Author Topic: Triplex not qualified for traditional financing even if owner occupied?  (Read 1100 times)

Valley of Plenty

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Some of you may have seen my post a few weeks ago asking how much to put down on my first house hack.

Today, I pulled the trigger on pre-approval. I called up two local banks that were recommended to me as having the best financing. Told them that I'm seeking pre-approval for financing for a duplex or triplex which would be used as both a rental and my primary residence.

Bank A tells me that they can do the financing in house at 4% interest on a 30 year fixed loan. Not bad, but I asked if that's their prime rate, because I've heard people here and elsewhere say they got approved at closer to 3% in recent months. They told me that 4% is their best rate for in house, and that because I'm looking at multi-unit properties, I wouldn't have access to the "secondary market". I have no idea what that term means; I've never encountered it before, but far as I can tell it offers better financing options in terms of interest and minimum down payment, but apparently excludes rental properties even if they are owner occupied.

Bank B tells me basically the same thing, except with the added twist that "3-4 unit homes have to be financed as investment properties, with a minimum of 25% down." I reiterated that I will be living in the property as my primary residence, and they said that they'd check to make sure, but they don't believe that makes a difference. A duplex would apparently qualify for traditional financing, according to them.

Are these banks right? If so, is all the information I've picked up here and elsewhere on FI and Real Estate blogs wrong? I know for certain I've heard multiple experts say that living in the property allows you to get around the investment property financing limitation. I was really planning to use a low down payment to leverage my returns and free up more funds for future investments, but now it's seeming like that may not be an option.

Any answers or insight appreciated!

rothwem

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It really varies from bank to bank, there's no law or anything.  When I bought my duplex (for owner occupying purposes) in 2014, I had a hard time finding a loan that wasn't an FHA loan that would let me put down less than 25%. One bank would do 10% down, but the rate was higher.  I ended up doing the FHA loan with 3.5% down, even though the closing costs were absurd (almost $5000 on a $245,000 property). 

Jon Bon

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In the past usually I pay about .5% premium for investment properties so that is about right.  The banks can be "right" any way they choose. Especially with investment properties lots of their policies tend to be straight up dumb. No one has any authority to make an independent decision so you tend to hear no a lot for with no good reason attached to it.

You might be able to find another bank, but I find most loan officers have a creative interpretation of the truth.... 4% is about the best in a generation so dont sweat the small stuff too much. Maybe go call about a commercial loan and that will make your 4% loan look much better!


Enough

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There are a lot of factors that go into mortgage writing.

I will second that I generally pay a 0.5% - 1.0% premium APR on multifamily properties (quotes for refinancing my current owner-occupied triplex - 30 year fixed rate - are 3.65% vs 2.95% if it was a SFH).   

In the past I have also had issues getting a conventional mortgage on a triplex due to a lack of comparable sales.  This is market specific but multiple banks said they would not write a 20 or 30 year fixed rate mortgage because, due to the lack of comparable sales, they would not be able to resell the note.  I had to go with a 5 year fixed / 20 year amortization commercial note that the bank holds on their books.

Evie

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #4 on: August 03, 2020, 01:25:35 PM »
My experience is that financing for anything more than a duplex starts to get much more complicated even with owner occupied.  It's not impossible but you may need extra time and more money down.

Valley of Plenty

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #5 on: October 10, 2020, 01:29:18 AM »
Update: I ended up having to put 10% down with 4% APR. The bank had originally told me they could do 5% down, but evidently they were mistaken.

10% down was certainly still doable for me, but I'm a bit frustrated with how ineffective the house hacking strategy seems to be, for my area at least. Don't think I'll bother trying for a house hack again, I'll just put 20% down.

sammybiker

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #6 on: October 10, 2020, 04:50:51 AM »
Thanks for the update @Valley of Plenty

What do your numbers look like?  Curious if you won't do one again because the numbers are that bad or the frustration is still recent?


Valley of Plenty

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #7 on: October 10, 2020, 06:32:27 PM »
Thanks for the update @Valley of Plenty

What do your numbers look like?  Curious if you won't do one again because the numbers are that bad or the frustration is still recent?

Mostly the former. The whole reason I decided on the house hack in the first place was because my research had suggested I'd be able to qualify for FHA loans at as little as 3% down. All the banks I spoke to though told me that a multi-unit property wouldn't qualify for an FHA loan, even if I use it as a primary residence. If I'm going to have to put 10% down anyway, I may as well just put 20% down and finance it as a commercial property instead of a primary residence. I'd prefer to have a single family home as my primary residence anyways.

I'll likely look to buy a single family home in a couple years, move into that and rent out the third unit in the triplex.

waltworks

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #8 on: October 11, 2020, 02:18:04 PM »
So, if you didn't end up wanting to do it due to financing... why did you do it?

-W

Valley of Plenty

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #9 on: October 11, 2020, 05:48:54 PM »
So, if you didn't end up wanting to do it due to financing... why did you do it?

-W

Because I found a property that was far too good of a deal to pass up, even without qualifying for an FHA loan.

