Is your banker lying to you?

Hey folks!  October already! My three children are back to school and I have a bit more free time to start blogging again.

As you may know if you’ve been following my blog posts over the last 6 months or so, I have some students of mine that have taken action and purchased their first apartment building. As I have been working with them and coaching them I shared with you some of the lessons they’ve learned in the course of their first multi-family transactions.

I’ll be interviewing them in the next few weeks and share these interviews with you.

I’m really really proud of my students because it’s not easy to get into multi-family investing. It takes a lot of courage. I can tell you from personal experience and from what my students have recently gone through, there are many sleepless nights involved in the process.  All these questions you have to figure out.

Where is the money going to come from? How much do I need? How much financing can I get? Is it a good deal? Am I over-paying? Etc. 

You have to dig in and do a thorough job when completing your homework.

One additional level of difficulty multi-family investors may face when they gather the necessary information for their deal is sometimes they’re given ‘WRONG INFORMATION’ by the people who are supposed to be professionals in the business SUCH AS LENDERS!

That’s right! I had a student that unfortunately was somewhat misled about the personal net worth requirement to qualify for his loan.  Lucky for him I knew the rules.

All right! I suppose I’ve got to be careful about what I’m about to say in the next few paragraphs, but do mortgage brokers and bankers sometimes REALLY LIE to real estate investors?

I don’t really want to get into an academic discussion about the meaning of ‘lie’ but suffices to say that over the years I’ve observed professionals in the multi-family financing world purposely ‘WITHHOLDING‘ information from investors, often times for self-serving reasons.

There you go! I think I put it in a politically correct and non-offensive way!

In the case at hand, my student had an accepted offer on a 20-unit apartment building and he was in the process of conducting his due diligence, which I was helping him out with. He was also seeking CMHC-insured financing and had contacted several lenders accordingly. While speaking to one of the bankers about the borrower qualification criteria, specifically about the personal net worth requirement, the banker indicated that he needed 50% of the loan amount in personal net worth to qualify. Initially, my student was blown away by the lender’s response as he could not qualify on this basis and he now had an accepted offer and the clock was ticking to move the deal along. But my student having recently graduated from my 2-day live MF investing training event knew better and argued he thought he only needed 25% of the loan amount in net worth to qualify.

Who do you think was right? 

My student of course!  A week later that the lender called to apologize…

I’m not quite sure how to explain this blunder, especially since this particular lender processes an important volume of CMHC-insured loans. I have yet to have a chat with that lender to get an explanation.  I like to think it was an honest mistake.  I promise to find out though…

When it comes to what amount of personal net worth is required for a loan, conventional lenders – that is private lenders, or lenders that do not have their financing insured by CMHC – each have their own rules and it’s a matter of asking each of them individually what their qualifying criteria are. It’s not uncommon for a large number of conventional lenders to follow CMHC’s guidelines in this regard. It’s their prerogative.

When it comes to CMHC-insured loans, however, CMHC has its own set of guidelines which are published on their website.  For your benefit I’m attaching a link to these guidelines (http://www.cmhc.ca/en/hoficlincl/moloin/mupr/upload/Reference-Guide-63885_w.pdf).  On page 4 of the guidelines here is what it says about borrower net worth requirement:

‘CMHC requires that the borrower have a net worth equal to at least 25% of the loan amount, with a minimum of $100,000.’

I don’t know about you but to me the above is pretty clear! It’s 25% of the loan amount with a minimum of $100,000.

I don’t want to get into how the net worth is actually calculated because it’s not the purpose of this article. My goal here is to stress that investing in apartment buildings is so different than investing in smaller properties you really need to know the financing rules BEFORE YOU START INVESTING.  As I have often said in the past, you should only work with people with concrete experience in multi-family properties for starters. This will save you much grief and make your deals go more smoothly.

Here is the thing:

Bankers don’t expect you to know those rules.

Hence the reason you should take the time to learn them. It’s not that hard! And when you do, here is what’s going to happen:

  • it’s going to help build your self-confidence
  • it’s going to build your credibility with the bank

Bottom line is that it’s going to help you take charge and be in the driver’s seat.

Another area where often information is  ‘WITHHELD’ is when mortgage brokers push hard for conventional financing (i.e. non-CMHC insured) without presenting the alternative of having the loan insured by CMHC, thus paying a significant lower interest for the loan.  You should always look at both alternatives. It’s also a factor of what investing strategy you’re using at the time.

Again, multi-family investing is a complete different game than investing in small rental properties of 1 to 4 units. You have to take a significant amount of time to do your homework and learn the rules of engagement, as it’s all going to go long way to help you avoid costly mistakes and achieve success and financial freedom. Please, also remember that MF investing is not for the faint of heart either. It’s not easy! Otherwise, everyone would be doing. But the reward is worth it because the financial leverage is unparalleled for such a low risk investment vehicle if done right.

When you take the time to do your homework, then nobody can pull the wool over your eyes and you become an educated and sophisticated investor.

To your success in all areas of your life.

P.S. Make sure to leave a comment. Thanks!

 

2 Responses to Is your banker lying to you?

  1. Claire Drage says:

    This is a great article and you are definately right that investors in multi family should always have all their options explained and the pro’s and con’s of both insured and uninsured… whether using a mortgage broker or going directly to the bank. I did want to mention that even though CMHC has their own guidelines for multi residential, the lender also has their own guidelines and does NOT have to follow CMHC’s to the word. In the case above, it sounds like it was an error on the lenders side in misquoting their guidelines which is unfortunate. As a mortgage broker, I experience many times where CMHC would approve the deal but the specific lender has their own guidelines and wont do it.. its like having a second “filter” the file has to go thru to make it work and obtain an approval. Every lender has their own risk tolerance and can add their own layer of guidelines. Having said that, bottomline is I just find another lender that will consider it as there is plenty of lenders to select from that will fit the clients needs. Happy investing and thank you so much for the great blog! Look forward to reading more.

    • admin says:

      Hi Claire. I’m very grateful about your comment. You’re right on when you say that often times lenders and brokers don’t know very well, or misquote CMHC’s guidelines. The fact is they just don’t know them well. CMHC does not provide any training to lenders and brokers for one. Secondly, guidelines are just that: guidelines! They’re not cast in stone and can be adapted to each deal on a case by case basis.

      At the end of the day, I advocate for investors to take charge of their destiny and be familiar with CMHC’s guidelines, which are in the public domain. Then nobody can pull the wool over their eyes.

      Once again, thank you for your comment.

      Regards,

      Pierre-Paul

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