Mortgages & Creative Financing

2 Solid Reasons to Get Pre-Approved BEFORE You Buy Your Investment Property

Expertise: Mortgages & Creative Financing
12 Articles Written

Let's face it — there are a million and one ways to invest in real estate. The method that I'd like to focus on today is the strategy where you are purchasing a property with your own money with the intention of renting it out. It's not everyone's strategy, but it is a traditional way to "get in the game," if you will.

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In this instance, you're going to be putting a 25% down payment on the property (let's say it's a single family residence for the sake of argument), and you're going to acquire a property that's already listed for sale on the local MLS by another real estate broker.

Do you remember when you were growing up and going to school? Like all the way back in first or second grade? You and your friends probably debated the question, “Which came first, the chicken or the egg?” Maybe you even debated it with your teacher or your parents… who knows!

In real estate investment, that question translates to, "Which comes first, a lender or a real estate agent?"

I'm pretty sure that this is debated constantly in the residential real estate arena because that's where my expertise lies. (I'm not sure about commercial real estate, but I would assume similar results!)

It's a very healthy debate, and both agents and lenders will definitely have their sides of the story as to which person you should contact first. Should you contact the real estate agent and have them find you a lender? Or should you find a lender and have them find you a real estate agent?

Related: Confessions of an Ex-Banker: How to Get Your Next Loan Approved, Guaranteed.

My opinion is slightly biased in this instance, but let me give you my perspective, and you tell me if you agree with it.

I think you should contact and be in touch with a lender before you even go out and find a real estate agent.

Here’s Why

The first most obvious reason to go to a lender before you go to a Realtor is to get pre-approved. In today's sophisticated real estate market, it makes absolutely no sense to go out looking for property without knowing what your maximum purchase price is. A good lender will be able to customize your pre-approval letter to each and every offer you submit on a property. Remember, a pre-approval is expected in today’s market.

Besides, most top real estate agents are too busy to waste time driving around and showing property with “tire kickers.” You know, those folks that are just window shopping? The top agents focus on money-generating activities because they are the ones doing the deals and getting it done. Imagine how much time a good agent would waste if you didn’t get pre-approved to buy a property because you had a derogatory credit or something like that? The answer is: a lot!

The second reason is that an established lender will be able to point you in the direction of a good real estate agent. (The agents that are actually out doing deals constantly.) Think about this reason for a second. When a lender provides you a referral for a real estate agent, it’s usually someone they know, like, and trust. And quite honestly, it’s probably someone they’ve conducted business with in the past. They know how the other person works, what to expect as far as communication, and just downright have a good gauge as to what to expect from the referred real estate agent.

Finding a Good Agent

I can tell you from personal experience that when a client wants to use their friend who's a Realtor, the results aren't always up to par. It really doesn't take much to get your real estate license these days. That's not to say that it hasn't worked well in the past because it has. It's just saying that the percentage of success is smaller.

Related: Pre-Approved Short Sales: Are They Real?

To be fair to the agents out there, good business goes both ways. I've seen great real estate agents go with a friend or family member who's a "mortgage broker on the side," and the results have been just as disastrous. I know it's hard sometimes to trust someone you've never met and their professional judgment, but going with a good lender who can refer you to a good agent is generally the way to go.

There you have it. Two solid reasons why you should get pre-approved by a lender before you actually go out and find yourself a real estate agent.

What about you? What other reasons can you think of as to why you’d want to find a lender before anything else happens? Or are you on the other side of the coin?

Submit your comments below.

