23. BRRRR – Understanding the Term Sheet
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
Often when I present term sheets to a client, they occasionally are surprised at the closing costs.
Most assume there are minimal financing charges like purchasing your own home using a traditional mortgage company.
Those costs are not comparable to financing a non-owner-occupied investment property through a commercial lender.
Let’s dig more deeply.
- Origination points – This is the cost the lender charges for their services. Depending on the type of loan and structure, this can be 1-4 points. Once you determine your loan structure (cash out vs rate and terms), LTV, interest rate, buydown option, etc. the number of points could change.
- Document and processing fees – This is the due diligence cost for underwriting to review and approve the loan. Most lenders charge a nominal fee between $600-$1500 per property. For a portfolio loan, the costs are different. Lenders will charge a fixed fee dependent on the number of properties. For larger portfolios, we can negotiate this cost.
- Title services – Lenders will estimate this to be 2% of your loan amount. Some are required by their legal department to include this cost in the term sheet. You can certainly use your own title company for closing which may result in lower costs. Remember, some lenders may charge a lender attorney fees typically .5% to 1% of the loan. These covers reviewing the final underwriting package along with preparing and issuing the loan docs.
- Taxes and insurance escrow deposit – This can be confusing. Many lenders will require a set number of months of initial escrow. After closing, you will still be required to pay monthly tax/insurance at part of your monthly payments. These future funds are escrowed and paid by the lender at the end of the year. Unfortunately, most all lenders will not let you pay taxes/insurance directly out of escrow. Every lender is different in their escrow calculations. Make sure you understand the requirements before you commit to your loan.
- Prepaid PITI – All lenders will require 3 months of your monthly payments at time of closing. This will include principal, interest, taxes, and insurance. They will be making your first three months payments on your behalf. If you close on March 1st, expect your first payment to be due on June 1st.
Remember that your escrow and pre-paids are not a hard dollar costs but funds to be applied to your loan after closing. All other fees will be hard dollar costs to close your loan.
Finally, each lender will require a minimum liquidity of funds in your bank account to begin the underwriting process. This is usually 6 months of loan payments. Make sure you have these funds in your bank account when start the refi process. Be sure to keep this minimum up to your day of closing.
Category : Blog