Mortgage Calculator

If you are looking to invest in real estate but not sure which property you can afford, our mortgage payment calculator is the best way to determine your threshold. You will need to enter in the home value, down payment you are putting into the property, the type of mortgage (FHA, conventional, etc.), and the interest rate on the mortgage.

Calculator Results

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The calculators found on BiggerPockets are designed to be used for informational and educational purposes only, and when used alone, do not constitute investment advice. BiggerPockets recommends that you seek the advice of a real estate professional before making any type of investment. The results presented may not reflect the actual return of your own investments. BiggerPockets is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by these tools. Furthermore, BiggerPockets is not responsible for any human or mechanical errors or omissions.

Need a mortgage loan?

Maybe you are earlier in the home buying process and just playing around with numbers. It’s hard to know how much you can afford before you are approved for a loan. If you are on the lookout for a mortgage lender but aren’t sure where to start, BiggerPockets can help you out. Should you not know what type of loan you need or where to start with lenders our mortgage loan page will lead you in the right direction.
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Frequently Asked Mortgage Loan Questions

What Is a Refinance?

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A refinance changes the terms of your loan. In most cases, it starts the loan clock over, too. A refinance can be used to pull equity (money) out of the home (called a cash-out refinance) and is typically used when rates have dropped.

How Do I Get a Mortgage Loan?

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A mortgage loan is created by banks, credit unions, and other financial institutions. You can also work through a mortgage broker, who acts as a middleman and works to get you the best rates and terms by working with multiple banks.

What Is a Fixed Rate Mortgage?

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A fixed rate mortgage means your interest rate will never change for the duration of the loan. When rates are low, it usually makes more financial sense to obtain a fixed rate loan.

What Is an Adjustable Rate Mortgage?

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An adjustable rate mortgage (ARM) means your rate fluctuates with the market. Once per year your rate can go up or down, depending on the current market rate. Most ARM loans have an adjustment cap (typically 2%) so you don’t see wild swings in your rate. Most ARM loans have a set period of time that the interest rate is fixed. A 7-year ARM would mean the first 7 years are fixed, and the remaining time on the loan is subject to market fluctuations.

What Are Points on a Mortgage Loan?

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A point is 1% of the mortgage loan amount and is typically used to “buy down the rate” of your loan. Points are paid upfront in exchange for a lower interest rate for your loan.

When Is the First Mortgage Payment Due?

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Your first mortgage payment due date depends on the day you close on the home. If you close on or before the 9th of the month, your first payment is due the first of the next month. If you close on or after the 10th of the month, your first payment is due the first day of the second month following closing. (Example: Closing on or before May 9, first payment due June 1. Closing on or after May 10, first payment is due July 1.)

Which Mortgage Option Is Best for Me?

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Everyone’s circumstances are different. Talk to your lender or mortgage broker to get different scenarios to see which one is the best fit for your specific needs.

What Does My Mortgage Payment Include?

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Most mortgages are PITI loans—that stands for Principal, Interest, Taxes, Insurance. Principal is the monthly portion of the original amount borrowed. Interest is the monthly interest on the loan. Taxes are your property taxes. One-twelfth of the annual amount is collected every month to pay the taxes when they are due, typically the following year. Insurance is your property insurance.

What Happens After I Am Pre-Approved?

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A pre-approval means that your financial information has been reviewed by a lender and a mortgage limit has been projected based on that information. After pre-approval, your lender will provide you a letter stating the loan amount you are preapproved for. Many sellers require this letter when accepting your offer.

What Credit Score Do I Need for a Mortgage Loan?

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The higher your credit score, the better terms and rates you’ll be offered for your mortgage. FHA will typically go as low as 580 to still qualify for the lowest down payment option. 500-579 and you’ll need to have a larger down payment. You’re also much less likely to be approved for a loan at all. Conventional loans and VA loans require a 620 credit score. USDA loans require a 640 credit score.

What Documents Do I Need for a Mortgage Loan?

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Your lender will ask for your last one to two months of paycheck stubs, the past two years of tax returns, and two months of bank statements. There may be additional documentation based on what these documents contain. Your lender wants proof of your income and your ability to make the down payment.

What Is the Difference Between Pre-Qualified & Pre-Approved?

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Pre-qualified means the lender has looked at your financial information and determined that if that information is correct, you could potentially be approved for a loan. Pre-approved means the lender has run your credit and, if there are no changes, you will most likely be approved for a loan.

Mortgage Types

  • Conventional Loan Conventional Loans

    A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA), and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.

  • Adjustable Rate Mortgage Adjustable-Rate Mortgage (ARM)

    Adjustable rate mortgages (ARMs) allow borrowers to pay lower interest rates on their loan for a set period, after which the rates change. The 7/1 ARM means that, for seven years, the borrower's interest rate will remain fixed. That's a clear advantage the 7/1 ARM has over other ARMs with shorter fixed-rate periods.

  • Fed Housing Auth Loan Federal Housing Authority Loans (FHA)

    An FHA loan is a mortgage that is insured by the Federal Housing Administration. They are especially popular among first-time home buyers because they allow down payments of 3.5% for credit scores of 580+. However, borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.

  • Homeready Mortgage HomeReady Loan

    HomeReady mortgages are a line of conventional home loans offered by Fannie Mae that are meant to help low- and moderate-income borrowers buy or refinance. HomeReady loans reduce the typical down payment and mortgage insurance requirements, but they're also more flexible about allowing contributions from other people.

  • Hard Money Loan Hard Money Loan (HML)

    A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies.

  • Veteran Affairs Loan Veteran Affairs Loan (VA)

    VA guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home, which must be for their own personal occupancy. The guaranty means the lender is protected against loss if you or a later owner fails to repay the loan.

  • Personal Loan Personal Loans

    A personal or private mortgage is a loan made by an individual or a business that is not a traditional mortgage lender. As you evaluate the decision to use (or offer) a private mortgage, keep the big picture in mind.

