Securing Financing: The First Step To Investing
By Paul Esajian on November 27, 2013
Before you can think about your long, wonderful career as an investor, the first thing you need to do is secure financing. Whether this is through means of lender financing or private money, everything you do in a transaction is dependent on some form of financing. It is not enough to assume that your credit score is acceptable and you have some money to put down. Lender programs, especially for investors, are constantly changing and the credit score you had a few months ago may not be what it is today. The first piece of the buying puzzle starts with obtaining financing.
Many lenders have closed their doors in the past five years. We have been left with a few mortgage brokerage shops, community banks and large national lenders. What you will find, for the most part, is that they all follow the same basic guidelines regarding down payment, credit score and debt to income. There may be a lender or two that deviates from these traditional indicators, but those are few and far between. Loan approval is largely based on credit score and down payment with 720 and 20% being the benchmarks for each.
What you want and what you can get are often two very different things when it comes to your mortgage. Even though you make money or have rental income, you may not be able to use all of this for qualifying purposes. You need to be able to verify income for two years if you are self-employed and most lenders will only use 70% of the rental income. This may prohibit you, as far as your debt to income ratio, with the end result being a lower purchase price range than you may have originally thought.
It is so important to get pre-approved for your loan first. Most realtors will not show you a property unless you have already been approved. They don’t want to waste their time with a buyer that may not be serious. Once you are pre-approved, you can pinpoint the exact price range you are qualified for. At this point, your realtor will only show you properties that fit your respective criteria. Also, once pre-approved, you have the ability to act fast if you do see a house that you like. This allows you to make offers quicker and close in a much shorter time-frame.
An alternative to lender financing is to get financing through private money or hard money lenders. These are usually individuals or a group that have access to money and will lend it in the right circumstances and to the right people. The fees and interest rates will be higher, but even so, this may be a viable short term option in the right circumstances. If you are looking to get in and out of the property in only a few months you can turn your money over a few times throughout the year.
Knowing what you are approved for should be the first step you make as an investor. You may have big plans for your business, but unless you can finance your properties, you will be stuck in neutral.