In order for your real estate investing career to truly flourish you're going to rely upon some form of institutional financing for property acquisition and rehab expenses. A systematic process will help ensure that you're ready to proceed, that you'll get the best-possible loan rate and terms, and that you don't miss any of the most critical steps that could slow down - or even derail - your plans.
This is a vital first step to getting that all-important loan approval, and it's also the most frequently overlooked. While most of us realize that almost all of our financial lives are an open book - tracked on an on-going basis by credit reporting agencies - many of us don't realize until it's too late how large a role our track records with creditors plays in the decision to extend credit in the first place. Before shopping for loan rates, looking at property, or speaking with motivated sellers, it's important that you ensure that your credit situation makes you a good candidate for the loan that you are seeking. In order to maximize your chances of success, follow this simple checklist:
o Check Your FICO score - It's important that you understand the importance your FICO score has on the loan approval process. Here's the reality: The higher your FICO score, the better off you'll be. Knowing your FICO score will be important later on when shopping for the best rate and terms for your loan.
o Check your credit report for accuracy - A simple key-stroke error can assign someone else's payment history to you and it can have a devastating impact on your credit score. At least once a year you should get a copy of your credit reports from all three major credit bureaus to ensure that the accounts listed are yours and that the information contained in them is accurate. If it's not, get it corrected by taking the appropriate steps to contest the entries in question. If you have unpaid bills, pay them. This not optional; it's critical to your success.
o Ensure that you have a good debt-to-income ratio - Ensure that your debt-to-income ratio and your credit utilization is in line with what lenders will be looking for. If your balances on credit card accounts are too high, pay them down or transfer balances to lower balance cards.
o Eliminate unproductive credit sources - If you're holding high-rate store charge cards, gas cards, and other credit accounts that you rarely - if ever - utilize, consider closing the accounts in the interest of furthering your real estate investing career. These accounts can reduce your FICO score and increase the cost of credit because potential lenders will see the potential you have to use those accounts, which could affect your ability to pay your bills.
Credit is important to the loan approval process and is a critical first step in ensuring that you get the loan and terms that you are seeking. Do everything in your power to ensure that your credit paints the most positive picture of you as possible.
Gather Your Paperwork
In advance of loan shopping and filing your application, it's a good idea to put together a packet of the documents that will be necessary in order to fill out your loan application. That way, when applying for your mortgage loan, you will simply be able to fill in the blanks by looking in one central location. This will also prove invaluable to your mortgage broker and/or loan underwriter because they will almost always need copies of some of the documents. Here's a list of documents that you're likely to need:
o Income information - This includes W-2's for the last two years for you and any co-applicant, 1099 tax forms and tax returns for the last two years if you're self-employed. In addition to your 1040, also have a copy of Schedules C, K, SE, and any other schedules and forms related to those years that were required in order to complete your tax return or were filed with the return. Also have an up-to-date P&L statement. If you're an active real estate investor with other property, include copies of all rental contracts, leases, and financial data for all of your other properties.
o Other financial information - At least three months' worth of bank statements from all bank accounts, your most recent quarterly and year-end statements for any investments you currently hold, including 401(k), IRA and self-directed IRA accounts, SRP's, Keough Plans, and stock and mutual fund statements.
o Other paperwork - If divorced, a copy of your divorce decree, alimony or child support statements, bankruptcy records, and copies of your social security card, or immigration status (including H-1 or L-1 Visas)
If you have other documentation you suspect might be requested, place a copy of it with these documents so you can quickly locate it if asked.
Shop Around for the Best Deal
There are thousands of lenders and financing sources for your loan needs and the rates and terms offered can vary substantially from one lender to the next. While there is some merit to finding a lender with whom you can forge a long-term relationship, it's equally important that you consider using a good mortgage broker who has contacts at multiple lenders.
A good broker can shop the market for you and may be able to locate lenders with unadvertised rates that could potentially save you a lot of money over the life of your loan. In addition, they can also help guide you seamlessly through the entire process - and help you to find the best overall loan package for your financing needs.
With that said, don't overlook the importance of establishing a relationship with a personal banker at your hometown bank. Not only will they be a source of valuable information, they will get to know you and your investing style and can take a real interest in seeing your career blossom as you do multiple deals together.
Regardless of whether you are dealing with a mortgage broker who is shopping the market for the best overall loan package or you are working with your local hometown banker, realize that a low rate in and of itself is not necessarily the best deal. Lender fees, closing costs, points, and other extras can substantially add to the cost of a loan. Be aware of the impact these costs will have on your bottom line and choose the least expensive option possible - in terms of total cost. It's also important that you consider how long you'll need the financing. If you plan to sell
quickly, it might make sense to go with a variable rate loan - even though there is a certain amount of risk involved, especially if rates go up.
Benefits of Pre-Qualification
Whether you're working with a real estate agent or are locating properties through some other means, it can be beneficial to go through the pre-qualification process beforehand. There are three primary benefits to doing this:
o You know what you can afford - You may have a rough idea in your head of how large a loan your lender is likely to give you, but until you have verification from them it's just a guess.
o Improves your bargaining position - If a seller knows that you're the real deal and that you have the cash to purchase their property, they'll be more likely to take your offer seriously. You don't have to actually "show them the money" to attract their undivided attention. If you can simply prove that you have the means to get it quickly they'll pay attention - and be more cautious about rejecting your offer.
o Enables you to close quickly - Some properties can be purchased quickly if you can close right away. Pre-qualification significantly reduces the length of time it takes to receive loan funding, which can save you thousands of dollars, especially if a seller is motivated by time constraints and wants their money right away.
