Markfitzpatrick

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Mortgages & Creative Financing

The “3 Cs” Every Lender Examines Before Approving Your Mortgage

The links to third-party products and services on this page are affiliate links, meaning that BiggerPockets may earn a commission (at no additional cost to you) if you click through and make a purchase. If you’re looking to purchase a new home or refinance an existing one, it’s important to understand the basics of qualifying for a mortgage so you can get the best deal possible. It’s not as easy to get a mortgage these days as it used to be, so it’s important to understand the basics of qualifying and take some simple steps ahead of time to “groom” your financial profile. The idea is to position yourself ahead of time to get the best deal you can. Mortgage lenders look at a variety of factors when making a lending decision, but most can be classified into three general categories, credit, capacity, and collateral — or the “3 Cs.” Credit: Do you faithfully repay your debts? Your credit scores are an important factor in mortgage qualifying because they indicate how well you manage debt. Mortgage lenders require a credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) to document your payment histories for mortgages, auto loans, personal loans, credit cards, and any derogatory information such as collections, foreclosures, judgments, charge offs, bankruptcies, liens, etc. Credit scores are considered highly predictive of the risk of lending to you, so lenders give them a lot of weight. The higher your credit scores, the better! Credit scores range from 300 to 850, with most people falling in the mid 600s and above. Scores below 620 are considered bad, and scores above 720 are considered good. Ideally, you want to have all three of your credit scores in the mid 700s or better to get the best mortgage deals. Related: What’s Better for Investors — a 15-Year or 30-Year Mortgage? The following are some of the factors that weigh heavily on your credit scores: Debt payment history: Late payments, particularly on mortgages, can have a big negative impact on your credit scores. Be sure to make all your payments on time. Credit utilization: If you carry credit card balances that are more than 30% to 50% of your credit limit, it can have a big negative impact on your scores even if you’re making your payments on time. Over-utilizing your credit can make you look “maxed out” and is considered a risk factor, which is why your credit scores are downgraded accordingly. Collections or charge offs: Past debts reporting as collections or charge offs can damage your credit scores significantly. If you have some of these in your credit file, be sure to get them resolved as soon as possible. If the debt is with a collection agency, you may be able to negotiate a reduced payoff, but be sure to get the agreement in writing. Bankruptcies and foreclosures: If you’ve had a bankruptcy or foreclosure in the recent past, pretty much the only cure for your credit scores will be time. Fannie Mae and FHA also have waiting periods of two to four years before you will be able to qualify for new mortgage financing. Capacity: Do you have the financial ability to repay the loan? Capacity has to do with your financial ability to repay the home loan. W2 income (you work for somebody) is considered the most stable income because it doesn’t typically vary much from month to month. Self-employed income is considered riskier from a lending standpoint because it can vary widely from month to month and the self-employed borrower is responsible for generating the business that creates the income. If you’re a wage earner, the lender will typically want you to document your income with W2s, pay stubs, and tax returns. If you’re self-employed, you typically won’t have W2s, so you’ll be required to document your income with tax returns. An important component of capacity is your debt-to-income ratio, or DTI. Your DTI is important because it shows what portion of your income is dedicated to debt payoff. The higher your DTI, the tighter your finances are and the riskier it is for the lender to give you a loan. Depending on the loan program, a mortgage underwriter typically won’t want to see a DTI higher than 45% to 50%. In other words, no more than 45% to 50% of your qualifying income should be going to debt service for mortgages, auto loans, credit cards, installment loans, etc. Related: Applying for a Mortgage Loan? Do These 3 Things Ahead of Time. Collateral: What is the security for the loan? Because the property you’re financing will serve as collateral for the mortgage, the lender will be concerned with the value, type, quality, and condition of the property. The value of your property is one of the most important factors because it allows the lender measure risk with a ratio called loan-to-value, or LTV. LTV is essentially the percentage of the value of the property that you are borrowing. For instance, if your property is worth $100,000 and you are borrowing $80,000, the loan-to-value is 80%. Lower LTV loans are less risky than higher LTV loans because the lender isn’t as likely to incur a loss in the event the borrower stops making payments. It’s because of this that lower LTV loans typically have better pricing and lower interest rates. Most of the time, you’ll be required to get a full appraisal to verify the value and condition of your property, but there are some refinance scenarios where a limited appraisal or no appraisal at all is needed. 3 Steps to Take Before Applying for a Mortgage 1. Check your credit. If you plan to purchase or refinance in the near future, it’s important to first check your credit to make sure there aren’t any issues that need to be cleared up ahead of time. Again, credit scores are an important factor when you finance a home, so you want to make sure they are as high as possible so you can get the best financing deal possible. 2. Pay off outstanding debt. If you have a lot of debt, I highly recommend paying off as much as you can before you apply for a home loan. Doing so will lower your debt-to-income ratio, make qualifying easier, possibly raising your credit score, and maybe resulting in better financing terms. Having a lower debt-to-income ratio could also position you to take advantage of shorter-term loan programs that offer lower interest rates and faster payoffs — which can put a lot of money back into your pocket over the life of the loan. 3. Take care of any needed repairs. If you’re refinancing, it’s important that your home appraise for as high as possible. If your home has some minor cosmetic issues or repairs that need to be done, take care of them before the appraiser comes out. Having your home in good condition could help you get a higher appraised value, which could result in better financing terms. Preparing for Your Next Mortgage is Well Worth the Effort Unless you know you have a pristine financial profile, low debt, and high credit scores, I highly recommend doing some legwork ahead of time to make sure you put your best foot forward for your next mortgage loan. It’s common in the mortgage industry for borrowers to get surprised with unexpected hangups, such as derogatory credit items or unexpectedly low credit scores. Understanding how lenders think and preparing your financial profile before you start applying for loans can help you get a much better deal and make the loan process go much more smoothly. What other tips would you add to this list? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