Learn More About Mortgage Loans

Starting Out

The Comprehensive Guide for Financing Your Very First Real Estate Deal

Are you someone who wants to buy investment property, but you just can’t figure out how to finance your first buy? If so, this article is written for you.   What follows are seven different ways to finance your first property. Before that, I’ll also share ideas to make sure this first purchase fits into your overall wealth building strategy so that you don’t waste time going down the wrong paths. To begin, you should know that every successful investor began right where you are. Just like the longest journey always begins with the first step, enormous real estate wealth begins with your first deal. I remember very well being a 23-year-old standing at the edge of my new venture into real estate, asking questions like: “How am I going to do this?”   “How will I raise the money for my deals?” “Will the lessons I’ve learned actually work for me?” It’s normal to have apprehension and self-doubt before starting something important. But the anecdote for this ailment is a big spoonful of knowledge and another big spoonful of action. I’m going to give you my best in the knowledge department right here, and you’ll have to do your part by taking action on what you learn. Is that a fair deal? Now, let’s move on to financing your first real estate investment! Strategy Before Details: The 5 Wealth Building Stages Jumping into borrowing a lot of money against real estate before you understand the bigger picture is sort of like taking off in an airplane without knowing how to land. You may successfully get off the ground, but good luck trying to find your destination and land in one piece! Here’s the big picture of wealth building as I see it. The wealth you will build from real estate will allow you to have more freedom, more flexibility, and more time to do what really matters. You can call this financial independence, retirement, freedom, or whatever you want. It’s the peak of the mountain on your wealth building journey. To reach this financial peak, you have to build a large net worth (a.k.a. equity) so that you can eventually live off of the income from your investments and never have to trade hours for dollars again. But before you reach that final stage, there are other milestones you’ll pass as you climb the financial mountain. These intermediate stages are important because they determine your overall real estate strategy, which includes how to finance your deals. Related: Real Estate Financing: The 4 Best Ways Savvy Investors Fund Deals Here are 5 stages you’ll pass during your climb: Survival is the milestone when you’re earning some money and getting your bills paid. It’s also the place where you’re digging yourself back out of financial holes you dug in the past. Stability is like Dave Ramsey’s first three baby steps. You pay off personal debts, you have cash reserves in the bank, and you build job skills that are in demand and command a better income in the marketplace. Saver is the stage where you realize the importance of your savings rate and put it into practice. Building wealth is actually simple, but it’s not easy. You need to maximize your income, simultaneously decrease your spending, and set aside a lot of money. Below average wealth builders save 0-10% of their income, but above average wealth builders save 25%, 50%, and even 75% of what they bring in. The faster you want to reach financial independence, the more you need to save. Growth stage is where most of us think of investing. It’s taking your $50,000 nest egg and turning it into $1,000,000. The key is to maximize compounding by reinvesting earnings, buying good assets, and maintaining discipline. Income stage is when you already have a large chunk of equity and you’re ready to enjoy the fruits of your wealth-building labor. The objective here is to turn equity into regular income that gives you time, freedom, and flexibility. Which of the 5 wealth building stages above best describe you? Are you in survival, stability, saving, growth, or income modes? Don’t beat yourself up wherever you are. Everyone has to climb the same mountain, and the fact that you’re doing it now is all that matters. Once you know your stage, it will help you begin focusing on a real estate investment strategy.   Choose a Strategy Before Your Financing Your real estate investment strategy and your financing are closely connected. You’ll be in trouble if you just walk into a bank and say, “I want a loan so I can buy investment real estate.” A strategy is your decision about which part of the real estate universe will best help accomplish your financial goals right now. You can invest in fix and flips, house hacks, mobile homes, commercial buildings, private notes, and much more. But you can’t do them all at the same time on your first deal. So, a strategy is about focus. It will help you get the right financing on your first deal.   If you’re working on wealth stages #1 or #2—survival or stability—keep in mind that you need a job or a side business more than you need investing. Investing takes your cash, and you need to put more cash in your pocket right now.   I wrote in more depth about 7 ways (other than wholesaling) to make money in real estate as a newbie. Most of these don’t actually include you borrowing the money because other people will buy your deals, but you’ll learn a lot about financing in the process. If you’re working on wealth stage #3, saver, it can make sense to begin purchasing and financing investments. Real estate is a great forced savings plan. Many people say it’s bad that real estate is illiquid or hard to sell. I say it’s GOOD. You’re forced to leave it there and not spend it! If you’re in this stage, a great place to start is with house hacking or live-in flips. You have to live somewhere, so why not multi-task and make your investment a savings tool? Owner-occupant financing programs like FHA or VA, which I’ll explain more later, allow you to get into properties with less down payment. You could also get into house flipping and rental properties at this stage, but because you lack sufficient savings, you’ll need to leverage the down payment and reserve money of partners or private investors. This is exactly what I did early on. Related: Newbies: You Should Focus on Your First Deal And Nothing Else. Here’s Why. If you’re working on stage #4, growth, you should have the credit, income, and capital to jump into real estate investing in earnest. You could focus on the strategy of fixing and flipping houses, renting small residential properties, buying high cash flow rentals like mobile homes, or moving into one of the many other smaller niches of real estate investing. In the section below, I’ll share some basic ideas below for how to finance your real estate with any of these strategies. For stage #5 investors, the goal is typically not to leverage up but to deleverage. At this stage, income is a higher priority than maximum growth. You may still choose to have some financing, but I’m guessing if you’re in this stage you’ve already figured out most of the ideas I’m sharing here. So, you’ve got your stage in mind, right? You have a basic idea of your strategy, and you’re ready to get started. Now let’s begin unpacking the different possibilities to finance your first investment property. 7 Types of Financing for Your First Investment Property Below are seven solid types of financing for your first investment property. For each financing type, I will tell you: What it is The good The bad Who can use it (i.e. owner occupied, non-owner occupied, 1-4 units, or any property) Possible investment strategies with this financing type (i.e. house hacking, live-in flips, rentals, etc.) Where to find this financing Further reading for you to learn even more If one or more of these financing types sound interesting to you, I recommend making it the primary focus of your education and your follow-up questions in the BiggerPockets Forums. That focus will help you become more competent and confident as you work on your first deal. Here are 7 possible types of potential financing for your first investment property. 1. FHA (Federal Housing Administration) Loans What it is: These federally subsidized loans generally have lower down payment requirements (3.5% as of 2016) and easier qualifying standards than other loans. They also have low, fixed interest rates for 30 years. The Good: Easier to qualify, attractive terms. The Bad: Fees can be higher than other programs, the closing process is not fast — typically limited to one deal at a time, major fixer properties won’t qualify. Who can use it: Owner-occupied only. Investment strategy: Good for house hacking or live-in flips, 1-4 units only. Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders. Further reading: Check out this article on buying a duplex with an FHA loan to learn more details about this program. 2. VA (Veterans Administration) Loans What it is: These are also federally subsidized loans only for U.S. military veterans. The terms of these loans are usually the same or even better than FHA, including a 0% down payment. The Good: Easier to qualify, attractive terms, multiple loans are possible. The Bad: Like FHA, closing process is not fast, and while multiple loans are possible, there is a limit based upon your maximum entitlement; major fixer properties won’t qualify. Who can use it: Owner-occupied only. Investment strategy: Good for house hacking or live-in flips, 1-4 units only. Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders. Further reading: For more details on VA loans and using them to buy investment properties, read VA Loan: The Real Estate Investor’s Guide to Eligibility and Funding. Related: Confessions of an Ex-Banker: How to Get Your Next Loan Approved, Guaranteed. 3. Conforming Loans What it is: Conforming means the loan conforms to the rules and guidelines of mortgage giants Fannie Mae and Freddie Mac. While the requirements are a little more stringent than FHA or VA, conforming mortgages are still a great mortgage product for investments. Although 20% down or more is the standard for non-owner occupied loans, programs do exist for 5-10% down payments on owner-occupied loans if you hunt around. The good: Attractive terms with low interest over 15-30 years, faster qualifying than FHA/VA. The bad: Larger down payment than FHA or VA, limited to 4-10 loans; major fixer properties won’t qualify. Who can use it: Owner-occupied OR non-owner occupied. Non-owner occupied typically requires more money down, higher interest rates, and other more stringent requirements. Investment strategy: House hacking, live-in flips, rental real estate; 1-4 units only. Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders. Further reading: Read this BiggerPockets article to learn more about qualifying for a conforming loan. Also, check out the Eligibility Matrix (8/30/16 version) put out by Fannie Mae to describe their requirements for borrowers. 4. Portfolio Loans What it is: Portfolio loans are kept by the bank or lending institution that made the loan, unlike conforming loans which are sold to Fannie Mae, Freddie Mac, or other mortgage investors. This means the requirements and loan terms vary depending upon which lender you use. This was how I financed my very first deal, which was a fix and flip property. The good: More flexibility, potentially larger number of loans than conforming, possible to get loans on fixer-uppers and commercial. The bad: Terms are not typically as good as FHA, VA, or conforming loans, you may have balloons in 3-7 years and/or adjustable interest rates, credit and down payment requirements more strict than FHA or VA. Who can use it: Owner-occupied or non-owner occupied; 1-4 units, multi-units, commercial. Investment strategy: House hacking, live-in flips, rentals, fix-and-flips. Where to find it: Banks (especially local ones), savings and loans, credit unions. Further reading: Brandon Turner wrote a good article about how portfolio loans transformed his business. There are also many threads on the BP forums. 5. Hard Money Loans What it is: These loans are asset-based loans, meaning the primary concern of the lender is the property serving as collateral. The individuals or small groups that make these loans are in the business of lending, so they can usually move fast, which makes them attractive for purchasing investment deals. The good: Fixer-uppers are OK, technically no limit to number of deals, can often borrow all or part of repair costs. The bad: High interest rates and other costs, may not loan to brand new investor who has no experience with real estate, typically short-term loans. Who can use it: Non-owner occupied; 1-4 units, multi-units, commercial, land. Investment strategy: Fix-and-flip, rental property (for purchase, will need to refinance). Where to find it: BiggerPockets has a hard money lender directory. You can also usually find several lenders at your local real estate investor association. Further reading: BP founder Joshua Dorkin wrote a good overview of hard money loans and BP Podcast #9 was about the subject. This article gives “8 Things the Experts Won’t Tell You About Hard Money.” Related: How I Find Private Money Lenders to 100% Fund My Deals (& How You Can, Too) 6. Private Money Loans What it is: Private money lenders are individuals or their self-directed IRA accounts who make loans against real estate. Unlike hard money lenders, these individuals aren’t usually in the business of lending. The good: More flexibility and faster closings than bank mortgages, potentially lower interest rates and costs than hard money lenders, potentially longer length of terms, and often lending relationships that last for years or decades. The bad: You can’t walk into a bank and ask for private money. It’s usually a result of relationships with other local investors built over time. Because these investors aren’t in the business, there is usually a limit to the number of loans based upon their available funds. Who can use it: Non-owner occupied; 1-4 units, multi-units, commercial. Investment strategy: Fix and flip, rental property. Where to find it: Networking online (like BP Forums or Marketplace) or at local real estate associations or business meetups. Further reading: This area of financing is my expertise. I wrote about multiple sources of private money and my first BP podcast interview discussed how I got started with creative financing. You can also check out this private money guide from Ankit Duggal. 7. Seller Financing What it is: Seller financing means the seller of a property accepts all or part of the purchase price in monthly installments. Unlike a bank, the terms are completely negotiable. The final result is just what works best for both you (the buyer) and the seller. The good: Typically great interest rate and terms, small down payment is possible, no credit or formal approval process. The bad: Requires negotiating skills and knowledge of real estate finance and contracts, not every seller has enough equity to seller finance and many with equity want cash (at least initially), you will need to fund your own repair costs. Who can use it: Owner-occupied or non-owner occupied; any type of real estate. Investment strategy: Best for rental property or house hacks; also works occasionally for fix and flips or live-in flips. Where to find it: Direct mail campaigns and other ways to generate leads directly from potential sellers; also possible through knowledgeable real estate brokers. Further reading: I wrote “Your Guide to Uncovering the Best Seller Financing Deals,” and Brandon Turner wrote the “Definitive Guide to Using Seller Financing to Buy Real Estate.” The Next Step is the Most Important Step In this article, you’ve learned about identifying your wealth building stage, focusing on a real estate strategy, and then choosing a financing source for your first deal. If you look at all of this information together, it could be overwhelming as a new investor. But the next step for you is not to learn everything. You don’t need to understand every single real estate strategy or financing source. You don’t need to worry about how you’ll do your second or third deals or how you’ll become a millionaire. You just need to understand one strategy and one financing source and then go do it. The next step in your real estate journey is the most important. Remember how I started this article? I said I’d share some information, and you’d take action. It’s that time for the action. The real learning happens when you try to apply what you’ve learned. Have fun and best of luck! [Editor’s Note: We are republishing this article to help out newbies who have started reading our blog more recently.] What financing source seems to be the best fit for you? What is your wealth building stage and real estate strategy? Is there anything I can help you with as you take action towards financing your first investment property? I look forward to hearing from you in the 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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Starting Out

