1. Learn about the workings of the lending markets There are two main lending markets: the secondary lending market in addition to the retail lending market. Mortgage brokers and banks interact with retail buyers and investors in the retail market. The loan is then sold on the secondary lending market, where conventional Freddie Mac and Fannie Mae loans are obtained, after being underwritten by lenders. If you are eligible, a loan from the secondary market typically has the lowest interest health + write for us rates and fees. On the other hand, the number of loans you can get on the secondary market is limited, and the rules for investment properties are more stringent. As a result, even if you are just getting started, developing a relationship with your neighborhood bank is essential.
Community banks frequently have in-house real estate programs. This indicates that rather than selling mortgage loans to a secondary market, they hold them in the bank. They have the flexibility to adhere to their own underwriting standards rather than the secondary market’s stringent requirements because of this. The advantages of working with a community bank are as follows: They are able to be adaptable, they know you and how you manage your finances, and they know the local market better than anyone else.
2. Know Your FICO (Fair Isaac and Company) Credit Score Your interest rate, approval, fees, and down payment all depend on your FICO score. I suggest signing up for a report from Equifax, TransUnion, or Experian. 850 is the highest FICO credit score you can get. 760 or higher is outstanding, and 680 or higher is good. Anything below that requires some improvement.
3. Know What an Underwriter Cares About Your Credit Score An underwriter cares a lot about your credit score. Additionally, they pay close attention to your payment management skills. The majority of secondary market loan products necessitate extensive documentation. This indicates that they want confirmation of your assets, as well as your payment stubs, bank statements, W-2s, and other tax documents.
Your debt-to-income ratio will be calculated using that data. 28% is the ideal DTI. That range has a high end of 36%. Your principal, interest, taxes, and insurance (PITI) are all included in this. With a high credit score and cash reserves, you might be able to raise your DTI ratio.
4. Know About the Loan Products Available There are a number of loan products available, but the three main categories are as follows:
A Loan at a Fixed Rate: The principal and interest on these loans will never increase because the interest rate is set in stone. You can get a loan for 15 or 30 years. Anything else is hard to justify with today’s low interest rates!
Mortgage with Variable Rate (ARM): These loans’ interest rates can change over time. The most common packages are 3-1, in which the interest rate is locked in for three years but can change after that, 5-1, in which it is locked in for five years, and 10-1, in which it is locked in for ten years. If you know you will sell or fix and flip before the adjustable period expires, ARMs may be a good choice.
Government loans and FHA loans: Veterans, first-time homebuyers, people who qualify for affordable housing, and others have great choices. Research your options and inquire of your mortgage lender or bank about them.
5. Expect Turbulence Real estate financing can take a long time to obtain, so be prepared for turbulence but don’t let it discourage you. Turbulence can be caused by the following factors:
Do your research and be ready to pivot in the event that the buyer runs out of money at the closing, among other things, such as lying on your loan application or late payments on your credit cards.
6. Negotiate a Loan’s Cost Mortgage lenders are still interested in your business, despite their current lack of clients. This is especially true if they are aware that you are an investor who has a high likelihood of returning business. Therefore, there is always room for compromise.
With junk fees, you should look for opportunities to negotiate the most. These fees are added by the lender or bank to cover their costs. Look at the top of your good faith estimate to find these. In order to guarantee transparency in real estate financing, the government mandates the listing of junk fees. What to look out for: fees for underwriting, administration, doc preparation, and mortgage origination.
Your goal should be to reduce your closing costs to no more than 3% of the loan amount. Keep in mind that you are unable to negotiate fees for title companies, insurance, or taxes.
7. Control Your Credit Score We’ll come back to the credit score again because it’s so crucial! Keeping your credit card balance below 33% of your total available credit is one way to control your credit score. Before refinancing another property, if you are an active investor, you should make payments for 90 days.
8. Know How to Get a Down Payment There are Repay a Home Loan a few different ways, in addition to saving, to get a down payment. This blog post covers how to raise money for a down payment in greater detail, but here are some quick bullet points:
Utilize your home’s equity, draw from an IRA or other retirement account, and communicate with friends and family. They may present you with cash as a down payment. From personal experience, it is wonderful as a parent or grandparent to be able to prepare your family for real estate success.
Use seller financing to enter into a real estate deal with partners. The seller contributes a portion of your financing, and they are exempt from paying capital gains taxes on the property.