Should I Refinance My Mortgage Even if It Only Saves Me $50/Month?

Does it make sense to refinance your mortgage if you are only saving a small amount a month, like $50? The best way to answer this question is with an answer to another question. Answer this question first: How long do you plan on keeping your property? It’s best to try and answer this question because the answer will have everything to do with whether or not refinancing with a small monthly savings makes sense for you. Many people refinance to lower their payment, which helps their overall monthly obligations. Others look to refinance in order to pay less interest over the life of the mortgage, since even a small reduction to the interest rate can mean savings tens of thousands over the long-term. Related: 3 Critical Keys to a Successful Refinance (for the BRRRR Strategy!) Let’s Look at an Example If you are in a position where you don’t need the monthly savings to help your monthly obligations, then you should apply that savings to your new mortgage. If you apply the monthly savings to your new mortgage principal balance, it has a tremendous benefit to your term. Let’s use the example of a 30-year mortgage with a balance of $150,000 that was taken out about a year ago, at an interest rate of 4%. The new mortgage rate would go down to 3.5% and reduce the monthly payment $77.81. Normally, a $77.81 monthly savings wouldn’t make sense to most people, but the trick is to apply that to your new payment. Doing this will reduce the term just over 5 years! Yes, that is like turning your mortgage into a 25-year term. Most people don’t realize that they should look at refinancing, even if the monthly savings is very small. Applying even the smallest amount to your mortgage will reduce the term and pay it off earlier. Related: Should You Refinance Your Mortgage? Consider This. Conclusion Does it make sense to refinance your mortgage, even if you are only lowering your payment a small amount? Absolutely! If you plan on keeping the property for a long time, just applying a small savings to the new mortgage payment will reduce the term, pay less interest, pay off the mortgage sooner, and build equity faster. Would you refinance your mortgage in this case? Let me know your thoughts with a comment! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

The Homestyle Renovation Mortgage: How to Use it to Fund Fixer-Upper Houses

The Fannie Mae HomeStyle Renovation mortgage program is a popular choice with home buyers. This program is different than the Fannie Mae HomePath Loan and is a convenient and economical way to make moderate renovations or repairs to a property. HomeStyle Renovation Mortgage: What is It? The HomeStyle Renovation mortgage is a single-close loan that lets you buy the home that may be in need of repairs. It is also possible to refinance the mortgage on an existing home and include the funds needed for repairs into the new mortgage. The loan amount for the HomeStyle Renovation mortgage is based on the “as-completed” value of the home rather than what the home is currently worth. A perk for this type of loan is that you do not have to occupy the property in order to qualify for this financing. In other words, you may use it for vacation of investment properties. Related: Mortgage Interest Rates Are Rising. Will They Crush Your Rental Portfolio? HomeStyle Renovation Loan Programs When getting a HomeStyle Renovation mortgage, it is possible to get a 15 or 30-year fixed rate, as well as certain adjustable rates. Standard mortgage insurance pricing applies to all HomeStyle Renovation loans — but the MI will be required to cover the as-completed value, not the as-is value of the property. Second Mortgages Allowed With the HomeStyle Renovation loan program, it is possible to get a second mortgage, such as a Community Seconds loan, that goes up to 105% of the value of the property. It is also possible to get a non-Community Seconds type of second mortgage, although there will be an increased fee when done.  What Improvements Are Allowed? There are very few limits on the type of improvements that can be made with the HomeStyle Renovation loan. The only requirements are that the improvements must permanently be attached to the property and the improvements must add value to the property. Some simple examples of improvements that qualify include in-ground pools, decks, landscaping, and fences. Related: How I Bought a Fixer-Upper Fourplex for $1 Down: A BRRRR Case Study HomeStyle Renovation Contractor Requirements The HomeStyle Renovation loan program allows for both a DIY option and the option to hire a contractor to perform the work. If you hire a contractor to perform the work, they must be licensed and registered. The contractor will submit all plans and specs to you and the lender for approval, as well as to the appraiser, who can then help determine the as-completed value of the home. There are special rules for DIY financing — so if you are interested in doing the work yourself, be sure to speak with your loan officer about the rules. Have questions about the Fannie Mae HomeStyle Renovation loan program? Check out the official website here. Have you used this loan program before? Any questions? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