5 Feasible Ways to Buy a House With Bad Credit

One of the most common questions I am asked each week on the live BiggerPockets Webinar is simply, “Can you explain how to buy a house with bad credit?” It’s a great question. While the average credit score in the U.S. is anywhere from 669 to 699 depending which credit report is used, with those numbers steadily rising year over year, a large chunk of Americans still have a credit score of less than 600. That means a huge chunk of individuals are unable to obtain a mortgage, thus making buying a house or real estate investing a difficult task. So, can you buy a house with bad credit? Well, I have good news, and I have bad news: The good news is YES, you can invest your money in real estate with bad credit. Later, I’ll explain five ways to do it. The bad news is you probably shouldn’t. Unless… well, we’ll get to that. But first… What Exactly is Bad Credit and Why Do You Have It? Bad credit can happen for a variety of reasons. Perhaps medical bills or maybe identity theft caused the issue. Maybe a person lost their job and had to miss some payments. The economic recession that started in 2007 led millions of Americans into financial difficulties, destroying millions of credit scores in the process. But also, sometimes bad credit is caused by good, old fashioned stupidity and ignorance. A credit card here, a credit account there. Vacations, new clothes, and other “need-it-now” luxuries have caused thousands of people to lose their good credit score and wind up in a rough spot. So what do banks view as “bad” when it comes to credit? While there are multiple methods for scoring credit, FICO defines credit ranges as follows: Poor: 579 and lower Fair: 580–669 Good: 670–739 Very good: 740–799 Exceptional: 800+ Do you fall into the “poor” range? No matter what reason you have for having low credit, it doesn’t matter anymore. It’s done. You have bad credit. But the real question is: Is your bad credit a symptom of a greater problem?  I ask this because most of the time, it is. It’s a symptom of greed, selfishness, impatience, and other terrible money habits. What if everyone’s credit score was suddenly boosted to 800 and 100 percent of their debts were wiped out? What would happen? Within three years, you would likely find the same people with the same low credit scores and high debt. The truth is, credit score is merely a number that represents your financial ability to manage your money. Your credit score is just a symptom of a greater problem. Now, before you think I’m being a jerk, leave this post and go back to watching Dancing with the Stars, understand that I’m not just talking to you. I’m talking to ME as well. I haven’t always had good credit. When I graduated high school, I fell into the debt trap that many college students do. Student loans, credit cards, and in-store credit. I needed certain things, so I bought them. Sometimes I would forget to send a check, and I’d get hit with a late charge and a declining credit score. Other times, I would use one card to pay another. I quickly maxed out several credit cards. It was a dangerous game. It wasn’t until I read Dave Ramsey’s book The Total Money Makeover that I realized I had a problem and I needed to change, so I did. Today I have a mid-700s credit score and haven’t had an issue in years. But I still remember what it was like to struggle with that credit score. Can you identify with that? Then keep reading. Have You Recovered From Your Debt Disease? The reason I bring all this up is because what I’m about to teach you is powerful. It does work. There are many ways to buy a house with bad (or no) credit. However, it’s not going to matter at all if you haven’t first addressed the underlying reason for why you have bad credit. Perhaps you were young and dumb, and you’ve grown up but haven’t been able to raise the credit score enough yet. Or perhaps it truly was 100 percent not your fault, and someone stole your identity (but I doubt that). The point is: Take some deep reflection and look at your life. Are you truly over the cause to your bad credit? Answer that question honestly, and until you can totally and completely say yes, don’t buy a house. To help you answer that question, ask yourself these three things: When is the last time you put something other than food on a credit card because you didn’t have enough money to pay for it? When is the last time you read a book on credit repair? What does your written budget look like? (What? You don’t have one? Uh oh…) Real estate investing will NOT solve your bad money habits, and anyone who says otherwise is trying to sell you something.  Now, before we get to the five ways to buy a house with bad credit, let’s talk about how you are going to improve your credit. Trying to Buy a House With Bad Credit? How About Improving Your Credit Instead? In a moment, I’m going to share some great techniques for investing in real estate that don’t require any credit score. So why do we care about improving your credit? Because soon you are going to want that sweet, sweet bank money. Bank loans may be tough to get, but it’s hard to beat the low interest and long terms that a bank can provide. Maybe today you don’t need it, but down the road, once if you choose to invest in real estate on a larger scale and you are looking to finance that 60-unit apartment building or the million-dollar house, you are going to wish you had that great credit. Besides, if you are unwilling to work to improve your credit, it simply means you haven’t recovered from your debt disease, and it’s going to kill you financially. You might as well go back to playing Call of Duty with your buddies. There are a billion articles on how to improve one’s credit score, so I don’t need to go too deep on that here. But the following six tips should help: Commit to fixing your debt problem. This will not be easy. Are you willing to do what it takes? Start making more income. Yes, that means you might have to put in some extra hours at work and find other ways to hustle. You need to get current on all outstanding debt and pay off what you can. Lower your balances. Make sure the balance on all of your revolving debt is less than 30% of the limit. High debt-to-limit ratios make your credit worse. Stop applying for credit. Seriously, stop. It hurts your score. Pay everything on time, no Matter what. I don’t care if your child is sick and your leg falls off on the way to bring him to the hospital. You will pay every bill on time. Consider getting a secured credit card. Once your debts are current or paid off, consider obtaining a secured credit card. A secured credit card is a credit card that has a maximum limit of whatever dollar amount you deposit with the lender. In other words, you give the bank $500 and then they give you a $500 credit card. Use this to buy your gas, groceries, and a few other things—and then PAY IT OFF IN FULL EVERY MONTH. This is your way to start building trust with the credit world. Repairing your credit is going to take time. There is no doubt about it. But if you commit to the process, it can be done. Soon, bad credit will be just a memory. What Credit Score Do You Need to Qualify for a Traditional Home Loan? If you’re looking for a traditional fixed-rate mortgage, you will likely need a FICO score of 620 or above. Still, there are other lending options that may allow you to buy a home with a lower credit score or with less money down. These include: FHA loans: 58o or higher credit score qualifies for 3.5% down (lower than 580 may require 10% down) VA loans: Most lenders want to see 580-620. USDA loans: Most lenders want to see 580-640. Fannie Mae HomeReady (for low and moderate income borrowers): 620 or higher credit scores can qualify for 3% down. How to Buy a House With Bad Credit Now, for those of you who HAVE made a change deep within your heart and soul and are working on improving your credit, let’s talk. If you still would like to buy a house or invest in real estate, let’s discuss five ways that it can be done. 1. Try a partnership. Partnerships are one of my favorite ways to invest in real estate because everyone has something they are lacking. Partnerships help fill that void. For you, perhaps it is your bad credit, but maybe you have something that they don’t have. Time? Skills? Hustle? What can you bring to the table that will help them achieve their goals while you achieve yours? Of course, when it comes to partnerships, one must be careful. Getting into bed with the wrong person can make you both incredibly dirty! Do your homework, vet your partner carefully, and as is true with all these tips, only invest in great deals. Related: Real Estate Partnerships: How to Find a Great Fit & Work Together Towards Success 2. Consider seller financing. Seller financing is the process in which the seller agrees to finance the property, rather than making you obtain a new loan. In essence, the seller agrees to let you make monthly payments to them until the property is paid off (or the term of the seller-financed loan ends). Seller financing can be powerful, as sellers typically will not ask to see a credit score. However, the best use of a seller-financed deal is when the sellers own the property free and clear. In other words, they should not have a mortgage on the property. If they try to “carry the contract” on the home that they have an existing loan on, their lender could foreclose due to something known as “the due on sale clause.” So look for deals where the owner has no mortgage. I believe seller financing will become increasingly popular in the coming years, as Baby Boomer owners of rental properties will be looking to get out of the game, but also looking to hold on to their monthly income. Seller financing offers a great win-win solution for all parties. It’s part of how I financed my 24-unit apartment complex with almost no money down. Related: The Definitive Guide to Using Seller Financing to Buy Real Estate 3. Look into hard money lenders. Hard money lenders are individuals or businesses who lend money at high interest rates and short terms to real estate investors. Hard money rates vary, but typically fall between 10% and 18% interest, with less than two-year terms (often just six months). In addition, hard money lenders also charge large fees, known as “points,” which can add anywhere from 3 to 10 percent of the loan amount. Many hard money lenders used to be investors themselves, but have moved to the more passive method of simply lending. Sounds nice, doesn’t it? Because of the high rates, high fees and short terms, hard money is ideal for house flippers and those looking to do the BRRRR (buy, rehab, rent, refinance, repeat) method of real estate. This way, the real estate investor can be in and out quickly, cashing out the hard money lender and moving on to the next project. Hard money lenders rarely look at the borrower’s credit score, though it is becoming more common. In reality, the hard money lender cares most about the security in the deal. They want to know that no matter what happens, they will make money. If the borrower defaults, can they foreclose and sell the property for more? If you have a low credit score but want to flip houses, hard money might be a great option. Just be sure to find an incredible deal so the lender feels secure, and then rock that flip and make your money. Related: The BiggerPockets Hard Money Lender’s Directory 4. Explore private money lenders. Similar to hard money, private money lenders are individuals you might know and are looking to achieve a good return on their investment. Unlike hard money lenders, private money lenders are not typically real estate professionals who lend money for a business; they simply are looking to diversify their cash into other investments. Private money lenders might be your dentist, your mom, your neighbor, or someone you’ve built a relationship with on BiggerPockets. The keyword with private money is relationship. When dealing with other people’s money, it’s unlikely they will ask you for your credit score. However, this means you must work even harder to make sure they receive the kind of return on investment they are looking to make. This is when the discussion earlier about the credit score being a symptom really comes into play. Don’t take advantage of grandma’s kindness and lose all her money. In fact, I would recommend never taking money from anyone who couldn’t afford to lose it. That would make for an awkward Thanksgiving dinner. 5. Check out wholesaling. Finally, let’s talk about perhaps the most popular method taught by the gurus for those with bad credit: wholesaling. Wholesaling is the business of finding great deals, putting them under contract, and quickly “flipping them” to a cash buyer for a higher amount. Many wholesalers do this entire process without using a single dollar of their own money or ever needing their credit checked. This probably sounds amazing to you, but before you head out the door looking for a good deal, understand a few things: Wholesaling is a JOB. It is NOT passive, and if you don’t work, you don’t get paid! Most would say that wholesaling isn’t even investing since you are not really buying or selling the property. Wholesaling is HARD. It requires time, patience, and great marketing skills. You also must have the ability to talk with sellers on the phone, sell yourself as a credible solution to their problems, estimate rehab costs, find cash buyers, and put the whole thing together without it all falling apart. In other words, wholesalers need to be good at the entire world of real estate investing. It’s not an easy task, and most people who try to wholesale never do a single deal. There are legal implications regarding wholesaling and the need for a real estate license. Simply put, you should probably get your license. Click here to read more on this controversy. If you are interested in wholesaling, don’t miss The Ultimate Beginner’s Guide to Real Estate Wholesaling. It’s pretty awesome. Wrapping it Up So, can you buy a house with bad credit? Yes. However, if your bad credit is a symptom of something else, fix that first or you’ll never enjoy the true wealth that can come from real estate investing. If you are serious about repairing your credit and building better money management skills, I’d recommend starting with The Total Money Makeover by Dave Ramsey, followed by The Richest Man in Babylon by George S. Clason. (And I don’t care if you don’t like reading—both books are also on Audible.) What do you think? Is it ever a good idea to try to buy a house with bad credit? Comment 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