Also because I am currently renting, which is financially sub-optimal for the area I live in.

I'll be trading in $675/month rent (on a three bedroom apartment) for a $470/month mortgage on a triplex. This was not a deal I was under any circumstances going to pass up.

waltworks

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #10 on: October 11, 2020, 06:14:33 PM »
But... you said that house hacking was "ineffective in your area"...sounds like it's very effective?

Your post just confused me.

BTW, where on earth can you get a triplex for like $100k?

-W

Valley of Plenty

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #11 on: October 11, 2020, 08:32:17 PM »
But... you said that house hacking was "ineffective in your area"...sounds like it's very effective?

Your post just confused me.

BTW, where on earth can you get a triplex for like $100k?

-W

The main purpose of house hacking is to put as little down as possible on the purchase. Typically a house hack involves putting 3% down, living there for a year, then buying another property at 3% down and repeating the process. The extremely low down payments reduces the time needed to save up for the next purchase. If I'm made to put 10% down anyways, the benefit is somewhat mitigated.

The town I live in, that's where ;) can't be giving away my exact location, or the rest of you savvy investors will swoop in and take all the deals ;)

Suffice to say it's a LCOL area far from any major cities. And the property I'm getting is an absurdly good deal, even for the market I'm in. Triplexes like the one I'm buying generally sell for between $80-120k, but I'm getting this one for $55k. Units area 3br/1.5ba, 2br/1ba, and 1br/1ba. One is already occupied, and the other two are move in ready.

I guess I should clarify that the $470/month mortgage is with *everything* included. Property taxes, insurance, and PMI.

waltworks

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #12 on: October 11, 2020, 08:47:08 PM »
Got it. You have a different definition of house hack, hence my confusion. Traditionally that term is just used to mean owning a property and renting out some portion of it (whether a legal multi-unit or a house with roommates) to lower housing costs. The downpayment amount/ease of getting more leverage via owner-occupying isn't usually the point of the exercise.

I am shocked you could finance a $55k home, actually (and sort of astounded you'd care about 3% vs 10%... that's a few thousand bucks!)

Good work!

-W
« Last Edit: October 11, 2020, 08:49:41 PM by waltworks »

Valley of Plenty

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #13 on: October 11, 2020, 10:03:39 PM »
I am shocked you could finance a $55k home, actually (and sort of astounded you'd care about 3% vs 10%... that's a few thousand bucks!)

-W

You're right, of course, and that thought has occurred to me. That's why having to put 10% down wasn't really an issue; the total with closing costs is going to be about $10,000. And evidently around here there isn't really a minimum for what banks are willing to finance. I guess it's because the average home is $100k or less.

That's also why I said going forward I'll just do commercial financing at 25% down. Or hell, I might just skip the bank entirely and pay cash.

sammybiker

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #14 on: October 12, 2020, 08:43:34 AM »
@Valley of Plenty Sounds like a killer deal, regardless of 3% or 10% or 20% down.

I'm in Western PA now, definitely curious as to the location.  $55k for a triplex sounds insane, given its not in a warzone.  What are the units renting for each, $600-700mo?

waltworks

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #15 on: October 12, 2020, 08:55:45 AM »
Agreed, at that price, I'd just pay cash. The overhead work/costs to close the loan aren't worth it.

That's got to be the best deal I've heard of on the MMM forums since back when Arebelspy was buying places in Vegas in 2010 or so.

-W

Valley of Plenty

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #16 on: October 13, 2020, 09:15:33 PM »
@Valley of Plenty Sounds like a killer deal, regardless of 3% or 10% or 20% down.

I'm in Western PA now, definitely curious as to the location.  $55k for a triplex sounds insane, given its not in a warzone.  What are the units renting for each, $600-700mo?

It's actually in one of the better parts of town, I'd consider it a Class C, but the neighborhood is slowly turning into a Class B with many of the more run down buildings being bought up and renovated. Lots of jobs coming in, and the borough has been putting forth an effort to make the town nicer overall (new sidewalks and traffic lights within the past 6 months).

Right now 2 of the 3 units are vacant, with the one that's filled being a 3br/1.5ba at $600/mo. I'm told that the current owner was able to get $500 and $550 for the 1 and 2 br units, respectively. The appraisal showed comparable rentals in the area going for about the same amount, however I know that *most* of the rentals in the area are going for higher than that. I currently reside in a 3br/1ba that rents for $675/mo, and I've found that to be pretty standard for the area. I'm not sure why the comps came in so low. I'll likely do some more research and list the units in line with my expectations, then reduce the price if necessary. The ROI is so generous that I have plenty of wiggle room to lower rents and still cash flow.

Valley of Plenty

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Re: Triplex not qualified for traditional financing even if owner occupied?
« Reply #17 on: October 14, 2020, 08:08:05 PM »
I have made a new thread dedicated to following this purchase.

https://forum.mrmoneymustache.com/real-estate-and-landlording/the-great-$55-000-triplex-saga/