Experts say that buying properties for investments is a good way of building wealth. However, funding your real property investments isn’t as straightforward as financing your first homes. This is because lenders consider real property investments as riskier loans than a home purchase. Plus, there are different kinds of lenders for investment properties, and their requirements differ, which makes getting a mortgage a bit more challenging.
The good news is, there are plenty of funding choices in the market and any investor can easily find them. If you are relatively new to the world of real estate buying, then you will need to research the different financing options to find the best possible loan for your investment needs. Here are some tips to keep in mind for a smooth loan application and approval process.
1. Improve your credit score
Financial experts warn about getting loans left and right. And for a good reason given that credit scores will always play a big role when applying for a loan. Lenders usually get the loan applicant’s FICO credit score from the three primary credit bureau and compute the average score. Your score will determine the down payment requirement, interest payments, and eligibility.
When you consider getting a loan to finance an investment property, make sure to check your credit scores first. Keep in mind that having a higher score means better chances of getting your loan application approved.
Generally, having a FICO score of 740 or higher will allow you to avail of a lender’s best rates and terms. Should your FICO score be lower, then work hard to improve your score first before applying for loans. Otherwise, you might end signing a mortgage with a high-interest rate and or shorter terms.
2. Reduce present loans
Speaking of credit scores, you should consider paying off some of your existing loans. Reducing your payables to lenders will increase your credit rating. Having less debt, after all, is one of the best ways to ensure that your loan application is approved.
Unfortunately, it’s hard to determine how much debt you need to pay off to improve your credit score. What’s sure is that all your debts when combined account for 30% of your credit score in FICO. This means a significant reduction of your debt will greatly affect your loan application.
3. Make sure you have complete requirements on hand
Lenders vary in their required documents and proof of capacity to pay. Conventional lenders, for example, provide better rates and terms to those with income documents than their asset-based counterparts.
Conventional lenders will require you to submit income and employment records to verify your capacity to pay. On the other hand, asset-based lenders as those you can find if considering personal loans for fair credit, as they do not pay much attention to either employment or income documents when approving investment property loans.
It is best practice to have all your income documents in order before applying for a loan. You will need recent pay stubs, tax returns, W-2s or 1099, and the contact information of your employer.
4. Ensure that the property can provide sufficient cash flow
If you are borrowing funds from asset-based lenders, then it is imperative to choose a property that will yield enough income to pay for the loan. This is because asset-based lenders barely look at an applicant’s income and debts but rather focus on the potential cash flow of the property. They are likely to approve your loan if the property generates income that can pay for the mortgage, insurance, and taxes.
Most of the asset-based lenders rely on the DSCR or debt service coverage ratio, a metric that divides the property’s potential income by the monthly expenses. The property must score at least a 1.2 DSCR.
5. Don’t put all your eggs in one basket
It is best to do comparative shopping for an investment property loan. Many first-time property investors tend to only apply to a single mortgage and accept any terms offered to them.
Most of these investors regret their decision after seeing other lenders’ interest rates and terms. If you compare prices when shopping for everyday items, then also do a comparative shopping of mortgages.
There’s a common misconception that applying to several lenders will hurt the applicant’s credit score. This simply isn’t true given FICO’s rules stating that applications within a two-week timeframe will only count as a single application or inquiry.
You can apply to several lenders that would include both asset-based and conventional lenders. Pick one that offers the best terms and rates.
At the end of the day, real property investors have many options when it comes to financing. Having a good credit score, minimal debts, and prepared documentation can all make the loan application process simpler. It also helps to do comparative shopping before signing up with a lender.
You may find this article interesting: “What is my Credit Score?“