Real Estate Investing | Getting financing

Earlier I talked about the challenges of getting started in real estate investing. Another big problem for some people is finding the money for real estate investments. It can be scary to go to banks looking for property investment loans. I don’t know many people that have lots of cash in their savings or checking accounts to buy a lots of real estate. So what do people do? They don’t have a choice but to go to lenders for the money to invest in property. This is good because when you get the investment loan you have leverage, which is good for us investors.
There are questions to consider when you are applying for a loan. What kind of loan should you get? Will you be able to qualify? Can you get a good loan with bad credit? All these questions could give you a headache. Hopefully I can help with this.

Searching for a loan
The costs for getting a loan vary. Unfortunately there is no universal number that lenders have. Everyone is different. Government loans are different than conventional lenders and so on. You really have to consider who the lender is and they type of loan you are getting.
 There are several factors. Factors too numerous to mention in this post. Again, this is where your team of real estate professionals will help you. Lean on them to give you the best advice and to help you find the best deal you can get to make yourself some money!

There are laws to help you too. Lenders have to tell you what all their fees will amount to. They can’t just spring it on you and tell you after the fact. They have to be upfront with you.

Points
With loans come points. 1 point equals 1 percent of the loan. This is how lenders can make money off you. They have to or they can’t stay in business. This is their fee to ensure they will make some money in the deal. A $300k loan will amount to $3,000 in points fees. You can try and negotiate the point fees if you are in the position to do so. Rarely do they have these numbers fixed and non-negotiable.


Locating a lender
When you are looking for a lender there are a few main places to find them. You have the government, banks, and other private lenders.


The Federal Housing Administration (FHA)
I have mentioned the FHA before. Lots of people, including property investors use the FHA to try and get a lower interest, lower down payment loan. The FHA don’t give you the money, they are basically the insurers of the loan. The banks and private lenders give you the money, the FHA insures it.

As I have mentioned before. Those interested in buying their first home usually try and go with an FHA loan. The interest rates and down payments are lower than a standard loan.

The down payment required is just 3% which is great for young couples looking for their first home, or the beginning real estate investor looking to get his feet wet.

This is all great, but remember as an investor you actually have to live in the home for at least a year. The FHA requires that. I don’t know of anyone that was actually checked on to see if they are in the house long enough to meet the requirements, but you never know when the might check.

I believe the FHA does have housing requirements before you can qualify for the loan. The potential investment property must meet their guidelines and must pass their “tests” via appraisals. If it passes they will give the green light.

VA loans
I have also talked about VA loans before. These are similar to the FHA loans. The difference is that you must be a veteran of the armed forces to qualify. The VA does the same thing as the FHA. They guarantee the loans

The big difference between the two is that they can be made with no down payment. They also get good rates and they don’t have insurance to pay on their mortgages.


First time buyer
There used to be a lot of programs like this. With the fall of the various mortgage lenders, I don’t know if they are as prevalent today. Most of these programs are similar to the 2 mentioned above. The terms are good and the down payments are lower. I do believe you also must live in the property for awhile in order to meet the requirements of the loan.

Conventional loans
You can get conventional loans at any bank or financial institution. There for a few months it was kind of difficult to get a loan, especially if you are a real estate investor. Most banks would require large down payments to feel safe in lending the money. The type of loan you get will be based on what type of investment property you are trying to acquire. If it is a duplex or single family home, you can get your normal residential loan. If you are trying to buy several units at once, like a small group of apartments, then you would apply for a commercial type loan. I want to say it is more than 4 units. I will have to check on that for you.

I believe that it is easier to get a residential loan compared to the bigger commercial loans. Not all banks will lend huge sums of money to an investor. There are tons of options with residential loans too. They are too numerous for me to mention. I would suggest stopping by your bank and talking to someone just to see everything that is offered.

A quick reminder that if you pay less than 20% down have to pay private mortgage insurance (PMI). This is paid so that the lender won’t lose a lot of money on the loan if the property goes into foreclosure.