The Loan Application
When completing your loan application, remember that incomplete and inaccurate information can slow down the approval process. If all of your financial data is in a centralized location, the loan application is simply a process of following a checklist and filling in a few blanks on the form. Attach copies of all requested documents to ensure that your loan can be underwritten quickly.
Give complete information on your application and - above all - be honest. You may think your lender won't find out about a minor credit issue, but the reality is: They probably will. If you're hiding financial skeletons in your closet, bring them out into the light of day. If your lender is aware of them, he or she is more likely to be forgiving than if they discover them later on. A late discovery can ruin any chance you might have had to get that all-important loan approval. If you disclose early, you could have time to remedy any defects and still get the loan you're looking for.
The Financing Package
Once your lender or mortgage broker has approved your loan, they'll present you with a loan package. Pay close attention to the overall package because it will detail the amount of your loan, the interest rate, fees, and any pre-paid points. Many of these fees will be required at closing, so be aware of what will be required of you. Make sure you understand clearly what your loan package consists of - and what it will cost. In addition, once approved, make sure you have your loan offer in writing. Here are a few other things you need to keep in mind:
o Don't apply for other loans, credit cards, or lines of credit before closing - Any financial transactions can alter your credit score, your debt-to-income ratio, or your ability to close your mortgage loan. Your lender will be watching so avoid any credit transactions until you have closed your loan.
o Don't miss ANY payments on other accounts - A single missed or late payment on another credit account can be enough to cause your lender to change their mind about your loan approval, especially if it causes even a slight dip in your FICO score. Because your credit score is an up-to-the-moment snapshot of your creditworthiness, this could conceivably be enough to change your qualification.
o Don't move money into, out of, or between accounts - The cash you have on hand plays a large role in your approval, so if you withdraw money (other than what you need for day-to-day expenses) you could inadvertently shoot yourself in the foot. If you receive a large influx of cash, make sure it is from a traceable source, such as a wire transfer.
o Be available in the event of last-minute emergencies - Last minute requests for information can come at any time, up to the morning of your loan closing. Try to avoid traveling out of town until you close your loan so that you can answer any last-minute questions or provide your lender with any documentation they might decide they need.
Closing the Deal
On closing day, you'll seal the deal and complete the transaction. This is where all your hard work will begin to pay off. Once you've read and signed all loan documents and handed over a cashier's check for any necessary closing costs, your loan is closed and the property will be yours.
Be patient because there are a lot of documents to review and sign. It really will be worth it, though, even if you begin to think midway through the signing process that your arm might fall off sue to writer's cramp! The mortgage loan process might seem a little daunting the first two or three times through, but in time it will become second nature to you. You'll enjoy this process much more because of what it represents: The fulfillment of a successful real estate transaction and the realization of your hopes, dreams, and aspirations. This is what real estate investing is all about so enjoy the process! You're going to have monthly payments and interest charges to contend with for however long you've financed a property. Investing in your salvation doesn't require monthly payments. Furthermore, there's no note to sign.
o It's a tax-free transaction - While politicians of all political stripes make promises they seldom fully live up to, there's one thing you can count on: Eventually, you have to pay the piper. The best Uncle Sam can offer you is to defer taxes - but at some point either you or your descendents will have to pony up some money to the government. Your eternal salvation has no hidden taxes or punitive tax rates. The best part? You can reap the rewards of eternal life without fear of a change in the rules of the game - and there's nothing the government can do to stop you or restrict the benefits.
o The benefits never end - Most tax write-offs are only available for a certain period of time or if you're willing to jump through an endless set of government hoops. If you don't toe the line, the government can yank your tax benefits - or even increase your taxes - anytime they like. Your eternal salvation is just what the phrase suggests: ETERNAL salvation.
Your eternal salvation is serious business - with eternal implications. We will all live forever. The question isn't if you'll live forever. That one has already been settled. The real question is WHERE will you live forever? You may think you can simply defer thinking about this for a rainy day. You may think that a place like Hell doesn't exist. What if you're wrong?
I've made an investment in my eternal salvation. I KNOW where I'm going when I die. Do you? If you don't - or you haven't given it much more than a passing thought - I strongly urge you to think about it a lot in the coming days and weeks.
Eternity is a long time. Invest wisely.
Your eternal salvation is yours for the taking today. You have to have faith in the investment and a strong belief with every fiber of your being that the investment is the right one. In this case, you're not simply relying on the word of a motivated seller who will say anything to close a real estate transaction. Because in this case, the "seller" is Almighty God. He isn't motivated by the hope of a quick buck in a hot real estate market. He's motivated by love.
When you step into eternity, make sure you're stepping into the right eternity. Invest today in your eternal salvation. Imagine for a moment how you'll feel when you do - and you're greeted warmly and shown to your Golden Palace for all of eternity.
Make your investment today.
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