Do you know which type of financing you qualify for now, and in what order?

Qualifying for Residential Financing

Residential financing refers to the purchase of regular residential homes with no commercial component from a single family home, to duplexes, triplexes and four plexes.  In some circumstances a five and six plex can be financed using residential guidelines but there are only a few lenders that do that so we tend to place them under commercial guidelines as detailed below.  You might be purchasing these types of properties with the following investment strategies in mind:

ü  Buy, Rent and Hold Single Family Properties up to a 4 to 6 Plex

ü  Buy for Rent to Own (short term hold)

ü  Sandwich Lease Options with Investors

ü  Buy, Renovate, Refinance and Hold

ü  Buy, Renovate, Flip

ü  Wholesale and/or Assign Deals

ü  Joint Venture Partners

So almost all lenders, with the exception of private, joint venture or hard money lenders, review two key areas in priority order below:

Firstly, you the borrower:  Is there sufficient income to pay your own existing financial obligations (mortgage, credit card balances, car payments etc.), good credit, and income to qualify.  Is it a corporation or personal?  Do you have liquid assets and a net worth?

Secondly, the Rental Property: Does the property have a positive cash flow? (rental income less mortgage, taxes and expenses result in excess cash)  Is the property marketable?  The lenders are always thinking about what will happen when you default and they are left holding and/or selling the property?  Most lenders do NOT want to own property… they are in the business of loaning money not property acquisition or management.

Types of Lenders and Financing Options

Below is a breakdown, in order of preference, the financing options available for Residential properties as outlined earlier. 

Every financing option and category above will have a different focus on underwriting your file and deciding to provide you with the funds that you require.  They are also going to have different options such as rate, fees, terms, flexibility on documentation, size of portfolio etc.    Our goal is to strategically select the right lender in order of acquisition that aligns with your portfolio growth plans.  Below is a brief overview of each category of lenders qualifying criteria as each will have a different focus or emphasis when considering offering financing.

Major Banks & Financial Institutions

These are of course the major banks and financial institutions such as credit unions etc., which will provide you with the best rates and terms.  They are focused on both you the borrower and the property equally.  You will be required to have good credit, excellent provable income, debt service ratios well in line, down payment from your own resources and purchase a property in a major centre in good condition.    Your down payment can come from borrowing against a secured line of credit on an exception basis and if it means your debt service ratios are still in line.  Some major banks and financial institutions will start to “cap” the amount of properties in your portfolio that they are willing to finance to 4 or 5.   Many will also not allow the property to be in a corporate name unless it is a commercial property.


Alternative Mortgage Lenders

These are financial institutions such as smaller credit union, trust company and monoline lenders that offer mortgages that will provide you with the best rates and terms.  However, they may add a default insurance premium (CMHC, Genworth or Canada Guaranty) to the mortgage or require a larger down payment.  Just like the major banks above, they are focused on both you the borrower and the property equally.  You will be required to have good credit, excellent provable income, debt service ratios well in line, down payment from your own resources and purchase a property in a major centre in good condition.    Your down payment can come from borrowing against a secured line of credit on an exception basis and if it means your debt service ratios are still in line.  Some of these lenders have no limits to the amount of properties you can purchase or have in your portfolio.  These lenders are often very flexible with the property being in a corporate name.




Non-Traditional (Sub Prime/Equity) Lenders

These are alternative trust companies and other approved lenders that offer mortgages that are much more flexible in qualifying but in turn may have higher interest rates, lender fees and not as many terms available.    These lenders have no problem with financing investors with large portfolios and are flexible in overall qualifying.  Such areas as those with weaker credit ratings, self-employed borrowers with very low “taxable or provable” income, corporate names, borrowed down payment, etc.  In most cases they do require that the property be located in a desirable area and major centre but there is some flexibility although they may decrease the amount of funds they will offer you.

Private Lenders / Joint Venture Partners

These can range from an individual that has funds to lend to large companies that have billions in funds that they manage and wish to lend to real estate investors.  These could even be your friends and family that you have asked if they want to be a “money” partner in your real estate portfolio.  Private lenders and joint venture partners are usually extremely flexible and focused on mostly the property and their fees & interest rate return.  The acquisition strategy is going to be key along with how and when are they going to get their money back: the exit strategy.  These types of lenders are extremely flexible on their terms and qualifying but in return are taking a much higher risk, so demand a much higher return on their money.  For example, in a buy, rehab and sell scenario, it might not be just about an interest rate return, but also a percentage of the profit when the property is sold.  Each deal is analysed on its own merits and so the range of financing options, terms, rates, fees etc., can differ greatly and negotiated.   The private lenders will be registering a lien and/or mortgage charge on the property to be used as collateral.   Joint venture partners may or may not register a lien and/or mortgage charge on title, however they may also require a General Securities Agreement to be signed by you personally.  Often joint venture partners are used for their capital injection into the property or your company.




Hard Money Lenders

There is sometimes some overlap between joint venture partners and hard money lenders because they can also range from an individual that has funds to lend to a larger group that has millions in funds.    Again, these could even be your friends and family that you have asked if they want to be a “money” partner in your real estate portfolio.  Hard money lenders are the most flexible and are often used for short term flips and may be financing not just the property acquisition but also the rehab and renovations costs as well.  Their fees, interest rate return and portion of the profit will differ with each deal but they will expect a much higher return on their money for the higher risk.  They are often financing more than 100% of the current value of a property.  They will expect to see a very clear plan on how they are going to get their funds and profit back.  Hard money lenders may or may not register a lien and/or mortgage charge on title, however they will most likely require a General Securities Agreement to be signed by you personally.  They may also require shares in your corporation.