How to qualify for the perfect mortgage loan to buy an investment property. If you're going to make money with a rental property than having the right loan at the right interest right is crucial.
There are literally thousands of mortgage lenders, and each one has several different loan stipulations and contracts. There are lenders who only cater to the most creditworthy (and offer the best rates), and there are lenders who lend 50% of a property’s value (offered at high rates). Basically, there are lenders for everyone, but why settle for a lender who gives you lousy rates? You’ll only do yourself a disservice if you settle, so it’s important to get the best loan you can.
The best place to go is the bank—banks love to lend people money. They want to earn more customers and benefit from the interest rates that loans accrue. But sometimes, certain banks will not have a program that fits your needs, or you might not place within the parameters of their lending ability. Or worse: Some banks might try to tie you into a mortgage loan that doesn’t fit your needs.
But worry not. Scan the real estate section in the local newspaper or online for the rates offered by other banks. Call, email or visit the banks to see what they can offer you, based on the information you provide. By doing your own legwork you can get a feel for what is out there, and also have a clearer understanding of what you can find by yourself, before you bring in a mortgage broker.
Afterwards, discuss with your broker which rates are the safest and most appropriate according to your plans. In fact, working with a broker will probably make you feel safer and more secure because of his/her formal relationship with the lender. After all, the broker is bringing business to the lender, and he/she should feel greater responsibility towards honoring commitments with the broker’s clients.
When confronting lenders, they’ll want to know a few things.
- How much money you have and how much you will likely make over the next 30 years.
- Outstanding debt, such as money you owe for education, vehicles, credit cards, etc.
- Assets you have, such as stocks, mutual funds, or a piece of property, including land, boats, and vehicles.
- Your FICO or credit score.
Lenders need to know this kind of information for several, important reasons. First, they want to know if you make enough money to pay them back. Second, they want to make sure you have a history of trustworthiness. Third, they want to know if you own something valuable in the case that you are unable to pay them back. And fourth, lenders require that you make a down payment worth at least 20% of the value of the property you intend to purchase. Many of these assessments can be facilitated if you supply the following:
- Two most recent pay stubs from your employer
- W-2s for the last two years
- Last two months' bank statements
- Long-term debt information (credit cards, child support, auto loans, installment debt, etc.)
It’s also a good idea to show proof that you pay your bills on time and what you perceive your expected earnings to be. The former can be provided if you print out billing statements from the Internet, or furnish check stubs and actual bills with due dates included. The latter can be supplied if your employer is willing to provide a contract of terms that outlines your expected earnings.
TIP: If need be, build your case for a lower interest rate by supplying the following: references, statements from past tenants, letters of recommendation from partners, bank statements, and whatever else you think might help.
An appraisal of your property is also needed to obtain a mortgage. In fact, an appraisal is just as important as your credit history because the value of the property you intend to purchase can be used by the bank as collateral if you are unable to make a payment. You can be refused a mortgage or granted a smaller amount if the appraisal is less than the loan amount you want to borrow. As a result, you will have to make up the difference by making a larger down payment or renegotiating the sale price with the seller.
This situation can be avoided if you consult with your Realtor for a Comparative Market Analysis (also called a CMA, or “comps”). The CMA will show you recent sales of properties within the neighborhood where you plan to purchase. This lets you know if you’re paying a reasonable and fair price for the property, and it also gives you an idea about the appraiser’s perspective of the property’s value.
The value of the property is determined by answering two questions:
1. How much would it cost to rebuild the property?
2. How does the property measure against other properties of comparable size, quality, and location that have sold recently?
Banks and mortgage companies frequently lament over the fact that some people overestimate their properties’ worth, and are therefore disappointed when they do not receive the loan amount they think they deserve. You can avoid this frustrating scenario if you get a CMA report before approaching the lenders. And don’t forget to obtain your own copy of the appraisal—you are entitled by federal law to own one.
REMINDER: Improve your credit. But if you have a strong history of paying rent, car payments, and or other mortgage payments on time, you are more likely to qualify for a low interest rate. You can prepare for the mortgage loan by eliminating, reducing, consolidating, and avoiding debt. Once again, this goes back to having a plan and saving money to buy your investment property.
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