9 Red Flags Underwriters Notice When You Apply for an FHA Loan for Your Flip

Interested in getting an FHA loan for a home that may be a “flip” home? Be ready for the underwriter reviewing your file to scrutinize the property more closely. Related: Why You Should Consider Flipping Houses for Profit (Instead of Investing for Cash Flow) FHA Loans and Property Flipping: What Underwriters Look For Although each lender has a different checklist that most underwriters know like the back of their hand, here are a few simple things that you can expect an underwriter to look at before approving your loan. Red flags may be raised if: Appraisal lacks sufficient analysis of all pertinent offerings or listings for the subject property, the contract of sale for the subject property, and the sales/transfer or listing history of the subject property and comparable sales. Comparable sales or listings used in the appraisal report are properties involving the same property seller and/or real estate broker as the subject property in an attempt to create an artificially inflated market. The property seller or any other party claims that the property was significantly renovated since being acquired by the seller, but the claimed renovations were not actually performed or cannot be sufficiently documented. Improper transactions often use inflated appraisals that falsely claim to be justified renovations. There appears to be “unusually large profits” for the property’s market area without appraisals that provide a reasonable explanation and justification for the large increase in property value. The property was acquired by the property seller as a part of a distress sale in which the property seller or a related party was a party to an option contract to purchase the property from the prior for an option price substantially below actual full market value. The option contract and the true market value of the property are typically not fully disclosed to the prior lender. The property seller or an agent representing the seller arranges or assists in arranging financing, settlement services or the appraisal, including some cases where the property buyer and seller are represented by the same real estate agent or broker (dual agency). Some improper transactions result from collusion between the seller, real estate broker, lender/loan officer, and appraiser to defraud an unwitting buyer. The contract seller is not the current owner of record. There are undisclosed “simultaneous,” “double,” or “back to back” closings or escrows. There is a new purchase transaction with undisclosed secondary financing, in which part of the purchase price is refunded to the buyer or is quickly followed by a cash-out refinance. Such payments may or may not be reflected on the HUD-1 Settlement Statement. Related: 6 Clever Ways for House Flippers to Save Big on Remodeling Supplies There are other red flags that underwriters will look for when evaluating financing for a new home loan, but these are a few that you can expect virtually lender to abide by. Have more questions about financing flipped properties? Be sure to ask your loan officer for help — they should be very familiar with these situations. Is there anything you’d add to this list? Be sure to leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

Should You Refinance Your Mortgage? Consider This.

Most people have heard the old rule of thumb that it takes a 1% drop in your interest rate before a mortgage refinance is the smart play. This rule has been passed on by countless personal finance experts over the years. I don’t want to call this advice dumb. Let’s just call it simplistic. Maybe it caught on because it’s easy to remember. Or maybe it’s just so simple that people tend to pass it on as sage advice. It’s not. In fact, there are times when a refinance makes perfect sense even if the rate is going up, not down. For example, if someone has an adjustable rate mortgage that carries long-term risk, it might make sense to accept a higher rate on a new loan. Some people refinance from a 15-year to a 30-year term due to changes in income and the resulting cash flow crunch. Other people might need to refinance due to a divorce situation or to get a non-occupant co-borrower off the mortgage. You get the picture. Should I Refinance My Mortgage? Those are specific instances, all with legitimate reasons to accept a mortgage with a higher interest rate than the current mortgage carries. But what if you are simply trying to assess whether or not to refinance based purely on the economic benefit derived from a lower rate? Here are the things you need to know to make a sound choice. Your personal plans for the property The current rate on your mortgage The new rate on the proposed mortgage The amount of the new mortgage The total net closing costs Let’s start from the top. Related: Mortgage Interest Rates Are Rising. Will They Crush Your Rental Portfolio? Your Personal Plans for the Property How long are you going to keep the property? Do you have plans to sell it within a few years or less? Will there be a reason to do another refinance during a similar time period? If the answer to either of these questions is yes, it may make more sense to either just hold on to the mortgage you already have or to consider an adjustable rate mortgage, which can result in a much lower rate than a fixed rate does. If you are going to dump the property within a year, you will have a hard time recouping any closing costs you incurred in the refinance. If you are not sure, however, you may want to hedge your bets by planning for the long term just in case. The Current Rate on your Mortgage Versus the Proposed New Rate These figures will help you determine how much money you can potentially save through a refinance to a lower rate. Forget about that 1% figure for now. I will show you how to calculate your own scenario. The Amount of the New Mortgage You will need this number in order to calculate the monthly savings in interest from the switch to a lower rate. Here is an easy formula: (Old Rate – New Rate) /12 x Amount Owed / 100 = Monthly Savings Here is an example. Let’s say you are refinancing a $250,000 mortgage from 5.5% to 4.75%. 5.5 – 4.75 = .75 .75 / 12 = .0625 .0625 x $250,000 = 15,625 15,625 / 100 = 156.25 Your monthly interest savings would be $156.25 on this loan. The Total Net Closing Costs When you have the total net closing costs, you can then compare these costs to the monthly interest savings from the new loan and get an idea how long it would take to pay off the costs of the loan. Please note that I said net closing costs. Here is a tip for you loan shoppers. Don’t ask your loan officer “how many points” there are on the loan or what the origination is. That is so 2006. I guarantee that you will not get the same answer out of different loan officers for the exact same quote. This is because the rules have changed. You need to get your mind off points and origination fees and on to net closing costs. There are a lot of things that go into closing costs, and some of the points are actually credited back to you in the transaction. The only thing that matters is what the actual costs are to you after all the calculations have been completed. You can end up with a no-cost loan that has three origination points in this new world. If you focus your attention on the wrong things, you may end up paying more. The Loan Estimate is a form that provides you about some important details for the loan you’ve requested. This form will provide you several pieces of information, including the estimated interest rate, monthly payment, and total closing costs for the loan. It will also give insight into the estimated costs of taxes and insurance, as well as how the interest rate and payments may change in the future. It may additionally let you know about other special features of the loan, like penalties for paying off the loan early or increases to the loan balance even with on-time payments. Related: TRID Explained: What You Need to Know About the New Closing Disclosures To further see what the loan will cost you, you may want to check out a closing cost calculator such as this one. Going back to our example above, let’s say the net closing cost is $3,500 for this loan. We have already calculated our savings from this new loan to be $156.25 per month. If you divide the closing costs by the monthly savings, you will have a figure that represents the number of months it takes to pay off the cost. That is your break-even point on this loan. $3,500/$156.25 = 22.4 months I am sure that it is now clear to you why your plans for the home are an important part of your decision. In this scenario, if you plan on keeping this loan for two years or more, it probably makes sense. If you spend enough time going over scenarios, you will soon find that the higher the loan amount, the less of an interest rate change is needed to make the numbers work. After all, a mortgage is all about the numbers. Happy crunching. Have you recently refinanced? Any questions about this process? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

