When I first started in real estate investing I had multiple lenders tell me “no, you can’t lend on that”. And I took their word for it. I thought “If one or two say no, then they all must say no”. And that was completely wrong. There is a difference in lenders and sometimes the difference is pretty big.

Having great lenders can make you more profitable in real estate. Lenders take up 70%, 75%, 80%, or even more of our deals. And some of these loans are for 30 years – that’s longer than most businesses and longer than most marriages! So yes, having good lenders is somewhat important.

This post will focus on "buy and hold" real estate investors with residential (1-4 unit) properties and how to find good "investor friendly" lenders. Basically, if you are using the BRRRR method to keep a home to rent it – this post is for you.

We are going to hit 4 main areas in our discussion today:

Loan Types
Differences in Lenders
Questions to Ask Lenders
How to find the best “Investor Friendly” lenders
Let’s begin.

Loan Types
There are lots of lenders in the US most of what we will discuss today is how to separate lenders from each other. Many will say “sure, we can write a loan on an investment property” but that doesn't mean they are good at it. One of the main reasons that you hear different stories from lenders is because lenders might have different TYPES of loans. Generally speaking there are 2 main types of loans for investors. Now this is how I define them. If you go to a lender and ask “which one of the two loan types do you offer” they won’t know what you are talking about. These definitions are for you to understand the difference conceptually and why one lender will say one thing and another something totally different. I’ll call our two loan types “Conventional” and “Portfolio”.

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are 30 year fixed rate loans. They have the lowest rates and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans (more on those in a second)....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. These loans types are based on you personally. Your personal credit. Your personal income. Fannie/Freddie money = Fannie/Freddie rules. Which means that lenders don’t have much say in these loans – they have to follow the rules they are instructed to follow.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. Sometimes referred to as "non-QM" loans. Sometimes called "DSCR" loans. Whatever they call them, the loans come from the lender's own source of funds. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. These loans are easier to get but the terms are different. They usually don't care about your personal income but rather the income of the property. Even Hard Money is a form of "portfolio" lending. If the lender has control, it comes from their portfolio of funds. Thus the name. Since there are over 8,000 lenders in the US, that means that there is over 8,000 different portfolio loans. It can vary WIDELY between lenders some times with this type of lending.

Some other common differences between the two loans:

Appraisals – Conventional loans will always go off of “sold comparable properties” (or comps). Portfolio loans could be based on that too but mostly they are based on the rental income method of evaluating the value of the property.
Lending to an LLC – Conventional loans must close in your personal name. Even if you switch the title to your LLC after closing the loan will always be on your personal credit. Portfolio loans should be able to lend to your business in every situation and never report to your personal credit.
Rates – Conventional loans are 30 year, fixed rate, no prepayment penalty, no balloon payment. It is very common to see a portfolio loan with a higher rate, a shorter term, and maybe even be an adjustable rate – and sometimes all 3 of those.
Loan Structure – Conventional loans are based on 1 property. If you buy 4 separate properties…you will have 4 separate conventional loans. Many portfolio lenders will have a “blanket” option to go over multiple properties with one loan (Just lookout for that release clause).
And we could certainly keep going here. Keep in mind that I cannot speak for every single lender in the country. So could your local lender do something different that is not mentioned here? Yes, completely possible. But hopefully knowing the difference between lenders will help you understand what type of lender you are speaking to and what to expect.

Difference in Lenders
Since portfolio loans come from each individual lender there will be obvious differences between each lender. Comparatively, Fannie Mae and Freddie Mac dictate conventional lending rules which means that most lenders will be required to follow the same rules – mostly. The difference between lenders with conventional loans is almost unnoticeable if you aren’t a real estate investor. But if you are a real estate investor the differences can be DEVESTATING to your deals.

