DISCLAIMER: Loan programs are constantly changing so get pre-approved (not pre-qualified) for a loan to truly understand what you are able to qualify for. If you need help finding a lender, contact me directly.
In Orange County California, you basically can’t – unless you have all the key factors of qualifying for the loan.
- Down Payment
- Income to qualify for the loan
As of early 2020, you will pay somewhere around $300K – $500K per unit. For a fourplex, the prices are typically $1.2MM – $1.8MM. If you make $60K right out of college, this is impossible to qualify for – until you get creative!
Many people don’t know that the government considers 1-4 unit properties “Single Family” properties, and you can get a government backed loan for 96.5% of the purchase price. Also, you can count 70% – 75% of the market rents towards your income to qualify for the loan.
Ok, that is one step in the right direction.
What about the down payment? Well, these loans typically allow gift funds for the down payment. This can be from a family member or friend. However, you should probably get this money into your bank account and let it “season” for a few months in order to make the paperwork easier on the loan. You will have to disclose that the funds are gift funds.
But how do you convince a family member to give you the money? Think like an investor. Treat it as a syndication and tell the family member that they will own 3.5% of the property (or whatever amount it takes to get the money). You can put them on title as a minority owner so that when the house is sold they have to be paid off at 3.5% of the future value. You can also put them on the property as a silent second (a type of loan that the title company can help you with) and the interest rate they get is not paid each month, but accrues and is paid off when you sell or refinance the property. You have to be careful with this because if the interest is too high, you can owe more than you want and it complicates the finances. Contact me to help structure this and figure out what you can afford and the risk you are willing to take.
You will still have to show money in the bank for a few months of payments including taxes, insurance and PMI. This is really something you need to save on your own just for your own financial safety. Get a second job for a year or two and you will have this taken care of.
Now, I just threw out the term PMI. That is the mortgage insurance required by the government for high leverage loans when the LTV is greater than 80%, it acts as a lender’s protection in the event that you default on your primary mortgage and the home goes into foreclosure. This is typically an ugly amount and I don’t like it. If your loan program will allow it, you should have the seller carryback a note for 16.5% (remember, your down payment is 3.5%) of the purchase price. I like the idea of a 30 year amortized note due in 10 years at the interest payment of the first mortgage plus a small premium of 1% – 3% – whatever makes the purchase work for you. Contact me if you want to run the financial analysis and explore your options.
If the lender won’t allow a Combined LTV (CLTV) greater than 80% to avoid PMI, then you are stuck with it – but you should at least explore the options. Loan programs change constantly.
Naturally, you want to buy a property at the lowest price possible, but this usually means that the property is a little bit worn or ragged around the edges. Also, you might have a major system that is going to go bad in the next 5 years. This type of expense, if not planned and budgeted for, can cause tremendous heartburn. So be sure to have a thorough inspection to find all the issues and get a credit for the repair at closing. Some sellers won’t do that but will discount the price. In that situation, you may want to consider a loan like a 203K Construction Loan. I happen to be a 203K Construction Consultant because of my construction and development background and am on the national registered list of consultants – though I am not active except for unique situations. This is part of the Federal lending code. The code for single family homes is section 203B. For condos it is 203C. And for construction the code section is 203K. it is a little more complicated and takes extra time and paperwork, but you can get a loan for more than the purchase price of the property to make all the repairs and upgrades you want. It all depends on your ability to qualify for the loan at the higher price. The rents should also be increased with the upgrades which helps you qualify.
The 203K is just another tool for you to use in building your wealth.
Another tool is the NACA loan. They specialize in home ownership for people with damaged credit and they will finance 2-4 unit properties as well. In my opinion, this is THE BEST LOAN for single family home ownership you can obtain. Their leverage requirements are not aggressive, but with the completion of the training program you go through, they provide loans at below market pricing. You can’t get this through your mortgage broker and you have to go through NACA, but, again, this is just another tool you can use to get on the road to wealth building.