Financing Skill

This skill models all aspects of real estate investment financing: loan product comparison, amortization, refinance timing, creative structures, and rate sensitivity analysis.

Loan Product Reference

Conventional Investment Loans

USE CASE: Standard rental properties, 1-4 units
TYPICAL TERMS:
  Down payment:     15-25% (SFR: 15-20%, 2-4 unit: 20-25%)
  Rate:             Market rate + 0.25-0.75% investor premium
  Term:             30yr fixed, 15yr fixed, 5/1 ARM, 7/1 ARM
  LTV:              75-85%
  DTI:              Max 43-50% (varies by lender)
  Credit:           Min 620, best rates at 740+
  Reserves:         6 months PITI per property
  Property limit:   Up to 10 financed properties (Fannie/Freddie)
PROS: Lowest rates, longest terms, predictable payments
CONS: DTI limits, property count limits, full documentation required
RENTAL INCOME CREDIT: 75% of market rent can offset DTI (if not occupying)

DSCR Loans (Debt Service Coverage Ratio)

USE CASE: Investors who exceed DTI limits or want to qualify on property income
TYPICAL TERMS:
  Down payment:     20-25%
  Rate:             Market + 1-3% (higher than conventional)
  Term:             30yr fixed, 5/1 ARM, interest-only options
  LTV:              75-80%
  Min DSCR:         1.0-1.25 (varies by lender)
  Credit:           Min 660, best terms at 720+
  Reserves:         6-12 months PITI
  Property limit:   No limit
QUALIFICATION: Based on property cash flow, not personal income
  DSCR = NOI / Annual Debt Service
PROS: No personal income verification, no DTI limit, unlimited properties
CONS: Higher rates, larger down payment, requires strong property cash flow

FHA Loans (Owner-Occupied House Hacking)

USE CASE: House hacking 2-4 unit properties (must owner-occupy)
TYPICAL TERMS:
  Down payment:     3.5% (credit 580+), 10% (credit 500-579)
  Rate:             Market rate (often best available)
  Term:             30yr or 15yr fixed
  LTV:              96.5%
  MIP:              1.75% upfront + 0.55-1.05% annual
  DTI:              Max 43-50%
  Credit:           Min 500 (580 for 3.5% down)
  Occupancy:        Must live in one unit for 12 months
RENTAL INCOME CREDIT: 75% of other units' rent can offset DTI
PROS: Very low down payment, competitive rates, lenient credit
CONS: Must owner-occupy, MIP for life (if <10% down), property standards
HOUSE HACK MATH:
  Gross rent from other units - vacancy - expenses = offset against PITI
  Net housing cost = your PITI - net rent from other units

VA Loans (Veteran House Hacking)

USE CASE: Veterans house hacking 1-4 unit properties
TYPICAL TERMS:
  Down payment:     0%
  Rate:             Market rate (typically lowest available)
  Term:             30yr or 15yr fixed
  LTV:              100%
  Funding fee:      1.25-3.3% (can be financed, waived for disability)
  DTI:              Residual income method (more flexible)
  Credit:           No VA minimum, lenders typically want 620+
  Occupancy:        Must owner-occupy
PROS: No down payment, no PMI, best rates, flexible DTI
CONS: Must be veteran, must owner-occupy, funding fee

Hard Money / Bridge Loans

USE CASE: Fix-and-flip, BRRRR acquisition/rehab phase, quick closes
TYPICAL TERMS:
  Down payment:     10-30% of purchase (based on ARV or purchase price)
  Rate:             9-14% (higher in tight credit markets)
  Points:           1-4 points origination
  Term:             6-18 months (interest-only)
  LTV:              60-75% of ARV, or 80-90% of purchase price
  Funding speed:    5-14 days
  Rehab draws:      Funded in draws based on completed work
QUALIFICATION: Based on deal quality and borrower experience
  Experience matters: first-time flippers pay more
PROS: Fast closing, flexible on property condition, based on deal not borrower
CONS: Very expensive, short term, extension fees, default risk
TOTAL COST CALCULATION:
  Interest: Loan Amount × Rate × (Months / 12)
  Points: Loan Amount × Point Percentage
  Fees: Origination, doc prep, inspection, extension
  Total Financing Cost = Interest + Points + Fees
  Monthly Cost = Total / Hold Period Months

Seller Financing

USE CASE: Off-market deals, flexible terms, avoiding bank qualification
TYPICAL TERMS:
  Down payment:     5-20% (negotiable)
  Rate:             5-8% (negotiable, often below hard money)
  Term:             3-10 years with balloon (or full amortization if lucky)
  Amortization:     20-30 years (with balloon at term end)
  Due-on-sale:      Negotiable
PROS: Flexible terms, no bank qualification, faster closing, creative structures
CONS: Balloon risk, typically above-market rates, seller must agree
KEY NEGOTIATION LEVERS:
  - Price vs. terms tradeoff (pay full asking for better financing)
  - Interest rate vs. down payment
  - Balloon term length
  - Prepayment penalties (avoid if possible)
  - Subordination clause (can you refinance with new first lien?)

Subject-To (Sub2) Financing

USE CASE: Taking over existing mortgage, keeping seller's rate
STRUCTURE: Buyer takes title, seller's loan stays in place
RISKS:
  - Due-on-sale clause (lender CAN call the loan)
  - Insurance and escrow complications
  - Seller's credit at risk if buyer defaults
  - Legal complexity varies by state
CONSIDERATIONS:
  - Most viable when seller's rate is below current market
  - Seller needs motivation (distress, relocation, etc.)
  - Title held via land trust or LLC for privacy
  - Always involve an attorney experienced in creative financing
NOTE: This is an advanced strategy. Flag risks prominently.