How do you qualify for these loans?
The biggest factor is your credit score or your FICO score. If you have bad credit, it will be difficult for you to get a good rate on a loan. If the credit score is really low, you may not be able to get a loan, period.  Lenders take a look at your score from all 3 credit agencies.

How do you get a good FICO score?
Well keep you credit in check. Don’t have too many open lines of credit. Have lines of credit that have been open for a long time. Few, if any, delinquencies are also factors in your FICO score. I have had lenders tell me that too many inquiries for your credit reports will have an effect on your FICO score.

Debt to income ratio
You also need to look at your debt to income ratio. Basically this is just your income divided by all of your debt. It is obvious that you want to have more than enough income to cover all of your debts and then some. If not, the chances if you getting a loan for your potential investment property is slim.

The key with all of this is to try and get your credit scores up as high as you can….and keep them there. It can be tough at times, especially if you are carrying a lot of debt, but you can get there. This will make a big difference in your bottom line.

Getting commercial loans
If you are making good money in real estate investing, eventually you may want to tackle bigger property investments. You may take a shot at buying apartment complexes or multiple duplexes. If you are going to try this you will have to get a commercial loan. I believe the down payments are larger than conventional loans. Probably because of the large sums of money the lenders will be handing you. Usually you won’t find a beginning real estate investor going after these just because they don’t have the money available to make the big down payments.
From what I recall, you will need to go into more detail with your cash flow to get the property. Lenders need to see a higher cash flow to feel comfortable giving you the money for the investment property. These loans usually take a while to finalize due to all the processes that need to be completed. Lenders will do extensive appraisals also to ensure their money will be going into a good investment. They need to make money too!

Other mortgages
You have even more types of mortgages to choose from. You have fixed rate and adjustable rate mortgages or ARMs. Generally fixed rate mortgages are the way to go for most people. ARMs have fallen out of favor in recent years.  Real estate investors have to look at things differently. Sometimes the fixed rate mortgages can be costly for an investor. The rates, especially for multiple units, can be higher. Adjustable rates may offer the investor more flexibility. You have to do your research on what type of loan would fit you best.

Don’t be afraid to shop around for a lender. Also feel free to negotiate with them. If you find a lender that is giving you a better deal, bring it up to other lenders as you shop around to see if you can get an even better deal. If they want your business bad enough, they will work with you.

Assumable loans
I should mention assumable loans. Assumable loans are simply loans that already exist on a property and can be take over by someone else. If you find a house you want to flip, and the owner has a current mortgage on the investment property that is an assumable loan, you can assume the payments on the current loan instead of trying to find lenders for a new loan. The seller will be happy to tell if you if the loan they have is assumable. If they don’t your real estate agent can find out for you.


Private lending or owner financing
Many investors like to get their financing through private lenders. Owner financing can be a great way to go if you are having trouble finding traditional financing from banks. You don’t have to worry about the various fees that you would have to pay with traditional lenders. Oftentimes you can negotiate great terms that can help you improve your cash flow and make you more money. You can even negotiate the down payment you would be making. That is what’s great about the owner financing option. It can actually be tailored to the needs of both the current owner and the real estate investor. You can be really creative with this type of financing. There is no limit to what you and the owner of the property can do. This flexibility is great for investors.


Hard money
What is a hard money loan? Basically a hard money loan is when a third person or party makes the loan on an investment property, or any property for that matter. When investors can’t get financing for an investment project because of bad credit, or damaged property, they may have to try and get financing through hard lenders. Hard money loans are more expensive for the investor, but if you have done the proper research on your property and have enough cash flow to cover it, then by all means, go for it.

This is just an overview of the types of lending that is available or real estate investors. There is something for everyone, regardless of the situation. Just like everything else, do your research and try and make the best decision possible. Remember, the bottom line is that you want to make money, if the rates are higher than you wanted, but you are making money, then that is fine. You are still making money after all.