Mortgage Questions, Answered: How to Qualify For & Obtain Home Financing

Have mortgage questions? You’re not alone! Although common, getting a mortgage is a complicated process that few thoroughly understand. A mortgage is one of the least expensive ways to finance your home purchase — second only to an interest-free loan from the Bank of Mom & Dad. A mortgage is also one of the best ways to finance your investment property purchase — historically low interest rates maximize your buying power. But getting a mortgage isn’t as easy as walking into the bank, asking for money, and leaving a few minutes later with a check. Besides the mortgage questions most folks have, today getting a mortgage is significantly harder than it used to be. Thanks to the housing crash in 2008, lending guidelines are far more restrictive these days — no more NINJA loans (No-Income No-Job Applicant). If you want a mortgage, you have to meet some fairly strict requirements — so you better get your mortgage questions answered before you apply. If you’re just hitting the bare minimums, you’ll be paying higher interest rates and Private Mortgage Insurance. Mortgage Questions: What is a Mortgage? A mortgage is a loan, secured by a specific piece of real estate, used to finance the purchase of that real estate. Once the borrower secures a mortgage, they make regular, monthly payments to the lender for the life of the loan. Typical mortgages are for 15, 20, 30, and even 40 years. If the borrower stops making these payments, the lender will seek foreclosure, which is the legal process of taking possession of the property. Typical mortgage issuers are banks — both local community banks and national chains, credit unions, and mortgage brokers — who qualify you and fund the loan, then sell the loan on the secondary market, usually to Fannie Mae/Freddie Mac, private entities supported by the Federal Government. Fannie and Freddie purchase loans from the lenders who originate them — provided they meet their lending requirements — then either keep them in their own portfolio or bundle them with other loans and sell them as mortgage-backed securities. Loans can be sold at any time. If this happens, the borrower receives notice of the sale and a date on which the payment is now due to the new lender. There is no limit to the amount of times a mortgage can be sold, but the original terms of the mortgage remain intact. So let’s look at the steps to getting a mortgage and cover some common mortgage questions. Know Your Credit Score Before you start looking for a mortgage, before you even start looking for a property to purchase with that mortgage or getting answers to mortgage questions, you need to know how much money you can spend. Your lender will ultimately give you that dollar figure, and one of the top factors they consider is your credit score. Your lender will run your credit report to see what sort of credit risk you pose. Before you talk to a lender, it’s best to know what they’re going to see on that report, so you can make adjustments and remove any inaccurate information. Your credit report is the history of how you have used credit — on-time payments and low credit utilization shows lenders that you are a good loan candidate. The higher your credit score, the lower your interest rate will be. The best rates go to borrowers with scores of 740 or higher. On-time payments make up 35% of your score. Credit utilization makes up another 30%. That’s already two thirds of your credit score, so making payments on-time every month and keeping your balances low are two of the best things you can do to improve your credit score or keep it up if it’s already high. What is a Good Credit Score? In your search for answers to mortgage questions, it’s important to learn the role that credit score plays. While there are a few different credit scoring companies, most lenders look at your FICO score. FICO stands for Fair Isaac COrporation. They’ve been around since the dawn of time and are considered the Gold Standard of credit scoring. Their system ranges from a low of 300 to a high of 850 — but that scale is skewed toward the high end. Here’s how it shakes out: Excellent: 750+ Good: 700–749 Fair: 650–699 Poor: 600–649 Bad: 599 and under Like I said above, the best rates go to borrowers with a score of 740 or higher. Most lenders stop at 620, although a few will go down to 580 for owner-occupants. The lower your score, the higher your interest rate will be, effectively lowering your buying power. Related: How to Improve Your Credit Score Minimize Credit Issues One of the most important mortgage questions to answer is how to get your credit score to where it needs to be. If you aren’t in the “excellent” or “good” categories, now is the time to try to get there. You can simultaneously work on improving your credit score while you are looking for a property to purchase. But let’s get to the root of the problem — what makes your score so low? Are you consistently making late payments? On-time payments make up 35% of your credit score. If you find yourself continually making late payments, there are several ways to fix that. Sign up for automatic payments/withdrawals. Most companies have an automatic payment option — where you give them either a credit card or bank account number — and they schedule the payment for you. This works great for most situations, but not for everyone. Both my husband and I work from home, necessitating internet access. The only current option is the local cable company, who isn’t known for great customer service. I write them a check every month to pay the bill because when it comes time to cancel, I don’t trust them. My city is installing a fiber optic network, which will provide lightning fast internet service. As soon as it goes live in my neighborhood, I’m cutting the cable — and I want as little hassle as possible when I do. Pay bills when they arrive. I used to open my bills and put them to the side, intending on paying them when they were due. Instead, I forgot about them and paid them late. It wasn’t a question of having the money to pay them; it just slipped my mind. I paid several late fees before I started paying them the day they arrive. I open them up, write the check, and put it into the outgoing mail right away. I haven’t paid a late fee since implementing this practice. Schedule payments on your electronic calendar. For those bills you don’t want to automatically pay but you also don’t want to send in as soon as you get, schedule them on your electronic calendar. Google has a great calendar for Android, Apple has a great calendar for iPhone — and they will both send you a notification. Is your debt-to-credit ratio high? Your score is also affected by how much of your credit you use. Let’s say your credit card has given you a $1,000 limit, and your current balance is $800. You are using 80% of your available credit — and lenders don’t like that. They much prefer a credit utilization rate of under 30%, or a balance of $300 on a $1,000 limit. Start paying off your credit cards. If buying a property is a priority, take all your extra money and throw it at your cards to bring your debt to credit ratio down as much as possible. Before You Apply Have mortgage questions regarding the application process? First, there are a number of things that you can do to make your mortgage application the best it can be. A great credit score is just the start. Put your spending on hold. When you’re trying to get a mortgage, hold off on spending money. Unless your car dies or the furnace goes out, don’t make any large purchases until after the loan closes. If you are just barely qualifying, you don’t want to make an unnecessary large purchase and throw your credit utilization out of whack, effectively ruining the deal. This is also not the time to go opening new credit cards. Before approving your application, the card-issuer runs a credit check. This gives you a hard inquiry into your credit history, and a hard inquiry will knock a few points off your score. The mortgage industry is tight-lipped about exactly how it analyzes your qualifications and determines the limit on your loan. Play it safe and make as few purchases as possible until after the loan closes. Put large transfers on hold, too. When applying for a loan, your lender wants to see documentation about everything financial. Routine or easily-explained transfers of money into and out of your account are fine and expected, but large or unusual transfers are questioned, and documentation isn’t always easy to provide. Once the money has been in your account for 3-6 months, it’s considered yours, and no documentation is necessary. The last time I got a mortgage, in a weird turn of events — and poor timing on my part — I had a fairly large deposit leaving my primary checking account to an online, higher-interest account. I left some of the money in the online account when I transferred it back to the checking account, and the entire thing happened between statements, so it didn’t appear correctly on the documentation. This whole situation jeopardized my loan, and it took literally hours of phone calls to the various institutions to get the whole mess sorted out. Learn from my mistake and get everything in order before you even apply for the loan. The pennies you miss on the interest are more than made up for by the lack of hassle during the loan qualification. It’s definitely worth getting mortgage questions regarding transferred answered before you start the process so you can learn how to avoid missteps. Find a lender. If one of your mortgage questions isn’t “how can I shop around for mortgage rates?” you should add it to your list. The cost of getting a mortgage varies from lender to lender, so you’ll need to ask mortgage questions related to lender choice before anything else. Some lenders may have a decent rate with high closing costs, while another might have a higher rate with significantly lower closing costs. The key to finding the best deal is to compare apples to apples. When seeking to get your mortgage questions answered, be sure to get rate quotes from at least three lenders — five is better, and the more quotes you get, the better rate/terms you can find. Take a look at local institutions like credit unions, as well as national options like mortgage brokers. You shop around for the best price on tires and groceries, right? Why wouldn’t you shop around for the best price for your mortgage? Put all the information in a spreadsheet with headers like “Lender Name,” “Interest Rate,” “Loan Term,” and “Closing Costs.” A lower interest rate with higher closing costs can actually cost you more money. You’ll want to get all your quotes within a tight timeframe — myfico.com says for lenders using the older scoring method, that means 14 days. For lenders using the newer scoring method, it opens up to 45 days. (Lucky for you, your lender probably won’t tell you which method they will use, so play it safe.) Getting mortgage quotes from several different lenders doesn’t (usually) mean you are looking for several different mortgages — it’s interpreted by the credit bureaus as you shopping for the best rate. The multiple inquiries get lumped into one hard inquiry and don’t have the negative impact on your score that multiple hard inquiries typically would. According to a report from the Consumer Financial Protection Bureau, 47% of homebuyers didn’t shop around for their mortgage. Speaking to just three different lenders can save you thousands of dollars in mortgage costs. Why wouldn’t you shop around and get mortgage questions regarding different costs answered first? Related: The Investor’s Guide to Financing Options for Buy & Hold Rental Property  Get pre-approved. Most real estate markets have come back with a bang, and competition for properties can be fierce. In tight markets, offers won’t even be given a second glance unless accompanied by a pre-qualification letter or a pre-approval letter. In ultra-tight markets, the more thorough pre-approval letter is the best way to go. What’s the difference between a pre-qualification and a pre-approval? Pre-qualification means the lender has taken your current income and debt into consideration and determined that if those items are found to be valid, you could qualify for a loan of up to $X. Pre-qualification can be done in about an hour. Pre-approval, however, means that the lender has looked much deeper into your background. They’ve been given proof of your income, debts, and assets, run a background check, and submitted the whole business to underwriting for their approval. Pre-approval takes about a week and is a much more in-depth investigation into your financial history and current situation. A pre-approval letter is valid for about 120 days, so you want to get this paperwork started in the beginning of your home search. So, how do I get a pre-approval letter? Once you have decided on a lender, based on their rates, closing costs, and ability to get the loan approved within your timeframe, ask them for a pre-approval letter. Start this process as close to the start of your home