Visiting Banks Before Our First Deal
@Joseph Morris, I'm not a lending expert but my husband and I have done our fair share of conventional financing and refinancing for properties. You will want to provide items listed below:
- Tax returns w/W2s for last two years; If you are self-employed, two years worth tax returns and profit and loss statements
- Two months of most recent pay stubs
- Six months of PITI reserve funds for all mortgages including subject property
-Two months of most recent bank statements (any account you are using to fund closing costs, down payment, etc.) BTW - you should have this ready to show listing realtor and seller to prove you're a serious buyer
- Letter of explanation on the source of any large deposits recently put into your account
Once you select the property, you can provide an outline of expenses and market rent to show potential positive net of at least $300.
Make sure to ask for a PREAPPROVAL Letter not a PREQUALIFYING Letter from the lender with qualifying amount.
Put all these items in an easy to read format (binder/notebook). You may also want to include a letter about yourself to showcase any skills and abilities you have in real estate investing, landlording, finance, remodeling, etc.
Before you talk to a lender, check your credit to see where you stand. Go to freeannualcreditreport.com or creditkarma.com. The higher the number, the better the interest rate.
I would also look at your current debt to income ratio - what you owe now compared to your income and what you owe now in addition to the subject property PITA to your income. Aim for both of those numbers to be no higher than 35-37%. If you purchase a residential income property - like a 2-4 unit - you may be able to apply a percentage of the gross rents to your income, however, some lenders like to see two years of landlord experience to do this - check with your lender.
Questions I'd ask the lender would center around flexibility for financing:
- Do all your loans get sold on the secondary market or do you keep some loans in house if borrower meets specific criteria (portfolio lender) If you state it this way, the loan officer will know what you're talking about
- What loan packages are available to first time home buyers or first time buyers of investment properties (FHA, FHA/203K, VA, etc.)
I'm sure some of our BP loan professionals can provide more in depth, expert information, but this should get you started.
Good Luck and share your story when you get your first property!
Penny Clark
Thank you kindly for the quick reply!
We recently sold a second home that we had rented out for the last 2.5 years (recent large deposit AND landlording experience). We hadn't originally purchased that home as an investment property, though we're happy with the outcome (the cash-flow was positive, but the real 'gain' was waiting out the market to be able to sell the house without a loss).
In the letter about us and our skills, how detailed should I be? Should I just 'tell our rental story' and how we've used that as 'training' for the next investment? I'll have the tax-returns to support the rental income/landlord experience. Do you suggest highlighting my project management experience, and/or home improvement experience? As I am writing this I wonder: does a 'real estate investing' resume make sense for the binder?
For the financials - I of course can bring in the most recent bank statements, stubs, etc.; does it pay to put together a 'financials summary page' that characterizes all of the assets/debts in an easy to read single page (with the account statements behind it for reference)? Should I include revolving debt here (we have outstanding 0% debt on a credit card - we COULD pay it off though we'd prefer to keep the capital for purchase or reserves; in fact SHOULD we pay this off before applying for any loans?).
Along these lines - can 401k or IRA account balances be considered as 'reserves'? I know there is an extra step there to cash-out in an emergency, but we have significant account balances available in an emergency...
My discover card provides me a FICO score each month - should I print off that estimate for the binder as well (I know they'd ultimately run my credit before loaning me anything - it just seems that I'd be better off sharing my credit rating up front to help show the bank that how serious and credible I am...
Should I bring in our analysis for one or two of the recent deals we've looked at? This way sharing our process (and ensuring that the bank is happy with our level of diligence)... We are targeting local banks, so are obviously motivated to sell ourselves, not just our financials...
My apologies for the switching between "I" and "We" above - my wife and I are working together through this process, though it is highly likely that I'll be solo at the bank.
Thanks,
~Joe
Yes, I would definitely include your landlord experience, project management and home improvement experience too. Your IRA and 401 K may be used to count as an asset but the bank will want to see cash reserves in an account that has seasoned for a while. If there are any large deposits that appear in your account used for proof of funds, the bank will want to see a letter of explanation of the source. The less revolving debt you have the better, so pay those off.
The spreadsheet idea and rental income statement showing your monthly net profit is great idea too.
The bank always pulls their own credit report from all three bureaus which is why you want to pull it first so you can see what the bank sees.
PM me if you have any more questions.
Joe, I just wanted to add it'd be a good idea to include a projected plan and income statement for the subject property detailing expenses and potential rental income so the bank knows you'll be in the black with the property from the start
Thanks again for your help - we'll take some time and put together our binder, and then start talking to banks next week. Here's to hoping!
~ Joe