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Have Your Finances In Place At All Times

Whether you are looking to refinance or purchase, you need to have your finances in place. You never know when you will need to pull cash out of a property or purchase using a traditional mortgage. If you don’t have your loan items together, you may miss out on opportunities that come your way. Closing a loan has gotten a bad-rap over the past few years. Underwriting is more difficult, but it is still based on basic loan principles. If you have good credit, low debt and can document your income, you can close in a short amount of time. You never know when you will need to take a mortgage. Here are some items that every investor should know about getting a loan:

• Know your credit score. The loan process starts with your credit score. If your scores are low, it doesn’t matter how strong other factors are. Payment history is the most important factor, but it is not the only one. You need to have established credit and low balances. If you pay everything on time, but are nearly maxed out on all accounts, your score won’t be as high as you think. Lenders will look at the middle score of three reporting bureaus (Transunion, Experian & Equifax). In most cases the scores are similar, but it is not uncommon for one to be 50 points lower. There are certain benchmark scores that lenders look for. 620, 640, 680, 700 and 720 are very important credit score numbers. If the middle score falls below these thresholds, your loan approval could be in jeopardy. It is a good idea to get monthly updates from one of the three reporting agencies. This will give you an idea where your scores are and where you can make improvements.

• Know your true income. Self-employment income can be difficult to calculate. Oftentimes what you make is not what is on your tax return. Having a high adjusted gross income may not be enough to qualify for a loan. Lenders will look at your bottom line number after deductions and expenses. When all is said and done, this number can leave you with very little income. If you plan on using rental income lenders may only take 75 percent of that amount if it is on your tax returns. If you are self-employed, you need to talk to a lender and figure out what income you can use. Not using your full income can leave you with fewer loan options than you may have thought. The good news is that loan programs are always coming and going. A stated income loan makes sense for someone self-employed, but those have largely gone away. Ask your lender to keep you updated of any new self-employment programs that become available. If you have any changes in your income, you need to find out where you stand.

• Down Payment/Equity. Property values have undergone quite a shift over the past couple of years. Any refinance starts with having an idea of what your property is worth. Looking at one isolated sale on your street is not a true indicator of the value. You need to talk to a realtor and look at many sales over the past few months. If you don’t know your value and start the refinance process, you will waste money paying for an appraisal. Having money for a down payment is not enough. That money needs to be in an account for at least 60 days. You can pool money from different accounts, but it has to be in place for some time before you close. Lenders will ask for all large deposits to be documented. Depending on the source of the money, it may not be allowed to use. Simply having enough money to close is not enough.

• Employment. Loan approval requires a two year employment history. If you are self-employed, you need to have tax returns or an accountant’s letter verifying this. Lenders will also look to see an increase in income from year one to two. Having a few good deals is not enough to get approved for a loan. As a W2 employee you cannot have any gaps in your employment. The rules are not as strict for W2 employees, but employment history in the same line of work is needed. If you have switched lines of work or just got started investing, speak with a lender and find out all the guidelines. Different banks may have different rules for self-employed borrowers.

Loan approval has not changed that much over the years. The biggest changes are in the amount of documentation needed. Every item you submit to a lender is scrutinized by an underwriter looking to pokes holes in it. You should be prepared to submit more paperwork than you expect. If you know what you need before you apply, you can get a jump on the process. Everything related to your income, down payment and employment will be needed. Keep these items constantly updated on file so you have them if you need them. The loan approval process can take anywhere from 30 to 60 days, depending on the borrower. If you don’t have your items in place, you can lose your interest rate or even lose your approval. Getting a loan doesn’t have to be difficult if you know what you need to provide.

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