search as possible — you want to give them time to have the letter written up, and you want to give yourself time to look for a home. Remember, these letters are typically only good for 120 days. If you’re in a hot market, it might take that long or longer to find a home you want to buy. Pre-approval limitations A pre-approval letter is easy to get because it’s not binding — it isn’t a guarantee that you will receive a loan. It’s a letter that tells how much money you have been preliminarily qualified for. Pro tip: I like to have my lender adjust the pre-approval letter dollar amount to the amount I am offering, making it seem like I am offering at my limit. I don’t want the seller to know I am approved for a higher amount — they might feel like there is more room to negotiate. My sister is currently selling her house and buying a new one, so I borrowed her pre-approval letter. Here’s what has to happen before her pre-approval turns into approval: Specific conditions required for final approval include the following: A valid sales contract on the subject property Acceptable appraisal supporting loan value Evidence of hazard insurance and flood insurance (if required) No changes in employment, income, credit, and asset information submitted Satisfaction of any final secondary market/investor requirements Satisfactory verification of employment, income, credit, and asset information submitted An acceptable preliminary title commitment issued on the subject property So in order for her to actually be given the money to purchase the house, seven different contingencies have to be met. How to Get a Mortgage: The Mortgage Application After you have gotten your mortgage questions answered, viewed your credit report, decided on your lender, and found a house you want to buy, the fun really starts. Typical residential real estate contracts allow for 30-45 days for the mortgage to be approved, the home to be inspected and any problems resolved, insurance obtained, appraisal, flood certification if necessary, etc. Documentation In addition to the tax returns and pay stubs, there are a whole host of other documents your lender may ask for including 3-6 months of bank statements, proof of any other income like rent or alimony, and paperwork regarding monetary gifts used for down payments. Be prepared to discuss the most minute details of your financial life, and have explanations ready for any odd ducks that may pop up. The more documentation you can provide up front and mortgage questions you can get answered, the lower your chances are for a last-minute document dash to satisfy the underwriters — or worse a last-minute denial. Cash for Closing Buying a house is expensive. In addition to the down payment, there are a multitude of other costs you will be expected to cover — and the amount of cash at closing will be considerably more than just your down payment. Down Payment You have to either come up with the entire down payment yourself or have it gifted to you. If you are receiving a gift, the person giving the money has to sign a paper stating it was a gift and that they do not expect to be repaid. They may also be asked to provide proof of funds like a bank statement. If you’re purchasing a property for your primary residence, you can qualify for a loan with as little as 3.5% down. Think $3,500 for every $100,000 in purchase price. If you’re purchasing an investment property, lenders typically want a 25% down payment. That’s $25,000 for every $100,000 in purchase price. You can turn an investment property into a primary residence easily with a little thing we like to call house hacking. Purchase a property with either more bedrooms than you need and rent out the extra space or purchase a multifamily property with more units than you need and rent out the extras. You can qualify for a residential mortgage on multifamily properties up to four units. Credit Report Your lender will run a thorough credit report on you and all other persons who will be named on the mortgage. They want to see how timely your debt payments have been in the past, which gives them an idea of how timely you will be making your payments to them in the future. This should only cost around $25. Title Insurance Your lender will require you to pay for a title insurance policy, which covers their interests in the property. You will have to pay for an additional title insurance policy to cover your own interests in the property — if you do not and an issue arises down the road, you are not covered and can lose your entire investment. The lender’s policy is based on several things, such as the price of the home, when the last title policy was written, and any extended coverage. The title policy that covers your interests will be more expensive than the one covering the lender’s interests. That policy will come at a discount when purchased and bundled with the owner’s policy. For my most recent retail transaction, the owner’s policy on a $312,000 sales price was $1,006. The lender’s policy was $400 because it was bundled with the other policy. The owner’s policy comes at a discount 70% re-issue rate because the previous policy was written within the last 5 years. Home Inspection There is an inspection period in your contract, typically 7-10 days from the time that both parties have signed it. During this time, you may get an inspection on the home to give you an idea of the condition of the property. The purpose of the inspection is not to nitpick obvious items, like a dirty floor or cracked walls. Related: Home Inspections Can Save You Thousands: Here’s How to Get the Most Out of Yours The inspector walks the entire home and tests all the major systems like furnace, electrical, plumbing. They don’t guarantee the system, but they can tell you the age and general condition of it, along with the average lifespan for that system. A water heater’s average lifespan is 12-15 years. My most recent inspector told me he’s seen water heaters that have died after 5 years, and others that are still working fine at 19 years. After the inspection is finished, the inspector will show you the things he found, pointing out both the urgent items that need repair immediately, as well as less significant items. The inspector will write up everything in a report and share it with you, either via email, in print, or both. My most recent inspector had a portable printer with him and printed it while we were still in the home, in addition to emailing it while we were talking. Your home inspection will cost between $300 and $1,000, depending on how big the house is and what extra services you choose, such as infrared cameras, sewer scopes, radon testing, etc. Appraisal The lender will order an appraisal for your property to make sure it is worth what you are paying for it. The economic downturn and housing crash was due in large part to bad appraisals to approve bad borrowers. Guidelines are far more stringent now. The lender can no longer specify an appraiser. The appraiser comes to the property and walks around it, making note of features, improvements, and general condition. The appraiser then compares it to similar homes within a small area surrounding the subject property — typically within a half mile or less — that have sold recently. Flood Certification FEMA (Federal Emergency Management Agency) has drawn up maps around the United States to determine areas that are more prone to flooding. As you can imagine, these areas are typically located near waterways. If a property is located in a FEMA-designated Flood Zone, the lender may require the homeowner to obtain flood insurance as a condition of the loan. Flood insurance is only available through the federal government and typically has a waiting period of 30 days before it is active; however, if you purchase flood insurance at the same time you purchase the property, your waiting period is waived. At the Closing Table Now that we’re at the closing tables and all your mortgage questions have been answered, everything is smooth sailing, right? HAHAHAHA! Again, the more work you do up front and mortgage questions you get answered, the less likely you are to have issues at the closing table. At least on your side. The seller still has the opportunity to throw a monkey wrench into the whole thing. Your closing agent, real estate agent, or attorney will let you know when the closing is scheduled to happen. Bring your state-issued ID card, the funds in the correct form of payment, and patience. Wait, back up a comma. The funds in the correct form of payment. This is kind of big. My last closing, where I represented the buyer, I missed a crucial line in an email. Funds over $50,000 were only accepted through wire transfer. Not a big problem, except that the closing agent reminded me of this when she still hadn’t received my funds at 3:00 p.m. the day before closing. Now, I was the one who missed the line in the email. I’m not trying to shirk blame. This one was all on me. But I’ve never heard of a closing company who wouldn’t take a cashier’s check for the buyer’s portion of the purchase. And I had said more than once, “The lender will wire their portion on time and we’ll bring a check to closing.” So “the funds in the correct form of payment” is actually very important. That and an ID card. Closing Documents Have mortgage questions regarding closing documents? It’s no surprise to anyone who has ever gotten a mortgage that the documents are difficult to read and understand, even after you’ve gotten mortgage questions regarding the process answered. Even better, these documents were frequently delivered the night before or even the morning of closing, giving the borrower little time to review them before closing. The government tried to clear up the process by redesigning the forms used at closing and amending the timeline for delivery. These new forms clearly state the loan amount, as well as terms and details specific to the loan, such as origination fees, prepayment penalties, any points, etc. The new timeline makes it mandatory for the lender to provide a Good Faith Estimate no more than three business days from application, and a HUD-1 no less than three business days before closing. On the HUD-1 statement, you will be given an exact account of where each dollar in the transaction is going or where it came from. As the buyer, you will be given a dollar figure to bring with you to the closing table — or to have wired prior to closing. You’ll also get an accounting of how that money is spent, including any concessions the seller is offering or any money owed you for fees for that they are responsible during their ownership, but won’t become payable until you own the property. You’ll also get an accounting of items you will prepay. Prepaid Interest Mortgage interest is paid in arrears, meaning your June 1 payment covers the month of May. Depending on the day of the month you close, you will prepay the interest for the current month at the closing table. It is important that you get mortgage questions related to payments you’ll owe answered beforehand so you know what to expect. Closing within the first week of the month usually means your first mortgage payment is due on the first of the next month. An early June closing means a July 1st payment. Closing during the last three weeks of the month will typically mean that your first mortgage payment isn’t due until the following month, so a late June close means your first payment is due August 1. When you’re closing in the later part of the month, you’ll prepay all your interest for the month you close. The later in the month you close, the less money you bring to the closing table. If you close on June 15, you’ll prepay for June 16-30. If you close on the 26th, you’re only prepaying June 27-30. Prepaid Insurance/Taxes -Escrow Property taxes are also paid in arrears, and are typically collected monthly along with your mortgage payment and held in an Escrow account. Using the same theoretical closing date of June 15, 2016, you will prepay your taxes from January 1 – June 15. Actually, you’ll receive a credit from the sellers, who will be responsible for paying the taxes for the days they owned the property. Signed, Sealed, Delivered — It’s Yours! A smooth closing will take around two hours to complete. As the buyer, you will sign your name about 96,000 times. The closing officer will explain each document to you before you sign. To be honest, most people don’t read the documents before they sign them, and the closing officer usually does a good job of explaining them. If you’d like to read each document — and I encourage you to do so in order to get all your mortgage questions answered — it will push your closing time back significantly. You may want to ask for a copy of the documents before you get to the closing table so you can read them at your own pace. Two short hours — and a couple of hand cramps — later, you are now the official owner of that new property. Congratulations! Have any details about the mortgage process you’d add? Did this article answer all your mortgage 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