Loan Comparison Model

When comparing financing options, build this table:

| Metric                    | Option A   | Option B   | Option C   |
|---------------------------|-----------|-----------|-----------|
| Loan type                 |           |           |           |
| Loan amount               |           |           |           |
| Interest rate              |           |           |           |
| Term / Amortization       |           |           |           |
| Monthly P&I               |           |           |           |
| Monthly total (PITI)      |           |           |           |
| Total cash to close       |           |           |           |
| Annual debt service       |           |           |           |
| DSCR                      |           |           |           |
| Cash flow (monthly)       |           |           |           |
| Cash-on-cash return       |           |           |           |
| Total interest paid (hold)|           |           |           |
| Total cost of financing   |           |           |           |
| Break-even vs. Option A   |           |           |           |

Always include a "Total Cost of Financing" that captures ALL costs: interest, points, fees, PMI/MIP, and closing costs.

Amortization Schedule

Generate amortization schedules showing:

| Month | Payment | Principal | Interest | Balance  | Cum. Principal | Cum. Interest |
|-------|---------|-----------|----------|----------|---------------|--------------|
| 1     | $X      | $X        | $X       | $X       | $X            | $X           |
| ...   |         |           |          |          |               |              |

Highlight key milestones:

• When principal exceeds interest in monthly payment
• Equity position at years 1, 3, 5, 10, 15, 20, 25, 30
• Total interest paid at each milestone

Refinance Analysis

When to Evaluate a Refinance

Trigger a refinance analysis when:

• Rate environment has dropped ≥0.75% below current rate
• Property has appreciated significantly (equity harvest opportunity)
• Current loan has adjustable rate approaching reset
• BRRRR strategy calls for refinance after rehab
• Investor's Return on Equity has dropped below target CoC

Refinance Calculation

CURRENT POSITION
  Current loan balance:     $______
  Current rate:             _____%
  Current monthly payment:  $______
  Current property value:   $______ [ESTIMATED - comps needed]
  Current equity:           $______ = Value - Balance
  Current LTV:              _____% = Balance / Value

NEW LOAN TERMS
  New loan amount:          $______ = Value × Target LTV
  New rate:                 _____%
  New monthly payment:      $______
  Cash out:                 $______ = New Loan - Current Balance - Costs
  Refinance costs:          $______ (typically 2-5% of new loan)

ANALYSIS
  Monthly payment change:   $______ (+/-)
  Annual cash flow change:  $______
  Break-even period:        ______ months = Refi Costs / Monthly Savings
  ROE before refi:          _____% = Cash Flow / Equity
  ROE after refi:           _____% = New Cash Flow / Remaining Equity
  Cash-out deployment:      If reinvested at ___% CoC = $___/year additional

Refinance Decision Matrix

REFINANCE IF:
✅ Monthly savings pay back refi costs within hold period
✅ Cash-out can be deployed at returns > cost of new debt
✅ ROE is below target and equity is better used elsewhere
✅ Moving from ARM to fixed before rate adjustment
✅ BRRRR strategy: recovering capital for next deal

DO NOT REFINANCE IF:
❌ Break-even period exceeds planned remaining hold
❌ New rate isn't meaningfully better (< 0.5% improvement)
❌ Refi costs eat most of the savings
❌ Property value doesn't support desired LTV
❌ Prepayment penalty on existing loan exceeds benefit

Rate Sensitivity Model

Show how interest rate changes impact the deal:

| Rate    | Monthly P&I | Annual DS  | Cash Flow  | CoC     | DSCR   |
|---------|-------------|-----------|-----------|---------|--------|
| 5.0%    | $______     | $______   | $______   | ____%   | ____   |
| 5.5%    | $______     | $______   | $______   | ____%   | ____   |
| 6.0%    | $______     | $______   | $______   | ____%   | ____   |
| 6.5%    | $______     | $______   | $______   | ____%   | ____   |
| 7.0%    | $______     | $______   | $______   | ____%   | ____   |
| 7.5%    | $______     | $______   | $______   | ____%   | ____   |
| 8.0%    | $______     | $______   | $______   | ____%   | ____   |

Highlight the rate at which DSCR drops below 1.25 and below 1.0.

Creative Financing Strategies

Strategy: Stack Financing

Combine multiple sources to minimize cash investment:

Example:
  Purchase price:     $200,000
  First lien (bank):  $150,000 (75% LTV)
  Seller second:      $30,000  (15%)
  Buyer cash:         $20,000  (10%)
  
  Blended rate: (150k × 6.5% + 30k × 7%) / 180k = 6.58%
  Total debt service: calculate both payments

Strategy: Lease Option

Option fee:       $______ (typically 1-5% of price, credited at purchase)
Monthly rent:     $______ (portion may credit toward purchase)
Option period:    ______ months
Strike price:     $______ (locked at agreement, or formula-based)
USE CASE: Control property with minimal capital while building equity credit
RISK: Lose option fee if don't exercise

Strategy: Wraparound Mortgage

Existing loan:    $______ at _____%
Wrap rate:        _____% (must be higher than underlying)
Wrap amount:      $______
Spread:           _____% arbitrage to wrap holder
USE CASE: Seller keeps existing financing, creates new note wrapping around it
RISK: Due-on-sale, complex documentation, state legality varies

Scripts

scripts/amortization.py

Generates full amortization schedules with milestone highlights.

scripts/loan_comparison.py

Side-by-side loan product comparison with total cost analysis.

scripts/refi_analyzer.py

Refinance break-even and ROE analysis.

scripts/rate_sensitivity.py

Rate impact modeling across the full deal structure.