Which comes first, the property or the financing?

Question

Hi, everyone.

I'm looking into different methods on how I want to get started in real estate investing but I have a question. How exactly does it all work? I've just started my research so maybe I don't fully understand the beginnings of the process yet but here is a scenario I go over in my head:

I find a property that I like and want to buy. Do I then go and get the financing I need (bank or hard money lender and let's pretend this includes the money for the property, closing costs, etc) and then go back to the agent and say I'm ready to buy? With that option, I'm assuming the agent would move on and sell to the person who has the money already, or is that where a good faith deposit comes in? Even so, there's no guarantee I get the loan. Or do I have to start looking for properties after already obtaining a loan? Will banks or lenders approve a loan without it being for a specific property? Do I request a loan within a specific budget and then go property shopping with that?

Any help with the above questions would be so much appreciated!

Thank you :)

Preston Dean · Answer

Hi @Larken Ewing,

Sounds like this would be your first deal or so.

Here are the (general) steps

1. You speak to a mortgage lender (mortgage broker) and you tell them what you think your credit score is, what you believe your debt to income is, and what your monthly income is. Based off that info, they will give you a Pre Qualification that says you are Pre Qualified to purchase a property around $____ amount. NOTE credit has not been pulled yet to verify what you told them.

2. You get with a realtor, someone a trusted friend recommended to you, and tell them that you are looking to purchase a house or duplex or whatever you want to buy and you have been Pre Qualified for $___ amount. That realtor should begin the home search for you and set you with with some homes that you like in the area and whatever criteria you tell them.. IE. 4 bed 2 bath more than 2,000 SQFT with a pool.

3. Based on the search that the agent sent you, you begin to see some homes you like and let your agent know that you would like to potentially see some homes. At this step is when you should reach back out to your lender and ask to formally be Pre Approved. This is when they will actually pull your credit and the lender will truly verify that you do have a ____ credit score & you do have ____ debt to income and you do make $____ per month

4. After a day or two you should receive a Pre Approval letter stating you are good to go and can purchase a house up to $_____ amount.

5. You and your agent go shopping and begin to submit offers on homes.

6. Your contract gets accepted and now you are officially under contract. In Texas you have 72 hours to submit Earnest money (1% of the house value) + option/inspection fee (about $50/day). During option/inspection period (how ever many days you want) is when you do all your inspections. If for whatever reason you don't like anything about the property you can back out of the deal and you will receive you earnest money back but you will forfeit the option/inspection fee.

7.Right before option/inspection period end you and your agent decide what to negotiate on. Asking for repairs? asking for $$$ off the purchase price? Ect...

8. After negotiations are finalized you then have the appraisal hurdle to clear. If you purchased the property for $400K but it only appraises for $390K then the bank will only loan on the $390K and you have to come up with the difference of $10K or ask the seller to help chip in. NOTE this is only with conventional offers. FHA & VA - the purchase price has to be the new appraised value in Texas

9. Once you are over the appraisal period you should be days away from closing. Don't make any large $500+ purchases or open any new lines of credit for anything at this time. You will jeopardize losing the deal because your debt to income will increase.

10. You close and move in!

Hope that helps :)

Larken Ewing · Answer

Thank you!

Erik Estrada · Answer

It really depends on the type of loan. If it's an asset based loan (DSCR or Hard Money), Lenders will qualify you based on rental income, experience, fico, and ARV.

If it's a conventional loan, lenders will qualify you based on your ability to repay. They will look at your last 2 years of tax returns, recent income statements, credit, and monthly debts.

If you are looking to go Conventional, I would recommend getting Pre-Approved before submitting any offers.

If it is a DSCR/Hard Money loan, you just need to locate the property and provide the lender with details regarding the property, your credit score, and experience level.

Larken Ewing · Answer

This was sooooo helpful! Thank you so much!

Austin Clarence · Answer

The game plan will be fairly different depending on if you are trying to qualify with Conventional financing vs DSCR. Conventional will offer better terms but more paperwork, income qualifying etc.

With DSCR loans other than your credit score, the main piece of underwriting is property driven. What the house will rent for will be the main piece that will determine your eligibility. A good loan officer will look at rental comps with you and the realtor to make sure its priced out correctly up front and the right loan program is selected. With DSCR the lender should propose a back up plan in case the rents come in low on the appraisal. Let me know if you have any other questions!

Dustin Sanders · Answer

@Larken EwingYou're very welcome & I look forward to hearing more about your RE investing journey & you kicking some RE ass!

Dustin Sanders · Answer

Hey @Larken Ewing, I read through most of the comments and they’re not wrong & provide good advice. I’d done both when it comes to traditional financing (conventional loans) & DSCR loans and it really just depends on which route you go with pertaining to “which comes first, the property or the financing”

hopefully this helps!

Min Zhang · Answer

Hey Larken. When you want to invest in real estate, it's a good idea to figure out how you're going to pay for it (financing) before you start looking for a specific property. This way, you know how much money you can spend, which helps you focus on properties that fit your budget. Having your financing ready also lets you move fast when you find a property you like, which can be important in a competitive market. So, think about financing first, then start searching for a property. Let me know if you are considering OOS investing in Ohio. I can be your resource if you consider that route.

Bud Gaffney · Answer

@Larken Ewing work on both simultaneously as you’ll need both :)

Preston Dean · Answer

Great to hear!! :)

Which comes first, the property or the financing?

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