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Is it true that you can ONLY get or REQUIRED to get commercial loan for anything 5 units or more of investment properties?

I'm thinking of acquiring 6 units, but need $300K loan. Can I get residential conforming loan for this? If so, how?

If not, anyway around it? Such as asking seller to split it to TWO 3 units properties and sell it to me that way so I can do 50% loan for each? Is that legal?

Thanks

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Yes, most lenders consider 4+ units to be a commercial property and no you cannot split the properties into two 3-units for the purpose of this transaction unless it's registered as such on the county's records.

NiLR3M said:   Is it true that you can ONLY get or REQUIRED to get commercial loan for anything 5 units or more of investment properties?

I'm thinking of acquiring 6 units, but need $300K loan. Can I get residential conforming loan for this? If so, how?

If not, anyway around it? Such as asking seller to split it to TWO 3 units properties and sell it to me that way so I can do 50% loan for each? Is that legal?

Thanks


Residential loans are resold on the secondary market to companies such as fannie mae and freddie mac and they have to conform to certain lending standards one of which is no more than 4 units for residential properties. Therefore anything more than 4 units is a considered non conforming and hence you need a commercial mortgage.

You would have to consult an attorney to see if you can split the building depending on the layout. You might be able to split it in the middle and then have two 3 unit attached multifamilies, but it would probably need separate water, electric etc. Or convert to 6 condos, but then you're talking 6 mortgages and there's a limit of 4 mortgaged properties, 5-10 is much harder to do. And then there's 6x the closing costs which probably makes a commercial mortgage cheaper. The other option is to get rid of two units by making two units bigger and then you get into a 4 unit property. The owner would have to be willing to do that though.

If you will occupy the building as your personal residence you may be able to get a residential mortgage. Lots of people have bought older buildings or SROs and converted two or three small apartments into one larger one.

Kanosh said:   If you will occupy the building as your personal residence you may be able to get a residential mortgage. Lots of people have bought older buildings or SROs and converted two or three small apartments into one larger one.

That would be a two step process though. The 4 unit limit is pretty much a fixed one. What he would do is buy the property with a commercial mortgage, make the conversion into a 4 unit building and then refinance into a regular residential mortgage. No need to owner occupy. Only drawback is that the commercial loan has much higher fees and interest rates and they may have stiff pre-payment penalties. Its why you have to discount the price you're paying per unit because of the higher costs of the mortgage. One thing to remember is that there's always the appraisal, once the appraiser comes and sees 6 units, checks public records, etc., the deal will die if you attempt it as a residential mortgage. But usually it'd die once you tell the loan officer it's 6 units.

Thank you all for the explanations.

Who cares what they call it? If you have a nonconforming loan (which simply means that the bank won't be able to readily sell the loan or servicing rights since it won't meet securitization standards), then find a portfolio lender (a lender that keeps the loans it makes) and see what kind of terms they can offer. If a bank prices your loan too high, it may be a sign that they don't really want it. Find another lender.

Edit to add that a local community/regional bank may be a good place to start for an arrangement like this.

henry33 said:   NiLR3M said:   Is it true that you can ONLY get or REQUIRED to get commercial loan for anything 5 units or more of investment properties?

I'm thinking of acquiring 6 units, but need $300K loan. Can I get residential conforming loan for this? If so, how?

If not, anyway around it? Such as asking seller to split it to TWO 3 units properties and sell it to me that way so I can do 50% loan for each? Is that legal?

Thanks


Residential loans are resold on the secondary market to companies such as fannie mae and freddie mac and they have to conform to certain lending standards one of which is no more than 4 units for residential properties. Therefore anything more than 4 units is a considered non conforming and hence you need a commercial mortgage.

You would have to consult an attorney to see if you can split the building depending on the layout. You might be able to split it in the middle and then have two 3 unit attached multifamilies, but it would probably need separate water, electric etc. Or convert to 6 condos, but then you're talking 6 mortgages and there's a limit of 4 mortgaged properties, 5-10 is much harder to do. And then there's 6x the closing costs which probably makes a commercial mortgage cheaper. The other option is to get rid of two units by making two units bigger and then you get into a 4 unit property. The owner would have to be willing to do that though.