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

Do you wanna hear something not a lot of folks know about me? I used to be a front-end personal banker at a national bank. Yep, I was the guy who sat in the desk and took loan applications and tried to get you to refinance your house. Man, I hated that job. Really, it was awful. So much sales pressure, so many hours of staring at the clock. So many reminders that I should be out investing my money, rather than working for it. However, my job did give me some inside information about how the loan process works. Want to know what I found out? Loans were like a gun safe. They could be opened with the right code.  Every time. I titled this post with the word “guaranteed” NOT because I believe you will always be able to get a loan approved, but because I wanted to demonstrate that the lending process is not a mystery. It’s a lock that can be opened with a code. If you enter the right code, you WILL get your loan approved. Can you enter that code today? Maybe, maybe not. Unlike the code to a gun safe, this code is not something I can simply tell you; it’s something you need to have. But I do know that IF you enter it right, if you have what it takes, you are going to get approved. Whether you are looking to buy your first home, purchase an investment property, refinance a current loan, or something totally different, this post will give you the tools you need to crack that code and hear a resounding “yes” from the banker, every time. Understanding How a Loan Works Before getting into the details of just how to get your loan approved, let’s talk about the basics. How does a loan even work? Obviously, there are a lot of different kinds of loans and lenders. There are conventional banks, mortgage brokers, portfolio lenders, hard money lenders, private lenders, and more. Each is going to have their own system. However, let me make a few quick points about the loan process: Typically, the person who you are talking with is just a salesperson (like I was). Here’s the secret that makes the entire loan-procuring process 10x easier: They are not the ones ultimately responsible for saying “yes” or “no” to your loan. When you go into a bank and sit down with the banker, most likely they are simply there to collect your information and be the contact person for you. The real decision-maker is in the “underwriter.” The underwriter is an individual trained to look at all the puzzle pieces that the salesperson gives them and approve or deny a loan based on facts. The underwriter knows all the rules, laws, and regulations and can make an informed decision. However, while the underwriter has all the power, the underwriter is usually not very creative and definitely not emotionally involved (purposefully). Therefore, to get a loan approved, you must accomplish two things: Convince the front end sales guy about the worthiness of you and your loan Get the front end guy to convince the back end underwriter about the worthiness of you and your loan I find that #1, convincing the front end guy, is always easy. They are very quick to say, “Yeah, no problem. We can do that.” I ran across this about a dozen times when trying to refinance my recent 5-plex. Over and over, I heard it: “Yeah, Brandon, no problem. We can do that loan for you, no problem!” Then six weeks go by, and I get that fateful call, “Hey Brandon, this is [insert sales banker’s name here], and it actually looks like we can’t do that loan. You see, our bank will only [insert excuse here].” I don’t blame the banker, as I used to be one. I had one whole week of training, and I was sent out onto the sales floor to secure multi-million dollar loans. In fact, I was paid commission on loan APPLICATIONS in addition to loan closings. In other words, as a front-end banker, it was in my best interest to get someone to apply for a loan whether or not I thought they could actually get approved. That wasn’t my job; that was the job of the underwriter. I was just collecting leads and acting as “the middle man.” However, while the banker is not the one ultimately responsible for approving your loan, they are the first (and perhaps most important) person to focus your efforts on. Let’s talk about that. The Banker’s Role in Getting Your Loan Approved Let me tell you a quick story about myself — not to pat myself on the back, but to illustrate this point. When I worked at this bank, I was able to close twice as many deals as the other banker who worked there. Twice as many. We both had the same number of leads, the same number of applications, using the same underwriters. But I was able to do twice as much. Why? It’s the same reason I am able to buy twice as much real estate as many for almost no money down: Because I was creative. You see, most people don’t punch the code in right the first time when trying to get a loan approved; there is something wrong with it. A boring banker or underwriter will simply say, “No, sorry” and hang up the phone. But I was different. Instead of saying, “I can’t get this loan approved,” I always asked myself “How can I get this loan approved?” See the shift in thinking? Now, I didn’t do anything unethical or illegal to get these loans pushed through. Sometimes it was as simple as paying off a small credit card first or changing the loan type. My point is: When you start looking for a loan, look for a creative banker. You want someone who is not simply going to say “yes” or “no” like a computer, but someone who is going to fight to get your loan approved. Perhaps the best way to find this, at least when looking to get a loan on a piece of property, is to ask some real estate agents who their preferred lender is.  In my town, 9/10 agents will all say the same person. Find this person – that’s your first step in getting your loan approved. Now, even the best, most creative banker is not going to think of everything. This is why it’s ultimately UP TO YOU to make sure your loan gets approved. No, you didn’t just misread that. Once you finish this post, you’ll have no excuse to simply “apply and pray” for loans.  You’ll be able to know, or at least have a very good indication, of whether your loan is going to be approved or denied. No matter how good your banker is, they still can’t turn a pig into a pancake. It must pencil out for the underwriter. To make sure it does, let’s talk about how an underwriter thinks… Understanding How an Underwriter Thinks Let me tell you a little industry secret: lenders need you more than you need them. Think about that. Without borrowers, a lender makes no money. Why else do you think banks and mortgage companies spend hundreds of millions of dollars on advertising? They need us! So why does it seem so difficult to get a loan? To put it plainly, a lender follows the exact same advice I give new real estate investors: it’s better to do NO deal than a bad deal. In other words, they would rather do no loan than lend on something that will go bad. This seems pretty obvious, but it’s the first step in getting your loan approved. A loan is a gamble for the lender, and lenders only want to bet on sure things. This is why it appears so hard to get a loan — because you have to prove you are a good bet. So, what constitutes a “good bet?” Well, I don’t know because I don’t know YOUR lender. However, there is a really easy way for you to find out: Ask them!  Start building relationships with your local banks NOW, whether you plan to borrow this year or not. You never know when that relationship will come in handy. Let’s move on, and I’ll give you some specific on exactly what your banker is looking for. The 12-Digit Code You Need to Crack to Get Your Loan Approved Remember: your lender needs to loan out money — you just need to get the safe open! When an underwriter looks at your loan and is going to issue a “yes” or “no” verdict, they are going to want to make sure you have the right code. This code is the minimum requirements that they require in order to lend. Some of these requirements are set by the bank policy, others are set by the government. Others are simply set by the underwriter themselves. Getting your loan approved is as easy as correctly entering in the code. Below are 12 digits in that code. Some banks may have fewer digits needed, while others may have more, but these 11 should get you started: 1. Property Type Certain lenders only loan on certain types of property. So the first thing you should ask yourself is: will the lender lend on this kind of property? For example, if you are looking to purchase a commercial property but the lender you are talking with only loans on residential properties, you’ll see a door slam in your face. Trust me, I’ve been dealing with this. 2. Property Location Typically, lenders have certain locations they will and will not lend in. Be sure that your lender is okay with the location of your property. 3. Property Condition Many lenders will only loan on a property in great condition. Why? Because they want to ensure that the property can be sold if they needed to foreclose (and they want to make sure it is not dropping in value because of the condition). Therefore, be sure to check with your lender on what kind of condition they look for. Keep in mind, there are strategies for buying properties that need work, so don’t automatically rule out the fixer-upper. 