8 Important Credit Report Dos And Don’ts When Qualifying for a Home Loan

The links to third-party products and services on this page are affiliate links, meaning that BiggerPockets may earn a commission (at no additional cost to you) if you click through and make a purchase. It’s no secret that your credit report and FICO scores play a big part when it comes to qualifying for a mortgage loan. Your credit scores, payment histories, and amount of outstanding credit give lenders insight into how well you manage your finances, how extended you are financially, and how much risk there is to lend to you. The following are some important “dos” and “don’ts” related to credit reports to help you get the best possible terms on your next home loan. 8 Credit Report Dos and Don’ts When Qualifying for a Home Loan Don’t let people run your credit report during the loan process. Lenders sometimes need to pull an updated credit report near the end of the loan process. If you’ve numerous inquiries since the initial credit report was run by your lender, it could pull down your scores and result in less favorable loan terms or loan denial. When you’re in the process of getting a new mortgage, don’t allow anybody to run your credit. Don’t take on new debts. Lenders often will have you sign a document attesting that you haven’t acquired any new debts during the process of getting the new mortgage. If they discover that you have, they’ll include it in your debt-to-income ratio (DTI). If your DTI was already close to the maximum allowed by the lending guidelines, the added debt could result in a loan denial. Don’t cosign for anybody. If the lender discovers a newly cosigned debt, they’ll include it in your debt-to-income ratio even if somebody else is going to be making the payments. If your DTI is tight already, this new debt could result in loan denial. If you plan to cosign for somebody, make sure to do it after your new loan is funded. Do continue to make all payments on time. Make sure to continue to make all debt payments (including your mortgage) on time as you move through the loan process. As I mentioned before, lenders often will update your credit report and/or mortgage rating near the end of the loan process, and if you’ve missed a payment on anything, it could jeopardize the loan. Related: Why Boosting Your Credit Score to “Excellent” Can Make You a Better Investor Do unlock any credit report freezes before beginning the loan process. Credit freezes can take some time to clear, so if you have them on your credit report, make sure to remove them from your report for all three of the major credit bureaus (TransUnion, Equifax, and Experian) ahead of time. If you begin the loan process before clearing the freezes, it can delay the processing of your loan and cause you to incur additional fees for rate lock extensions. Do remove any consumer statements that could cause the lender to question your qualifications. People often add consumer statements to their credit reports to dispute the reported information. If you’ve added a consumer statement to your credit report, I recommend getting it removed — particularly if it’s related to your mortgage — before you begin the loan process. If an underwriter sees it, they may request additional information and/or documentation that otherwise could have been avoided. Consumer statements can take some time to remove, so it’s best to do it well in advance of applying for the loan. Do clear up any derogatory credit items before beginning the loan process. Derogatory items such as collections, judgments, and charge-offs can negatively impact your credit scores and prevent you from getting the best deal possible — or getting a loan at all. Related: Can You Invest in Real Estate With Bad Credit? (Maybe… Here Are 5 Ways to Do It) Before you begin shopping for a loan, make sure to pull a copy of your credit report from all three credit bureaus and clear up any derogatory items reported. Yes, it can be hassle to do this, but it could save you thousands of dollars in interest over the life of your new home loan or make the difference between qualifying and getting denied. Do make sure home equity lines-of-credit are reporting as mortgages. I often see home equity lines (HELOCs) reported as revolving accounts (like credit cards) instead of mortgages on credit reports. If your HELOC is being reported as a revolving account and the balance is over 50% of the available limit, your credit scores could take a hit. The credit bureaus rate your scores down if you have balances on revolving accounts over 50% of the limit because you appear to be “maxed out.” If your HELOC is reporting as a revolving account (often designated with an “R” on the credit report), be sure to call your lender ahead of time and get it corrected. Investors: Any items you’d add to this list that have helped you qualify for loans? Let me know with a comment!  Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! 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Mortgages & Creative Financing

Applying for a Mortgage Loan? Do These 3 Things Ahead of Time.