Would you happen to know how much a conversion of 5+ into 4 usually cost? Is it just the matter of paperwork fees and making sure each unit have its own water, electric, gas meter provision cost?

Each currently have its own water, electric meter already. When doing paperwork to convert 6 into 4 units, can I leave the 2 extra meters in 1 unit or have to convert that 2 into 1 meter also? Thanks

dcwilbur said:   Who cares what they call it? If you have a nonconforming loan (which simply means that the bank won't be able to readily sell the loan or servicing rights since it won't meet securitization standards), then find a portfolio lender (a lender that keeps the loans it makes) and see what kind of terms they can offer. If a bank prices your loan too high, it may be a sign that they don't really want it. Find another lender.

Edit to add that a local community/regional bank may be a good place to start for an arrangement like this.
Yeah, smaller community banks usually don't have saturday hours the big ones have, you might want to plan for a lot of missed lunches or taking a day off. Took me a whole day to find two banks in my area that do the loans I needed.

dcwilbur said:   Who cares what they call it? If you have a nonconforming loan (which simply means that the bank won't be able to readily sell the loan or servicing rights since it won't meet securitization standards), then find a portfolio lender (a lender that keeps the loans it makes) and see what kind of terms they can offer. If a bank prices your loan too high, it may be a sign that they don't really want it. Find another lender.

Edit to add that a local community/regional bank may be a good place to start for an arrangement like this.


I think I finally figured out what you mean. Are you saying porfolio lenders (such as community or regional bank) can provide nonconforming loan at about the same as conforming loans since they do not have to conform to any rules? Other than googling around, is there a place somewhere that I look to see if the lender is porfolio lender or community regional bank? Thanks.

NiLR3M said:   dcwilbur said:   Who cares what they call it? If you have a nonconforming loan (which simply means that the bank won't be able to readily sell the loan or servicing rights since it won't meet securitization standards), then find a portfolio lender (a lender that keeps the loans it makes) and see what kind of terms they can offer. If a bank prices your loan too high, it may be a sign that they don't really want it. Find another lender.

Edit to add that a local community/regional bank may be a good place to start for an arrangement like this.


I think I finally figured out what you mean. Are you saying porfolio lenders (such as community or regional bank) can provide nonconforming loan at about the same as conforming loans since they do not have to conform to any rules? Other than googling around, is there a place somewhere that I look to see if the lender is porfolio lender or community regional bank? Thanks.
Where do you live? In every town, large and small, there are locally-owned banks with just one or a couple offices. Those are your best bet.

NiLR3M said:   dcwilbur said:   Who cares what they call it? If you have a nonconforming loan (which simply means that the bank won't be able to readily sell the loan or servicing rights since it won't meet securitization standards), then find a portfolio lender (a lender that keeps the loans it makes) and see what kind of terms they can offer. If a bank prices your loan too high, it may be a sign that they don't really want it. Find another lender.

Edit to add that a local community/regional bank may be a good place to start for an arrangement like this.


I think I finally figured out what you mean. Are you saying porfolio lenders (such as community or regional bank) can provide nonconforming loan at about the same as conforming loans since they do not have to conform to any rules? Other than googling around, is there a place somewhere that I look to see if the lender is porfolio lender or community regional bank? Thanks.
Call and ask if they sell loans on the secondary market. If they keep it for themselves they are portfolio lender.

They basically keep loans on their books and they can stretch the rules a bit, but the typical problem you will face is that they will only do a 5 year ARM instead of a standard 30 year. Basically bending the rules may mean being more generous with the DTI ratio if the overall loan looks good, max number of mortgages, pending lawsuits, etc. It's not a complete free for all, they still get audited and still have to conform to some rules. They may also have a commercial lending department where you can get rates from them.



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