Workarounds and Exceptions When Working with a Lender

When applying for a loan in the hopes of securing a real estate investment property, there are always lender guidelines to keep in mind. These guidelines are crucial as they allow lenders to set a baseline of expectations for borrowers to meet when starting the application process.

However, it can often be a smart decision to ask if a lender is able to offer or willing to discuss exceptions or workarounds for certain scenarios. If the lender shows extra effort and wants to come up with solutions to try and do business with an investor, it is a great sign that you are speaking to the right one.

Here are a few workarounds and exceptions to keep in mind that RCN Capital offers and ones that other lenders may as well.

Pulling in a Partner with a higher FICO Score

One of the most basic guidelines when working with a lender is ensuring that you have a high enough FICO score that meets their minimum requirement. For new investors who are unaware that the FICO score would be a requirement, this is a common speed bump on the road to getting approved for a loan. If your credit score is too low, then recruit a partner with a credit score that meets the minimum requirement and get your loan back on track.

Another overlooked strategy when it comes to bringing in a partner with a higher FICO score is just securing a better loan than the one you would have with your own credit score. This will come into play specifically for RCN’s long-term loan option. The difference between a 640 FICO Score and a 720 on a long-term loan can be as much as 15-20% LTV and could significantly lower the interest rate.

A final reason pulling in a partner with a higher FICO score makes sense is to just surround yourself with more experience. If you have a partner with a higher FICO score and more experience than you, your rates and leverages will improve, and you can qualify for other loan programs such as heavy rehab projects or ground up construction. As an investor, you can drastically broaden your search for properties and expectations if you have a partner with a higher FICO score. You can even lean on them for advice when it comes to ways to improve your FICO score. Just because they are your partner on one deal and could be a valuable resource doesn’t mean you have to rely on them for every deal.

Acquiring Properties via Delayed Purchase Instead of Refinance

In some scenarios, especially for fix-and-flips, borrowers will qualify for higher leverage with a delayed purchase than with a refinance if they have bought the property recently and can close the delayed purchase within 3-months of the purchase. Auction properties can benefit from this strategy.

If you were to refinance, there are seasoning requirements that could initially prevent you from qualifying for a loan with a lender. Knowing how delayed purchases work and having a lender suggest that to you is a positive sign that they are looking to help. At RCN Capital, we try to point out whenever a client has the potential to cash in on a delayed purchase. Investors can pull out the equity on their property almost immediately and this a huge advantage when it comes to expanding a real estate investment portfolio.

Including or Excluding Properties in a Portfolio Loan

The benefits of adding or excluding properties in a portfolio loan are crucial to know for any investor. Ask as many questions as possible to your lender about what their portfolio guidelines are and whether or not you should include certain properties. The benefits of applying for a portfolio include consolidating the monthly payments down to a single payment, reducing the average legal fee cost across consolidated properties, and occasional reductions in the cost of appraisals. Portfolio loans can be a useful tool for many investors in their ability to reduce closing costs per property on average and provide borrowers with a large sum of liquidity in the case of cash-out refinances. Another major advantage that your lender should offer when it comes to portfolio loans is the same interest rate across the board for the entire portfolio. Instead of having different properties that could have vastly different interest rates, portfolios allow you to consolidate and improve your rate. All these advantages are enticing, but not every property is right for a portfolio.

At RCN Capital specifically, we look at every property in a portfolio individually and ensure that it does not affect the overall performance of the portfolio. These underperforming properties can make a difference when it comes to rates and leverages certain lenders can offer. To obtain maximum leverage for a loan, it may be recommended to remove that certain property from the group even if the property does meet minimum guidelines (for example, at RCN Capital properties with lower cash flow will still be required to meet a 1.1 Debt Service Coverage Ratio which may reduce LTV to the point that the property reaches 1.1). Properties that have less than that desired 1.1 DSCR may reduce entire LTV of portfolio to reach that 1.1 requirement. Overall portfolio strength is more important than just including all your investment properties in a portfolio.

One exception that is worth noting for portfolio loans with RCN Capital is the minimum property value requirement for long-term loans individually is $100k. The minimum for our portfolio program is $75k so long as the average property value of the portfolio is over $100k. If you have a borrower with several properties that are rented long-term including a few that may be below the $100k threshold that RCN is typically looking for, this is an area where you can get a long-term loan for properties that are slightly below typical long-term loan requirements as far as property value is concerned. Be sure to speak with your lender about any exceptions or workaround that can help you when discussing a portfolio loan.

The list of workarounds and exceptions does not stop there. Always be sure to have an open conversation with your lender about what options are out there to make a specific deal work. The team at RCN Capital is always there to answer any questions you may have. Be sure to check back next month for part 2 of workarounds and exceptions that could help make your next deal possible!