There’s no question that applying for a home loan can be a paperwork intensive process. If you’re in the market to refinance or purchase a 1-4 unit residential property in the near future, the following are some good things to do ahead of time to help streamline and speed up the loan application process. 1. Run your credit. Credit plays a big role in qualifying for a home loan, so it’s important to check your credit report before you apply to make sure there aren’t any mistakes or inaccuracies that could hinder your chances of getting the loan. You can obtain a copy of your credit report for free once a year from AnnualCreditReport.com. 2. Pull together a “real estate owned” spreadsheet. If you own multiple properties, it will greatly streamline the loan application process if you pull together a spreadsheet ahead of time with the following information about the various properties you own: Property address Type of property (single-family, multi-unit, condo, etc.) Disposition (rented, pending sale, or sold already) Loan balance Estimated market value Gross monthly rent Principal and interest mortgage payment Annual taxes and insurance Monthly mortgage insurance or HOA payment if applicable Loan number and lender (for matching it up to your credit report) Related: Investment Property Loans: The Ultimate Guide to Funding Your Deals This information is required on the standard 1003 loan application, and your loan consultant will need to match properties to loans on your credit report. Putting this together ahead of time will save you and your loan consultant time and will help streamline the application process. 3. Gather up qualifying documentation. Yes, there is a lot of paperwork that goes into a home loan. And yes, it can be kind of a pain to pull it all together. That’s why I recommend assembling it ahead of time and keeping it in a file you can grab quickly if you’re going to be applying for a loan in the near future. Related: FHA Guidelines: How to Qualify for a 3.5% Down Loan The following is what a lender will generally need from you to get the ball rolling on a new loan: Full tax returns for the last two years for all borrowers Last two years W2s (if applicable) Most recent month’s worth of pay stubs (if applicable) Last two months’ worth of statements for asset accounts (if the loan you’re applying for is for an investment property, the lender will need to document adequate reserves) Recent mortgage statement for all properties you own (to verify the payment amounts) First page of homeowner’s insurance policy (if a refinance) or contact information for the insurance company (if a purchase) Purchase agreement and real estate agent contact information (if a purchase) Additional documentation may be requested depending on your situation and qualifications, but this is typically the minimum needed. If your tax returns are complex and you don’t have them pulled together in one place already, a good way to save yourself time is to have your loan consultant work directly with your accountant to get the needed documentation. Any other documents you’d add to this list? Let me know with a comment! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

Recently Self-Employed? What You Should Know Before Applying for a New Mortgage

In this day and age, many people are opting to start their own businesses. If you’ve recently moved from W2 status to self-employed and are planning to take advantage of today’s low mortgage interest rates, it’s important to understand some of the lending guidelines that may apply to your situation. Today’s mortgage lending marketplace is dominated by Fannie Mae and FHA-insured financing, and both will have roughly the same self-employment qualification requirements. First, underwriters will want to see that you have a stable two-year history in the same line of work. It’s not typically a problem if you’ve changed from a W2 job into your own business during the last two years as long as you’ve stayed in the same or a closely related field. If you leave a W2 job and start a business in a completely unrelated field, you’ll likely need to wait until you’ve had your business for at least two years before you’ll be able to use your self-employment income to qualify. Related: Will My Flips Qualify for Long-Term Capital Gains or Will I Need to Pay Self-Employment Tax? Qualifying for a Mortgage With One Year of Self-Employment Under new regulations, in certain instances, it may be possible to qualify for a mortgage with only one year of experience running your own business, as long as you’re able to show a high level of stability and cash flow for the business seems sound. For case studies illustrating when approval may be made for a business owner after one year of working, click here. In general, Loan Prospector, Freddie Mac’s software, is more likely than Fannie Mae to approval one-year requests, so consider finding a lender who will use this system. Supplemental Self-Employment Income If you’ve started a side business to supplement your existing W2 income — even if it’s in the same line of work as your job — you won’t be able to use the income to qualify until you’ve had the business for at least two years. Again, underwriters want to see a two-year track record of earning the income before they’ll allow you to use it to qualify. However, new regulations have made it a bit easier on borrowers by negating the need for verification of self-employment income if you can qualify for the loan using the income from your “salaried” job alone. Related: Conventional Mortgage Loans: The Basics on How They Work Income Verification The second part of the equation is verifying income. Self-employed borrowers should expect to be asked for full corporate and personal tax returns (where applicable) — which means you’ll need to have been in business for at least a full tax year. The income used to qualify will be the net income after all deductions, not the pretax figure. Underwriters can often add back some deductions (such as depreciation, depletion, and some other expenses), but if you write off a lot on your taxes, it could be difficult to qualify. Qualifying with self-employment income has become easier in the past few years. If you have good credit, equity in your home, and can show enough net income on your tax returns, you should be able to take advantage of today’s low rates. Have you successfully qualified for a mortgage using self-employment income? Any tips or questions? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Real Estate Investing Basics

What is a Debt-to-Income Ratio (DTI) and How is it Calculated?

