The world of real estate can earn you a generous income if you know what you're doing. The process of understanding the industry's ins and outs can be tricky, and many lenders have more stringent rules on real estate property investment than primary home loans.
Still, it's not impossible to find financing options for investment property loans. However, the real secret is to find the best possible one for your current circumstances. That involves work on your part, but there are some things that can ensure everything runs smoothly when looking for real estate investor loans.
Improve your credit score
Your credit score is of utmost importance when applying for any loan, whether it’s personal loans, business loans, investment property loans, or real estate investor loans. Even if you’re just at the limit, some financing institutions will not approve your application.
Generally, you can get an investment property loan with a score ranging from the low to mid-600s. (The average American has a credit score of 700.) The lender may want a larger down payment from you, and the interest may be higher than you’d like.
If you have an above-average credit score (more than 700), you’re more likely to get a lower down payment and pay a lower interest rate. That alone is a good enough incentive to strive for a higher credit score.
Carry out a credit audit
There is no such thing as too high of a score when it comes to improving your credit, especially when you’re looking for a loan. One way to further enhance your credit score is by performing a credit audit.
A credit audit is an examination of what you’ve done right, what you’ve done wrong, and how you can improve. It’s essential to cover this step before applying for a loan.
Ensure your target property will cover expenses
Since the loan is entirely based on the property, lenders will seek to justify the loan. That means they will examine whether the said property makes enough money to cover the loan payments, taxes, and insurance.
Many lenders employ a metric called DSCR or Debt Service Coverage Ratio. This number is the income of the property divided by the expenses, including the mortgage payment. For example, if the target property is expected to rent at $1,500 and the total costs are $1,000, you’d have a DSCR of 1.5. That DSCR number is high enough to warrant a loan for many lenders, where the minimum is around 1.2.
Collect and select
In doing your due diligence, you can decide the best deal by applying for multiple mortgages. You might be surprised at the different interest rates and other loan terms. The trick here is to apply within a two-week window so that it counts as a single inquiry with the credit bureau and will not hurt your credit score.
Pay off debts
When applying for any type of loan, reducing your overall debt will significantly raise the chances of approval. It will improve your debt-to-income ratio and your overall credit score, however there is no way to know just how much paying off your other debts will improve your score. Regardless, money owed accounts for 30% of your credit score, so a debt reduction may cause a jump in your score.
Source: http://totalcapitalnetwork.com/