4. Loan Amount This is something I ran into often in my search for a loan over the past year. You see, the five-plex I am refinancing is a commercial property because it contains five units (anything over 4 is considered commercial). However, most commercial lenders have loan minimums and since I only needed $100,000 for the refinance, I heard a lot of “Nos.” 5. Debt to Income Ratio (DTI) When buying a property, lenders want to know that you can afford it. To determine this, they use a ratio known as “Debt to Income” or “DTI.” DTI is a percentage number based on the relationship between your debt and your income. However, there are two different DTI numbers they care about, so let’s look at both: Front End Debt to Income Ratio – Front End DTI is the relationship between how much your total housing payment will be and how much debt you have each month. For example, if your primary residence house payment will be $1000 per month and you earn $3000 in gross monthly income from your job, your current Front End DTI would be 33.3%, because $1000/$3000 = .33. For real estate investors trying to buy or refinance rental properties, this number is not as important as Back End DTI. Back End Debt to Income Ratio – Back End DTI is the relationship between how much TOTAL debt you have compared to how much income you make. In other words: your total monthly debt payment divided by your total monthly income is your DTI. For example, if your total debt payment each month was $2000 per month and you currently earn $4,000 per month from your job (gross) your Back End DTI would be 50% (because 2,000 / 4,000 = .50). Every lender has a DTI number they care about, and one of the most important things you can do to ensure your loan gets approved is ensuring you are below the threshold of what the bank likes to see. Typically, you probably want your Front End DTI to be less than 28% and your back end to be less than 36%. When checking with a lender on their DTI requirements, you will typically see these numbers in the following format: (28,36) [where the first number is the front end, second number is the back end.) 6. Loan to Value (LTV) A lender’s primary concern is to “avoid risk.” To do this, they want to ensure that no matter what happens in the future, they will be okay.  If you continue to pay forever, they are happy with the interest. But if you stop paying, they want to know that they are not going to lose money. To ensure this, a lender wants to know that there is sufficient “equity” in the property to cover the costs if they need to foreclose on you and sell the home.  To gauge this, the lender relies on a percentage number known as Loan to Value, or LTV. The Loan to Value is a ratio between the total loan amount(s) and the properties fair market value.  In other words: LTV = Total Loan Amount(s) / Fair Market Value For example, if a property is worth $500,000 and you are looking to get a loan for $400,000, you are looking at an 80% LTV loan, because $400,000 / $500,000 = .80. Lenders typically have different requirements for maximum LTV based on the property type. For example, for an owner occupied property using an FHA loan, the lender will go up to 96.5% LTV. However, on a commercial property, a lender may not want to lend above 50% LTV. If you are an investor, you are likely to find 70-80% LTV the norm for investment properties. One additional note about LTV: the LTV is calculated using ALL the loans that have a lien on the property, including 2nd or 3rd mortgages. The lender will likely add all these loans together to determine the LTV. 7. Credit Score This one is pretty self explanatory, but banks want to know that YOU are trustworthy to lend money to so they generally have a minimum credit score that they want to see. This number will depend on the lender and the loan type, but if you are below a 600, understand that it can be difficult to obtain any kind of loan. To check your credit score, I would recommend checking out CreditKarma.com, which allows you to see your score for free (Like… actually free. No free trial, no credit card required. They make their money by selling credit cards. Yes, kind of ironic.) 8. Repayment Source Lenders want to ensure that your ability to repay the loan will stay consistent. To do this, they will dig in on your repayment source for the loan. For most borrowers, this means they will look into your job. They will want to know how long you have worked there for and how much you have historically made. If you just started a new job, it can be more difficult to get approved than if you have had the same job for years. If you are a property investor, the lender will also look at your rental income and may be able to use that income to offset your debt. However, most lenders will not give you any credit for this income unless you have been a landlord for more than two years (remember: they want stability). Additionally, no matter how long you’ve been a landlord, you likely will never get 100% of the rental income counted toward you. They will likely give you 70-80% just to be safe on their end. 9. Experience Next, they may want to know your experience level. This is especially true on large, commercial or multifamily loans. Why? Because the bank knows that you will not be able to pay the payment if something goes wrong. If the mortgage payment on your new apartment complex is $30,000 per month, the lender knows that there is no way that you could pay that if all your tenants left. Instead, they’ll want to look at your experience level to make sure you have the skills to ensure a catastrophic event like that will not happen. 10. Cash Reserves The lender will want to ensure you have the cash to weather any storm. Be sure to have at least some cash in a savings account before applying for your next loan. The amount will depend on the lender and how many properties you own, but every lender is going to want to see something. 11. Recent Credit Changes   A lender wants to know that not only is the property going to be stable – but YOU are going to be, especially in regards to your credit decisions. For this reason, it’s important not to do anything crazy with your credit while trying to obtain a loan. As lender Jeremy David Schachter of Pinnacle Capital Mortgage Corporation says, “What I always tell my clients, especially during the mortgage process, is keep on doing what you are doing when we initially got you pre-qualified. Don’t get tempted by the zero percent credit cards to furnish your home and with new appliances. Don’t change jobs, transfer large deposits into your account that can’t be sourced and don’t increase any existing debt, even after your credit is pulled. Lenders pull a refresh credit report as it is called right before you sign your official documents or close. If there is any new debt or an increase in your balances of existing debt, it could make or break your approval.” 12. Compensating Factors Lastly, understand that in the end, loan decisions are eventually brought to a real, live person, so there could be “compensating factors” if you fall short on a requirement or two. For example, if your credit score is a few points shy but the Loan to Value is exceptionally low, the lender may waive the minimum credit score requirement because the equity in the LTV compensated for it. However, there is no way of knowing exactly what your lender will or won’t do, so it’s best to simply try to fit your peg within their square box perfectly. Now that you have a good idea of how a lender thinks, let’s talk about how to fit your loan into a package that a banker will be excited about. Get Your Loan Approved By Making Your Lender’s Job Easier Earlier in this post I mentioned that getting a loan approved is like a code. If you can get the code right, you can get the door to open. That “code” was outlined above, but a code does no good if you can’t find the keypad.  In other words, you might know the 12 digits needed to open a safe, but if you don’t know how to punch those numbers in, those digits will be worthless. So let’s crack this safe together. As I said before,  a lender WANTS to approve your loan.  The banker wants to say yes. The underwriter wants to say yes. So why do we hear so many “nos?” Because people don’t enter the digits in correctly! So what’s the best way to make this process go more smoothly?  How do you get these digits entered correctly? Simple: Do the heavy lifting for your banker. You banker has a LOT of loans going on at the same time. They are doing a car loan for Bill Johnson, a house refinance for Sally Wiggins, and a broom loan for Harry Potter. Therefore, a banker is likely going to take the path of least resistance and prioritize the loans that will be the quickest and easiest to enter in. So, if you want your loan to get approved and get approved quickly — do the heavy lifting for them, so their job is as easy as possible. You already know the 12 digits that the banker needs to enter, so write these out as detailed and “plain as the nose on their face” simple for the banker, and then provide documentation to back it up. When you speak with the front end banker, ask them for a list of all the items you will need to have. Likely, that will be: Tax returns for previous 2 years W2s for previous 2 years Pay stubs for previous 2 months A personal financial statement Bank statements Purchase and Sale documents for the property Descriptions of all your properties And probably more. When the banker gives you this list, don’t think of it as a “wish list” but as a “must list.”  Your job is to compile this information in the most organized format possible. If there is one tip from this post you could remember it is this: there is power in presentation. Go overboard. Have fun with it! When I applied for the loan that was ultimately approved for my recent 5-plex refinance, I organized the entire packet in binder I bought from Staples, complete with a cover page, summary, photos, and divider tabs. There was nothing magical in this – but I simply gave him everything he wanted in the most organized way possible. Furthermore, I ran this property through the BiggerPockets Rental Property Calculator and took the PDF report that it generated and included that on top of the organized packet. This enabled the lender, in one place, to see all the financials of the whole property.  Upon giving him the application, besides being blown away by it’s organization, he commented how nice it was to see that summary document. And within a few days I had a full loan approval. (If you are not using this calculator to apply for loans or analyze potential deals, you are really missing out. Check it out today at BiggerPockets.com/analysis.) Wrapping it Up I can’t guarantee that you’ll always hear a “yes” from your lender. But I can tell you that if you don’t hear a yes, it’s because you either didn’t have the right code or didn’t punch it in correctly. Start thinking of the loan process like a safe to open – and the whole process becomes much easier and you’ll be able to finance far more properties. 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