Mortgage lending underwriting criteria falls into three general categories — credit, collateral, and capacity. Credit has to do with how well you pay your bills (as evidenced by a credit report and score), collateral has to do with the type and quality of the property you’re using to secure the loan, and capacity has to do with your financial ability to repay the loan. Your debt-to-income ratio falls into the latter category — capacity — and is considered an important factor in determining your financial ability to pay back your mortgage. What is a Debt-to-Income Ratio? Your debt-to-income ratio, or DTI, expresses in percentage form how much of your gross monthly income is spent on servicing liabilities such as auto loans, credit cards, mortgage payments (including homeowners insurance, property taxes, mortgage insurance, and HOA fees), rent, credit lines, etc. Living expenses such as cable, gas, electricity, groceries, etc., are not considered part of your DTI. If your DTI is high, it means you are highly leveraged and have tight finances, which, naturally, is considered risky from a lending standpoint. On the other hand, if your DTI is low, the lender knows you have plenty of room in your monthly budget to absorb unexpected expenses and still make your mortgage payments. Related: How I Went From $100,000 in Debt With No Job to Debt-Free in 5 Years Both Fannie and FHA allow for higher DTIs under limited circumstances, but there are standard guidelines. Calculating Your Debt-to-Income Ratio If you’re in the market for a home loan, it doesn’t hurt to calculate your debt-to-income ratio ahead of time so you know where you stand. To do this, simply tally up your total monthly debt obligations and divide by your gross monthly income, as follows: Either obtain a recent copy of your credit report or gather up your most recent statements for all your debt obligations. Note that only debt obligations are included in your DTI, not utility bills, phone, cable, etc. Tally up your payments for all debts, including auto loans, credit cards (use just the minimum payment), credit lines, student loans, and any other debt obligations that you have. If you have an American Express credit card, use 5% of the outstanding balance if the minimum payment is showing as the full balance on your credit report. Note that underwriters will include any child support payments in your DTI. Add your rent or home mortgage payment, including monthly property taxes, homeowner’s insurance, homeowner’s association (HOA) fees, and private mortgage insurance (PMI) premiums. Divide your total debt obligation figure by your gross monthly income (assuming you’re a W2 wage earner), then multiply by 100 to get a percentage. Related: Why Boosting Your Credit Score to “Excellent” Can Make You a Better Investor If you’re self-employed, I recommend working with your loan agent to determine your qualifying DTI. Self-employed income verification is more complicated and there’s really no way to determine your qualifying income definitively without tax returns. Keep in mind that when you’re qualifying for a home loan, your qualifying DTI will be based on what your expenses will be after the loan is complete. In other words, if you’re currently renting and are taking on a house payment higher than what you’re paying for rent, your qualifying DTI will be based on the new mortgage payment. If you’re refinancing and consolidating debts, your qualifying DTI will reflect your expenses after the various debts are consolidated. Any questions about calculating DTI? Any tips you’d add? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

5 Investment Property Finance Tips to Help You Get the Financing You Need

There’s no question that mortgage financing is a big part of your business if you’re a real estate investor. Because of this, it’s important to maintain your financial profile so that you can easily qualify for financing and take advantage of the best terms you can. As a mortgage consultant and real estate investor, there are some common stumbling blocks I see that hinder investors from getting the financing they need. The following are some important investment property finance tips to keep in mind as you build your business. 5 Investment Property Finance Tips to Help You Get the Financing You Need 1. Maintain your credit. Having good credit scores is not a prerequisite for being a successful real estate investor, but it certainly can help. If your goal is to acquire long-term buy and hold properties, chances are you’re going to need traditional bank financing at some point. Traditional banks place a lot of weight on credit scores, so it’s important to regularly monitor your credit, make all payments on time, and take care of any errors or inaccuracies promptly. Also, be careful not to over-utilize your credit. If your credit card balances are more than 30% of your credit limit, it can hurt your credit scores. 2. Consider the Delayed Financing program. Previously, Fannie Mae did not allow you to do a cash-out loan on a property until you’d owned it at least six months. With the introduction of the Delayed Financing program in mid-2011, Fannie Mae began offering real estate investors and home buyers the ability to do a cash-out refinance on your home and recapture the assets used to make the purchase within 24 hours of closing. Related: The Comprehensive Guide for Financing Your Very First Real Estate Deal 3. Maintain adequate reserve funds. It’s never a good idea to stretch yourself too thin financially as a real estate investor because you can always expect that the unexpected eventually will happen. However, having adequate reserves is also important when qualifying for financing. Hard money lenders and traditional banks like to see that you have the money to do the deal and cover the unforeseen should it arise. Hard money guidelines vary depending on the lender, but if you’re working with a traditional bank, be prepared to document up to six months’ worth of payments in reserve for each financed residential investment property you have. 4. Make your money when you buy. A lot of investors got into heaps of trouble speculating on rising home values during the housing boom when the market turned against them. Folks, this is not investing; this is hoping the market will throw you a bone. Sure, some people got lucky, but this kind of strategy (or is it gambling?) probably isn’t going to work in today’s market. It’s important that you structure your deals so that your profits are built in when you buy. In other words, buy your rehab deals with enough margin that you can make money even if an unexpected expense arises. Buy your rentals based on current, realistic expenses and cash flow, not what they might be at some point in the future. Building your profits into your deals when you buy will make it far easier to obtain the financing you need to get the deal done. Related: Creative Financing: 5 Outside-the-Box Tools Savvy Investors Use to Build Wealth 5. Have multiple exit strategies. A traditional bank won’t necessarily care if you have more than one exit strategy, but a hard money lender probably will. Hard money lenders lend on a short-term basis, and they like to see that you have a contingency plan for repaying them in case your plan “A” doesn’t pan out the way you expected. Structuring your deals so you have more than one exit strategy will greatly help you when you’re asking for money to finance the deal. Conclusion Again, just to recap, keep an eyeball on your credit and maintain a good reserve account so that you’re a financially strong borrower. Secondly, structure your deals with multiple exits and build your profits in when you buy instead of waiting on the market to make your money for you. And finally, consider using the Delayed Financing program to recapture assets within 24 hours of purchase. Any tips you’d add to this list? Let me know with a comment! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

