Real Estate Loans: Difficult in these times, but not Impossible
Gone for now are EASY Real Estate loans – good credit score, an OK debt to income ratio, and little or no money down.
In today’s economic times a solid credit score, little debt, and at least 20% down payment are required for mortgage loans from banking institutions. All this may sound daunting, but don’t fret!
The first step is to get solid advice from a mortgage professional. They will analyze your credit score and your debt to income ratio and determine what is the maximum loan that you can obtain. From this information you will know what types of properties that you can afford. They will also be able to help you with any credit score issues by pointing out areas that need attention. Removing debt is always a good start – especially student loans and revolving credit, such as credit cards, both of which can be problematic to your credit report.
If you qualify for a loan, the next step is to get a Good Faith Estimate or GFE from several lenders. A word of caution here, don’t allow the lenders to pull your credit at this point. It’s always a good idea for you to have an up to date copy of your credit report or, at least have a good idea of what your credit score is. Each time a lender pulls your credit, your score could be affected negatively. The GEF is the document from the lender that dislcoses all of the estimated fees associated with the loan for your investment property, also known as your closing costs. Here is a good primer on the new GFE.
Shopping around for the best deals on insurance and real estate attorneys can also help reduce the cost of the loan (in other words, your closing costs). Understanding how much money is required to be held in escrow by the financial institution (3 months, 6 months, or 1 year) for insurance and property tax will also have an impact on the closing costs of the loan. These items are called your “prepaids” and, they essentially must be paid up front at closing in order to establish the escrow account with the lender who will be paying your property taxes and hazzard insurance for you. Years past, lenders sometimes did not require an escrow for taxes and insurance. Today, the majority of lenders require an that you pay into an escrow account for these tiems. Also, lender Title Insurance coverage is required and its cost is dependent on the Title Insurance company that is used by the attorney closing on your loan. Borrower’s coverage is optional and is usually much less expensive given the fact that the dollar amount of the coverage is usually much less than that of the lender’s amount of exposure (for example, if the lender is putting up 80% the sales price and the borrower is only putting up 20%, the lender’s coverage would cost more since they are insuring a larger piece of the property). As a purchaser of any real property, investment or otherwise, purchasing Title Insurance is a very smart decision and well worth the small investment as it protects against past, present and in some cases even future title claims against your property.
If you are financing more than 80% of the loan (putting less than 20% down) on a conventional loan, you will more than likely be required to pay Private Mortgage Insurance (PMI). The current estimates on PMI are around $70 per $100,000 financed. This is added to your monthly payment.
Obtaining a Real Estate Loan should not be an intimidating process. Going through the process will give you a snapshot of your financial health and tell you where you stand in your pursuit of building your personal wealth. You should always keep your eye on the prize and keep working towards the goals for your financial future.
