Comparing Lenders for Investment Property Loans

Start by matching the lender type to how you will qualify: banks, credit unions, and mortgage brokers for conventional loans based on your income, community banks for portfolio loans, DSCR lenders when the rent has to carry the loan, and hard money lenders for short-term purchases. Then get written offers from at least three lenders within 14 days, so every credit scoring version counts the mortgage credit checks as one inquiry. Compare the offers line by line: rate, points, origination fees, prepayment penalty, and rate lock terms. For a rental you will not live in, the lender is not required to give you a Loan Estimate, so ask each one for an itemized written quote.

For the qualifying basics that apply to every lender, start with our tips for getting approved for an investment property mortgage.

Which lenders make which investor loans?

Conventional lenders start from Fannie Mae and Freddie Mac rules, but each lender can add stricter requirements of its own, so one lender's denial does not mean every conventional lender will say no. The agency rules are in conventional loans for investment properties. Portfolio lenders keep the loan on their own books and set their own rules, which is how a borrower past the 10-property limit or buying a mixed-use building gets financed; see portfolio loans for real estate investors. DSCR lenders qualify the loan on the debt service coverage ratio, the monthly rent divided by the monthly payment including taxes and insurance; see how DSCR loans work. Hard money lenders make short loans secured by the property's value; see hard money loans.

A broker can save you calls, but the broker's fee is part of your cost. The CFPB notes that some companies act as both lender and broker, so ask which role the company plays on your loan.

Will you get a Loan Estimate or a term sheet?

That depends on whether federal rules treat the loan as consumer credit.

• A rental you will not live in. Under the Truth in Lending rules, a loan to buy, improve, or maintain a rental that is not owner-occupied is business credit, whatever the number of units. The lender does not have to give you a Loan Estimate, a Closing Disclosure, or an APR. Expect a term sheet instead: a short summary of rate, fees, loan amount, and conditions. Ask whether it is binding or only an estimate.
• A 1- or 2-unit property you will live in. The lender decides whether the loan is consumer credit based on its main purpose. When the main purpose is buying your own home, it is consumer credit, and the lender must deliver a Loan Estimate within 3 business days of your application.
• A 3- or 4-unit property you will live in. The rules deem a purchase loan on an owner-occupied property with more than 2 units to be business credit. Ask the lender whether it will issue a Loan Estimate anyway.

When you get term sheets, ask each lender to put every charge in writing in the same order the Loan Estimate uses: origination charges, points, third-party fees, escrow deposits, and cash to close. Without that, the APR line is missing and you have to build the total cost yourself.

The line items to compare

1. Interest rate and loan type. Compare fixed with fixed and the same term with the same term. The CFPB warns against comparing an adjustable-rate APR with a fixed-rate APR, because the APR on an adjustable loan does not show the highest rate it could reach.
2. APR. When you have one, the APR combines the rate with points, broker fees, and other charges you pay to get the loan. It is a cost measure, not the whole picture.
3. Points and lender credits. One discount point costs 1 percent of the loan amount and buys a lower rate. A lender credit works the other way: the lender pays part of your closing costs in exchange for a higher rate. On a Loan Estimate, points are on page 2, Section A, and lender credits are in Section J.
4. Origination charges. Application, underwriting, processing, and origination fees all sit in Section A. The CFPB says to compare the Section A total, since lenders split the same charges into different names.
5. Prepayment penalty. For most consumer mortgages, federal rules allow a penalty only on certain fixed-rate loans, capped at 2 percent of the amount prepaid in the first 2 years and 1 percent in year 3, with none after that. Business-purpose loans, including most DSCR loans, are not covered by that cap, so get the full schedule in writing.
6. Rate lock. Locks commonly run 30, 45, or 60 days. Ask what a longer lock costs and what an extension costs if closing slips. The rate can still change if your loan amount, credit, income, or the appraisal changes.
7. The 5-year cost. Page 3 of the Loan Estimate shows what you will have paid in 5 years and how much of that went to principal. The difference is your 5-year borrowing cost. If you expect to sell or refinance at a different point, compare interest plus upfront charges, minus any lender credits, at that point instead, as in the example below.

Worked example: points versus a higher rate

Two hypothetical 30-year fixed offers on a $300,000 loan:

Offer A costs $3,505 more at closing ($4,500 minus $995) and has a payment $50.37 lower ($2,021.16 minus $1,970.79). Dividing $3,505 by $50.37 gives about 70 months, but that shortcut ignores that Offer A's lower rate also pays down more principal each month. Counting only what you lose (upfront charges plus interest paid), the offers cost the same at about month 56:

• After 3 years: Offer A has cost $65,403 and Offer B $64,159, so B is $1,244 cheaper.
• After 5 years: Offer A has cost $104,761 and Offer B $105,033, so A is $272 cheaper.

If you expect to sell or refinance before month 56, about 4 years and 8 months, Offer B costs less. A prepayment penalty changes the answer: if Offer B charged 3 percent on payoff in year 3, that would add about $8,700 on its $290,400 balance.

Rates themselves are covered in interest rates for investment properties.

How to shop without hurting your credit

Credit scores treat several mortgage credit checks made close together as one inquiry, since you are buying one property. The CFPB describes a 45-day window, which newer FICO Score versions use. Older FICO versions, which some lenders still use, group mortgage inquiries over only 14 days, so collect every application and credit pull inside 2 weeks.

Rates change daily. The CFPB points out that a rate gap between two estimates may reflect market moves if they were issued on different days, so request your quotes on the same day and with the same loan amount, down payment, and lock period.

Questions to ask each lender

1. Will this loan be sold to Fannie Mae or Freddie Mac, kept in your portfolio, or made by a separate lender you are brokering it to?
2. What is the rate with no points, and what does each point buy?
3. What do all lender charges total, in writing?
4. Is there a prepayment penalty, and what is the schedule by year?
5. How long is the rate lock, what does it cost, and what does an extension cost per day?
6. What reserves do you require, and does the DSCR or debt-to-income limit change with the down payment?
7. Can the loan close in a personal name, an LLC, or either?
8. What is your typical time from application to closing for a loan like this one?