Jeff Trevarthen is a mortgage advisor at CrossCountry Mortgage and lends in all 50 states. With 16+ years in real estate finance, Jeff is an expert at coming up with creative loan solutions for all...
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    Stephen S. Wholesaler from Holiday, Florida
    Replied over 5 years ago
    Whatever works for you is fine by me. But I would prefer contacting the Realtor first. A good one will be able to mastermind the deal; have a group of agreeable lenders to go to and the ability to quickly find suitable property to the buyers specifications. The Realtor is the deal’s king-pin to me – everything depends on their skills and diligence – everyone else are their helpers. With Realtors real estate is ‘what they do’ and ‘how they think’ – this isn’t neccessarily true of bankers.
    Jeff Trevarthen Lender from San Jose, CA
    Replied over 5 years ago
    Great point Stephen. Thanks for commenting.
    Michael Williams Investor from Palmetto, Georgia
    Replied over 5 years ago
    hI Jeff Question: I am a newbie and am still in my, ” make 100 offers to get 10 deals mode”, and I have a friend that is pre-approved to get a $200,000 home loan and want’s to start investing with me. I bring hustle, marketing, some knowdgledge, and a little know how (and who to contact for the information and know how) and he brings the funding. In your opinion what is the best way to leverage his position. Question 2: I think I already know the answer to this but what is the differance in pre-Qualified and pre-approved?
    Jeff Trevarthen Lender from San Jose, CA
    Replied over 5 years ago
    Mark has the right idea. A pre-qualification is a quick due diligence by the loan officer to see if you meet the typical guidelines for getting a mortgage loan. A pre-approval is actually submitting it to a lender or in most cases an automated underwriting system like “Desktop Underwriter” or “Loan Prospector” for Fannie and Freddie respectively.
    Mark F. Investor from Orange County, CA
    Replied over 5 years ago
    Prequalified means the loan officer took a relatively cursory look at your income, credit, and assets and decided that it appears you’re qualified. Preapproved means the file’s actually gone to an underwriter and been formally approved. Obviously, the latter is the better one to have if a seller wants to make sure you can close.
    Replied over 5 years ago
    I would go to the lender first to find out if you can get financing and how much you can get before wasting you realtors time looking at properties you can’t qualify for. It is surprising how many people think they have credit without ever establishing a credit rating… Reply Report comment
    Replied over 5 years ago
    I would go to the lender first to find out if you can get financing and how much you can get before wasting you realtors time looking at properties you can’t qualify for. It is surprising how many people think they have credit without ever establishing a credit rating…
    Jeff Trevarthen Lender from San Jose, CA
    Replied over 5 years ago
    It’s true! A loan officer can help you get what’s needed to actually establish credit in the first place or give suggestions on how to clean up the credit. Thank you for commenting.
    Gordon Eisenberg
    Replied over 5 years ago
    Great article Jeff. I am currently doing a rent to own for my tenant with an agreement to deduct all the rental payments & security deposits off the sale price of my home. The house will be sold to my tenant for $119,000 “As Is”. My tenant must be able to secure a mortgage before the end of August or else will have to move out and find another place thus forfeiting all the rental payments paid to me. My tenant loves my home and wants to take advantage of this opportunity. I like it because I will forego the 6% commission and will not be paying any closing costs or any other fees which could come up in the process. My tenant makes $44,000 per year, but does not have any credit established. I have collected approximately $5000 from my tenant so far which would reduce the loan to $114,000. Based on the $995 rent per month I charge and doing some research basing a 30 year loan at 5% (which is probably high with today’s interest rates) my tenant will pay $611.98 which is a savings of $383.02 per month. Factoring in property taxes and homeowners insurance of $2000 per year or $166.67 per month my tenant will pay $778.65 giving my tenant a savings of $216.35. This savings will be greater reflective on the loan being under 5%. I just spoke to a credit union today who mentioned they have programs of 3.85% for 30 year loans. What is your advise to get my tenant approved for a mortgage?
    Jeff Trevarthen Lender from San Jose, CA
    Replied over 5 years ago
    Your tennant should go talk to a mortgage loan officer as soon as possible. They may or may not qualify right now, but if not now, maybe down the road.
    Susan Maneck Investor from Jackson, Mississippi
    Replied over 5 years ago
    Here is a trick for getting a decent credit score very quickly. It will only work, of course, if they don’t have a lot of minuses on their credit score. Your tenants should look for a relative or a friend who already has established credit. (It could even be you.) The tenant should ask them to make him an additional user on their credit card. Mind you, the principal credit card hold would not give the tenant the card, they would lock it away. But the tenant then inherits the credit history on that card. I inadvertently did this with my son. I added his name to a couple of credit cards when he was a teenager and give it to him only when I wanted him to run an errand for me. I checked his credit score just before he graduated from college and found, to my amazement, his credit score was higher than mine!
    Jeff Trevarthen Lender from San Jose, CA
    Replied over 5 years ago
    You’ve got to be careful here Susan. Having a credit card opened with a friend or family member puts the friend or family member at risk because they are now a cosigner on the card. If something happens where you don’t pay your bill or are over you credit limit, both of you will take the ding on your credit report, not just the offender.
    Israel Quintero Flipper/Rehabber from Phoenix, AZ
    Replied over 5 years ago
    Great article I have just starting to build a relationship with my lender and it’s been great results because they know the right people, wish I would have done it sooner.
    Jeff Trevarthen Lender from San Jose, CA
    Replied over 5 years ago
    Keep it up Isreal! The top loan officers that I associate with are really the center of things when you get down to it. The real estate agent will handle the legal stuff regarding buying and selling the property, but the loan officer is often well connected with financial advisors, CPA’s, and even insurance agents to help make sure your mortgage and financial situation is property structured for optimization.
    Sean Williams Real Estate Agent from Louisville, KY
    Replied over 5 years ago
    Always, Always, Always get pre-approved 1st. Especially with interest rates being so low right now most people find out they can afford more home then what they initially anticipated. Also, it gives you better negotiating leverage with the seller if you are pre-approved and the other buyer that is interested or submitting a bid it not! Right now the market in Louisville, KY is at a lack of listing inventory so when a “hot” property comes on the market you better be able to move quickly. Be already pre-approved might just help you seal the deal with the seller!
    Pat L. Real Estate Investor from Bergen County, New Jersey
    Replied over 5 years ago
    Thanks for the article, Jeff. If buying out-of-state real estate, is it preferable to look for pre-approval from an institution within the locality where are you buying? Or, as it is a “pre” approval, does staying local and/or getting financing with a national firm make more sense? Thanks again, Pat
    Isaac Riches Investor from Salt Lake City, Utah
    Replied almost 5 years ago
    Thanks for the insightful article, @Jeff Trevarthen. I’m still at the very beginning of the process, where I’m “paper trading” on properties, so your thoughts on the subject are very timely.