How to Grow Your Income Property Portfolio with Owner-Occupied Financing

A great strategy for growing your residential (1 to 4 units) rental property portfolio over time is to regularly acquire new homes to live in and convert your old ones into rentals. Assuming you don’t mind moving every so often, this is a great way to supplement other acquisition efforts and leverage more favorable financing terms along the way. The primary advantage of building your portfolio this way is that you can take advantage of more favorable owner-occupied financing terms. Interest rates on owner-occupied traditional bank mortgages tend to run an average of 1% to 1.5% lower than comparable investment property loans, which can add up to a lot of cash flow over time. You also have a lot more down payment flexibility when financing owner-occupied. These days, most lenders require a minimum of 20% down — and more frequently 25% — for an investment property, but down payments on owner-occupied properties can be as little as 5% for a conventional loan and 3.5% for an FHA loan. Note: Putting down less than 20% will require you to pay mortgage insurance, but you do have the option of putting down less with an owner-occupied loan. One of the most confounding traditional bank financing issues for many investors is the Fannie Mae limit on the number of financed properties you can own. Believe it or not, this acquisition strategy can help you avoid it in many cases. I’ll explain more later. Related: The Comprehensive Guide for Financing Your Very First Real Estate Deal Financing Considerations to Keep in Mind If you’re converting a primary residence to a rental and acquiring a new home, there are some considerations to keep in mind when qualifying for the new bank loan. The biggest issue for most people has to do with their debt-to-income ratios (DTI) because the lender will want to make sure you can handle the old loan and the new loan. You can use the new rental income to offset the ding of the new mortgage to your DTI, but with certain limitations: If you’re converting a one-unit property to a rental, you must have at least a 30% equity position in the existing property to use the new rental income. If you’re converting a 2 to 4-unit property, you must have at least a 30% equity position in the existing property to use the new rental income from the unit you previously occupied. You can use the income from the other units regardless of your equity position. One way you can make sure you have always have this kind of equity position in each home you purchase is to avoid buying at a retail price point. Many investors already have a business buying fixer properties, rehabbing them, and reselling to an end buyer. Why not do the same for yourself? Buy a fixer, rehab it, then move in yourself. If you’re buying right in the first place, you should always have a healthy equity position in the property. Lenders usually like to verify rental income via filed tax returns, but income for a newly converted property probably won’t show up on your returns quite yet. To document the new rental income, you’ll likely be asked to provide a fully executed lease agreement and a bank statement documenting the security deposit. To account for maintenance, repairs, and vacancies, the lender will use 75% of the gross rental income for qualifying purposes. Related: Creative Financing: 5 Outside-the-Box Tools Savvy Investors Use to Build Wealth Another big advantage of expanding your portfolio by regularly converting your homes to rentals is that it gets you around the often sticky limits on financed properties. When you’re taking out a bank loan on an investment property, Fannie Mae guidelines only allow you to have up to 10 financed residential properties. Practically speaking, the limit is often more like 4 because it can be hard to find a bank that will finance properties 5 through 10 even though Fannie allows for it. However, if you’re taking out a bank loan on an owner-occupied property, the limits don’t apply. If you’re financing a property to move into, the whole number of financed properties issue is completely moot. You can have as many financed properties as you like! Pretty cool, huh? Conclusion If you’re thinking that moving on a regular basis is a pain in the neck, I’m with you. I’m not a huge fan of moving, that’s for sure! However, would adding another cash flowing property to your portfolio help ease the pain of packing and unpacking all your stuff? If you have a family with a few kids, this might not be worth the trouble, but if you’re single or married without kids, this might be a great way to build your portfolio until you need to be more established and permanent. Employing a strategy of acquiring new homes and renting the old ones allows you to take advantage of the best bank financing terms — which helps maximize cash flow and ROI — and you can avoid the annoying Fannie Mae limit on the number of financed properties you can own. Note: Guidelines can change at any time, so be sure to check with a qualified mortgage professional for current guidelines and qualifying information specific to your particular situation. Do you use owner-occupied financing? Any questions or comments about this method of financing? Let me know with a comment! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Business Management

What You Don’t Know Could Cost You! Here’s How to Shop For Mortgage Rates The Smart Way!

