With lender guidelines continually tightening, investor financing has become more difficult than ever to obtain. Investors that I worked with even a year ago to acquire investment properties with conventional financing are having trouble getting approved for a loan in the current lending environment.
Whether it’s a borrowers borderline debt to income ratio, credit score, financial reserves or even number of properties currently owned – getting conventional financing on investment property can be tricky. It seems that in many cases, investors meet all of the guidelines except for one or two exceptions, which unfortunately may result in their loan being denied.
Having run into this situation many times, I’ve learned to ask the question, “Do you have any friends or family members that might want to partner with you?” Interestingly, most investors do. In many cases, we’ve been able to help the investor ultimately obtain financing by adding a partner to a loan or even swapping out the borrower for a partner who qualifies by him or herself.
Who Should You Turn to First?
For most of our investors, the first obvious choice is their spouse. Assuming the spouse has documentable income and good credit, getting qualified may be as simple as adding this income to the loan. (As an aside, when a couple can each qualify for a mortgage without the other, I recommend they do not go on a loan together. This way, they can maximize the number of properties that can be purchased between the two of them)
If a spouse cannot help with a loan approval, an investor may want to ask friends or family members to partner with them in the investment. Whether or not the partner gets the loan by himself or together with the investor doesn’t necessarily matter as long as both partners are comfortable with the arrangement. Most investors form a corporate entity and outline the terms of the partnership in an operating agreement of some sort. This involves detailing responsibilities that relate to time and financial requirements as well as the dividing of income. Once the property has been purchased, the partners may then decide to put the corporate entity on title to the property.
For somebody who is unable to finance an investment property, finding a partner may be the next best option. As with any business venture, I would highly recommend that in doing so, each party consult with an attorney and CPA to make sure all aspects of the investment are properly managed. With so many investment opportunities in this depressed real estate market, it would be a shame to miss out just because of a technicality in a particular lending guideline. If that’s you, find a partner and start investing!