Even for a turnkey investor, the act of investing in real estate can be a process. For anyone looking to buy a property, lending is often involved. However, the act of acquiring a loan for an investment property versus acquiring a loan for a personal home can be a drastically different process.
If you're only schooled in the latter, it's important that you understand what it necessary to have to wow your lenders to secure smooth and agile lending in what can be a time-sensitive process. Obtaining loan approval is critical to opening doors for leveraging and diversifying purchase methods. The last thing you want is to limit your borrowing options or miss out on a good investment opportunity because you were unprepared.
So what do investors need to keep in mind when looking for lender approval? Here's your cheat sheet.
4 Things Lenders Demand from Real Estate Investors
While credit in and of itself is not the end-all and be-all of financial wellbeing—after all, it is only an indicator of your ability to borrow more money, and earning money and growing wealth is of greater importance—a high credit score is essential to your ability to borrow.
Good standing is necessary when acquiring a mortgage for a traditional home, but it's even more critical when acquiring an investment property. If your score is less than 740, be prepared to pay a higher interest rate, if you are approved at all. If you want your interest rate to remain the same, you'll find yourself paying a fee at lower credit scores.
This is why we so often stress the importance of guarding and improving your credit score as an investor. Being in excellent standing is necessary to woo lenders and get the best possible terms when looking to acquire traditional loans for investment properties.
A High Down Payment
Unlike a mortgage for a personal home, investment properties can't take advantage of mortgage insurance. Because of this, you will have to put down at least 20 percent as a downpayment with your lender. To negotiate a better interest rate, a downpayment of 25 percent may help swing the terms in your favor.
Regardless, investors will want to over-prepare financially for their property acquisitions. Because of the fluctuations on interest rates, the potential for fees, and the demand for a high down payment, acquiring bank lending can be costly. It's far better to be over-qualified and over-prepared. Show that to the lender to instill confidence.
Under the Property Limit
Something that investors can't forget is that there is a 10-loan limit handed down by Fannie Mae. That said, not all lenders are willing to approach this limit. Some will go as few as four or five before you are considered too high-risk to finance.
For real estate investors, it's critical not only to be aware of where you stand on your loan limitations but to carefully plan your short and long-term investment strategy around your ability to carry these loans. Investors obviously hold more than 10 properties at a time. Speak with a portfolio advisor beforehand to ensure that you not only meet the requirements of your lender but that you have a plan to acquire more properties in the future and that your lender is willing to finance them.
Documents, Documents, Documents
Many lenders have different requirements, but here are some of the basic documents you should have on hand when purchasing an investment property with conventional financing:
- Two most recent signed federal tax returns; all pages, all schedules
- 2 years tax returns if self-employed, have rental properties, or non-salary income (retirement, pension, etc.)
- Two most recent W-2s
- Two most recent pay stubs
- Two most recent bank statements; all numbered pages
- Rental agreements, mortgage information and/or HOA documentation (if applicable) for any properties currently owned
- Social security, retirement and/or pension award letters, and 2 years’ 1099s
At first, it can seem daunting to collect all of this information, however the sooner you do it, the easier the buying process will be. You'll also want to have your employer's HR contact information so that the mortgage company can verify your employment. In addition to this list, there's definitely a chance that your mortgage company will need additional information and relevant documentation for your loan. Having consistent, open communication is incredibly important to be sure that you're not wasting your time chasing down unnecessary or incorrect information that will only hold up your purchase.
2 Things Real Estate Investors Should Look for in Lenders
Investors shouldn't solely be concerned with what their lender will be looking for from them. Investing in real estate so often comes down to working with the right people and the right partners, and it is no less true when it comes to your lenders.
An Investor-Friendly Reputation
When looking for a bank to borrow from, understand that not all lenders are created equal. This isn't necessarily in reference to their terms, either. Different lenders will have different levels of experience and attitudes toward investors. It's valuable that you know how your lender feels about investors before you pursue lending.
How familiar are they with real estate investing? Do they have personal experience? If they don't, you may spend a lot of time trying to get your lender to even understand what it is you're trying to accomplish. Remember, your lender is part of your investment team and part of your success story. Picking the right one is critical, so choose experience.
Experience and Communication
Memphis Invest offers a list of preferred lenders to our clients looking to finance their investment property purchases. These lenders have been vetted by our finance department, meaning that they not only offer amazing rates and customer experiences, but they understand our process and will be able to deliver the type of service that Memphis Invest expects.
Navigating the financial side of real estate investing can be overwhelming. It’s a breeze when you have the support of the right turnkey partner.
Start your passive investing journey on the right foot.