This is Part II of a two-part article – Part I can be viewed at Interest, Fees & Diligent Shopping.
Tip #3: Be Honest
Because of the disaster that was the real estate bubble of the 2000s, lenders are requiring a lot more detail about your financial status and history. The paperwork your lenders will require is exhaustive.
If your financial closet has a few skeletons in it, don’t let that keep you from applying, but be honest if your loan officer asks about a specific incident. There are fewer and fewer undocumented secrets in today’s world, and your credit history contains a lot of information about your financial past.
Tip #4: Know – And Improve – Your Credit Scores
Your credit or FICO scores are the first item any lender will look at when considering your mortgage application.
Credit scores range from the worst possible score of 300 all the way to the best possible of 850, although most scores range from 500-800. These not only determine whether the lender will make you a loan, but also the interest rate, loan-to-value (LTV) ratio (the percentage of the real estate’s value that the lender will lend you), original fees and other fees the lender will charge.
The differences between the loans available to borrowers with strong versus weak credit are hard to overstate. Real estate investors with poor credit are often left with no options but hard money (or private) lenders, who routinely charge 5 points as an origination fee and 15% interest, and often lend only 60% LTV.
For more information read our Real Estate Investors’ Guide to Credit Scores.
Tip #5: Put Down as Much Down Payment as You Can
The higher the down payment you make, the less risk the lender carries, and as anyone who has ever been in the lending business can tell you, loan prices are all about risk. Generally speaking, mortgage lenders will lend at lower interest rates and fees, the lower the LTV of the loan, because of the lower risk for the lender.
As an added benefit, if you can make a 20% or higher down payment, you may avoid the private mortgage insurance (PMI) payments entirely.
The impact that lower interest rate mortgages have on real estate investors and landlords is profound – a lower interest rate is often the difference between positive and negative cash flow on a rental property, and the difference between a lucrative career and ledger books covered in red ink. Take especially good care of your credit, shop around, and remember to take a close look at the lender’s proposed fees, which can easily climb over $1,000.