good job, I had a fair amount of liquidity, and I had no other debt besides a small personal mortgage — I didn’t even need a loan.
However, I knew that if this worked well I would buy more and didn’t want to tie up all my cash in one property. Plus, I had an 828 credit score.
I called some banks and told them about the deal. They hung up the phone on me, without even giving me the courtesy of at least saying “no”!
The banks that did respond said something like, “We don’t finance non-owner occupied rental property.”
I was essentially buying this triplex at a 24% cap rate (which is very good!). There are apartment buildings all over town … I knew there had to be a way.
After bankers kept rejecting me, I started asking, “Do you know any other banker who would be interested in this type of loan?”
I finally got connected to a banker who was more than willing to work with me.
I had a great relationship with this banker and, years later, still do.
There are two reasons I’m telling you this story:
- Don’t be embarrassed if you have been turned down for a loan.
- You might simply be talking with the wrong person.
It’s not what you know. In real estate, it’s who you know.
Here are five questions to consider when looking for a quality mortgage lender:
1. Do They Offer Customized Loan Products?
Loans for non-owner occupied property amortize over 20 years and are fixed for one to five years. They then balloon or float. The interest rates on these loans are slightly higher than personal mortgages.
Since these loans are generally not sold off, the bank can customize the loan to help it match your cash flow.
For example, the triplex I bought was empty. I planned to spend a considerable amount to fix it up. The renovations would take several months. The banker offered to make the first three months interest only because he knew I wouldn’t have any tenants during that period.
Another nontraditional loan that an in-house lender can offer is to build in renovation costs into the acquisition costs. You still inject any needed cash equity at closing, but there are extra funds to draw on for your construction budget.
2. Are They a Specialist?
It’s important to find a lender or broker who specializes in loans for real estate investors. Ideally, they do many of these sorts of deals. You don’t want somebody who is trying to be all things to all people.
You don’t want somebody who is trying to be all things to all people.
Real estate loans can get complicated fast, so you want a quality broker or lender who knows all the nuanced details around real estate.
3. Have They Been Referred?
Ask the opinions of other real estate investors, and find out who they use for loans. Again, it’s who you know and relationships are everything in this business.
Relationships are everything in the real estate business
It’s important to get candid feedback on the positives and negatives of each lender they recommend. Attend local Real Estate Investors Association (REIA) meetings, or ask fellow Landlordology community members if they prefer someone.
4. What Are Their Rates and Terms?
Pay attention to the structure of the loan. If possible, get a list of every fee involved. It’s surprising how much some banks want to hold in escrow.
This can cause a serious drain on liquidity if you don’t plan on it.
Related: How to Finance a Rental Property
5. Is There Good Communication?
It’s important that you have good communication with your broker or lender. This person will be a stakeholder in your business.
You want a competitive rate on the loan, but don’t lose sight that this person can help build your business. Do you get along with them? Do you communicate well with them?
Don’t forget that you are the customer. Be on the offense when getting a loan. You should be interviewing the lender, not the other way around.
You are the customer. Be on the offense when getting a loan. You should be interviewing the lender, not the other way around.
Real estate is a capital-intensive business. It’s important to find at least one quality mortgage broker or lender who is ready to help grow your business.
Do you have any best practices you would like to share? Let me know in the comments!