Things like not using rental income, limiting the number of properties, not offering cash out loans, loan minimums and seasoning are all different items you will face when interviewing conventional lenders. For example – Fannie Mae and Freddie Mac do NOT have a loan minimum. So why do so many lenders have a loan minimum if Fannie/Freddie don’t? The answer here is with the nature of what we do – we are real estate investors. Investment properties foreclose at a higher rate than primary homes. By default, they are “riskier”. So if I am a lender, maybe I want to limit my risk to investment properties. And if I am a publicly traded company – then maybe even my shareholders want me to limit my risk to investment properties. Shareholders have rights too. And this is why we don’t work with large, national, publicly traded lenders. They have too many restrictions to investors. We speak about smaller, local lenders for a reason. They have less “OVERLAYS”. Overlays are the rules that lenders put OVER the Fannie/Freddie rules to limit their risk to us…well, our properties. Fannie Mae and Freddie Mac say that using an overlay is totally allowable. If you want your credit score minimum to be 680, even though Fannie/Freddie minimum is 620, then go ahead. You cannot be LESS conservative though. You still have to follow Fannie/Freddie guidelines. Some common OVERLAYS are:

Credit Score
Not using Rental Income
Seasoning
Loan Minimums
Making us have more downpayment than needed
Not using “After Repair Value”
Limiting the number of loans
Requiring more reserves than needed
And plenty of others too
So imagine you are trying to use the BRRRR method on a property and your lender states "We can't use the ARV until after 12 months, we can't refinance until after 12 months, we can't use rental income until it is on your tax returns, your loan amount can't be below $100,000, and we will require you to have 30% equity in your property".

If that was the case we couldn't do the BRRRR method - ever! And I’m using that example above because those are all examples of OVERLAYS that we have heard. Except no one probably told you they were overlays before. You can absolutely find conventional lenders with no loan minimums, no seasoning, using rental income immediately, and so forth. You just have to know how to find them.

Questions to Ask Lenders
So how are we supposed to find good, investor friendly lenders with all of these differences? I have put together a list of questions for you to ask your lenders as you interview them. You can certainly ask other questions if you like, but this post is for us "buy and hold" investors. You MUST ask these questions as a part of your interview process to make the BRRRR method (and other "buy and hold" methods) work.

Questions for Lenders

When do you start using rental income to help me qualify? (the answer needs to be immediately)
When do you start using “After Repair Value” on my property? (also needs to be immediately)
How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
How many loans can I have with you?
Can I change title to my LLC?
Do you sell your mortgages?
What is your loan minimum?
Can you explain to me what your reserve requirements are?
These questions are more for the “Conventional” Style loan. So if you ask these to a “portfolio” style of lender you may only get 25% downpayment minimum. But with Fannie/Freddie, their guidelines say 15%....and no seasoning….and using rental income immediately….and loan minimum…and so forth. We KNOW what their rules are, we just need to find a lender who follows their rules with as few of overlays as possible.

So what if the lender you are interviewing answers all of these questions except #8 they say $75k? That means 2 things:

Just make sure your ARV will never have a loan amount below their threshold.
But it also means that they might have some other small overlays somewhere else.
Fannie Mae’s guidelines are over 1200 pages long. Freddie Mac’s are over 2000 pages. It would be impossible to provide you with every question to every scenario to get answers to everything. So there’s one more technique to know on how to find good lender.

How to Find “Investor Friendly” Lenders

We now know what the differences are; we know what to ask; so how to we find them? The best way is to lean on other real estate investors! They’ve already done all the hard work of finding good lenders (hopefully) so put on your networking cap and start making friends!

Here's my 3 suggestions:

Post in the Bigger Pockets STATE forum that you are looking in. There are usually some good, local investors that monitor those forums. Maybe they already have a suggestion or recommendation for you? Certainly try there.
Visit your local REI groups. There are many groups that meet across the country. Obviously things are a bit different right now but many are meeting virtually. Some post here on the Bigger Pockets Marketplace. Many post on meetup.com. Networking is always a great practice and you never know who you might meet there and what good information they have to share. Would certainly recommend visiting if one is close to you.
Calling - and then there's this option. You can certainly just google search lenders and call each one. Which is what I have had to do many times...it stinks. Try to other two first.
*WHEW* I know that was a lot but hopefully this helps in some way on how to find “Investor Friendly” lenders. This certainly isn’t designed to be all-encompassing but maybe with some good luck and hard work you will have a great partner for years to come. The assignment from here – 4 lenders. If you are just beginning your assignment is to have 4 lenders at a minimum. You don’t want to find a great property that can’t get financing. Make sure you have multiples and you will have a significantly higher chance of success.

Thanks for reading!