It’s always a good idea to shop at least a few different lenders to compare mortgage rate quotes, right? After all, a mortgage is a big financial commitment, and shopping around for a better deal can potentially save you thousands or tens of thousands of dollars in finance charges over the life of the loan. Having said that, it’s not just important to shop around, it’s important to shop around the right way. There’s a few important things you need to be aware of to make sure you’re truly getting the best deal possible. How to Shop For Mortgage Rates Many shoppers don’t realize that there are a number of factors that can have a significant impact on the rate and fees you pay for a mortgage. When you’re just shopping around, lenders haven’t yet confirmed all of your qualifications, such as the payoff amount of your existing mortgage (in the case of a refinance), appraised value, how much is needed for escrow deposits, etc., so they need to make certain assumptions when they run their numbers. What makes mortgage shopping tricky is that lenders often use very different assumptions, which can make some rate quotes look unrealistically better than others. Related: Shopping for Commercial Loans The key to shopping rates effectively is to make sure that all the lenders you talk with are using the same or similar assumptions for a few key factors. The following is a list of some things to look out for: 1. Estimated appraised value The estimated appraised value is a key part of what determines loan-to-value (LTV), which is an important risk factor for the bank. If one lender is assuming a higher appraised value, it’s likely you’ll get a better offer because the LTV is lower. Make sure all the banks you’re shopping run their numbers based on the same or a similar estimated appraised value. 2. Loan amount Loan amount is the other key component of LTV. If one lender is assuming a much lower loan amount, their offer may look better on paper because the LTV is lower. If one rate quote comes with a loan amount radically different than the others, look for major variances in how much is predeposited for your escrow account or prepaid interest, closing costs, payoffs for existing mortgages, down payment amount, etc. Be sure to ask the lender to explain the assumptions behind their projected loan amount. 3. Payoffs for existing mortgages If you’re refinancing, the payoff amount of your existing mortgage(s) will impact the new loan amount, which of course impacts LTV and the rate quote. To make sure each lender is assuming the same payoff figure, I recommend calling your current lender and requesting a payoff amount for all mortgages on your property. When they ask what date to calculate the payoff through, give them a date about 30 days in the future. Make sure each bank you’re shopping with uses this payoff amount for their rate quotes. 4. Escrows or no escrows Whether or not you opt to escrow your taxes and insurance can impact the pricing on the loan. Make sure the lenders you’re shopping make the same assumption about whether you’re setting up an escrow account. 5. Rate lock term The length of the rate lock can have a big impact on the rate quote, so it’s important that all the lenders you’re shopping assume the same rate lock term. Rate locks cost the lender money, and the longer the lock, the less favorable the pricing will be on the rate quote. In fact, many lenders use rate locks as a gimmick to advertise really aggressive rates. I know of one lender that used to do this all the time; you’d hear an incredible rate on the radio, then when you picked up the phone to call, you would discover the rate came with no rate lock. Wow, serious? Considering how much rates can change in the span of just a few days, I don’t why anybody would want to gamble about where they’ll be in a month or two. I recommend going with at least a 45 to 60 day rate lock, but whatever you choose, make sure it’s consistent across all rate quotes so you’re truly comparing apples to apples. 6. Type of loan The type of loan you select, whether it’s a 30-year fixed, 15-year fixed, 5/1 ARM, etc., can have a big impact on a rate quote. Make sure that all lenders are assuming the same type of loan when running their numbers. 7. Property type If you’re financing a multiunit property, condo, or townhome, confirm the lender knows that because it can impact the loan pricing. Loan officers shouldn’t just assume certain things about a loan, but it’s not uncommon for them to do so. You want to make sure they’re not assuming you have a single-family home or the rate quote could be unrealistically attractive. All of these factors can have a big impact on a rate quote, so you want to make sure all the lenders you’re shopping are making the same or similar assumptions for each. If one lender is out in left field on one or more of them, have them fix it and update their quote. Related: What Type of Property Should You Buy? The key to shopping around for a mortgage is to make apples to apples comparisons between rate quotes. Only when you do that can you determine which rate quote is the best deal. Allow the Lender to Run Credit I also highly recommend that you allow each lender to run your credit. Credit scores can have a big impact on a rate quote, so you want to make sure that the lenders know exactly what your credit scores are. Even a variation of 10 or 20 points can significantly change what they offer you. Plus, when the lender has a complete application, which includes a current credit report, they’re required by law to send you a Good Faith Estimate that largely locks them into their estimates for the third party closing costs. If you haven’t completed an application with a credit report, they’re not required to honor the fee estimates they give you. Shop Around for the Best Mortgage Rates, But Shop Smart Shopping around for a rate quote is a smart idea, but it’s important than you do it right. The key to shopping right is making sure that all lenders are using the same assumptions for the factors I’ve covered here when they’re running their numbers. This enables you to make a true apples to apples comparison between rate quotes so that you can truly determine which quote is the best deal. Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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