Prospecting Starts With Financing
By Paul Esajian on June 10, 2014
There are many new investors who are often confused as to how to get started in the investing business. They spend too many hours coming up with an outline, a business plan and a target area that they forget the most important item necessary-financing. You can have the best intentions and the best plans, but unless you have the means to put them in motion, you won’t get very far. The very first thing you should do is determine if you can get approved for financing and if so for how much. Without this information, everything else you do can be for naught.
Financing can be as simple as getting a lender prequalification or as difficult as aligning yourself with a private money lender. Most new investors start with lender financing and go from there. It is easy to assume that because you have a good credit score that loan approval would not be an issue. Credit score is important, but it is just one of many factors that constitute approval. Income, assets, down payment and credit score are the four pillars that determine approval. If you are weak in just one of these areas, you can have a difficult time getting approved for a bank loan.
Lender programs have different guidelines and qualifications than traditional loans. The first thing you will notice is the increased amount of down payment necessary. Unless this is your first property and you are looking at a two-family to live in as a primary residence, you will need to put down at least 10% and most likely 15-20%. Anything over two units will require 20% down. This alone can make investing prohibitive unless the funds are in place. Not only do they need to be in place, but they need to be there for sixty days. If you are looking to take money out of other investments to use as a down payment, you should talk to your lender and see what you need to do and when you need to do it to make those work.
If you do not have these funds, you can look to align yourself with a private money lender. Many realtors, attorneys and accountants have private money lenders that they can refer to you. Unlike traditional lenders, they will not focus on credit score and asset seasoning. They will, however, look at how and when they will get their money back. You need to have a step-by-step plan complete with estimates and exit strategies. This is a viable option that many investors use when they are starting out. It may not be for everyone an every situation, but for the right property you can use this to get your foot in the door.
Mortgage programs and guidelines change almost every month. A program you may have used a few months ago may no longer be applicable. It is important to stay in contact with your broker or lender. Without financing, it is impossible to do everything you want to do in the real estate world.