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Don’t Kick Yourself Later, Invest Today: What You Need to Know to Begin Investing in Real Estate
While you never want to let sellers or their agents pressure you into buying a property in a hurry because “the area is so hot” or “the property is so perfect” or “10 other buyers are so interested,” you do want to be equipped to act quickly when your timeline tells you now’s the time because it’s the perfect deal. Here’s what you can do to prepare.
1. Before You Approach a Lender, Know Your Borrowing Power
Equifax, Inc.
Experian
National Consumer Assistance
TransUnion LLC Once you have your reports in hand, study them thoroughly and make sure there isn’t any negative or incorrect information that could hurt your ability to secure the best mortgage. If you do find an error, write the reporting agency; it must investigate and respond to you in 30 days.
What Lenders Will Consider Each lender you contact will get these same reports. Most lenders go with an average of the three scores or the median score. For more on understanding your FICO score, visit myFICO.com. In addition to your FICO® score, lenders will look at the following five factors:
If you're borrowing money to buy rental property, lenders may also take into account the rents you will receive.
Expenses-to-Income and Debt-to Income Ratios The Expenses-to-Income ratio is the sum of your interest payment, taxes, hazard insurance and any association dues divided by your monthly gross income. This ratio does not include other debt you may have (such as car loans), life or health insurance or any of your other monthly expenses.
Monthly Expenses = Expenses-to-Income Ratio percentage To get a good interest rate, your ratio needs to fall between 28 percent and 33 percent. Your Debt-to-Income ratio is the sum of your last calculation plus any other credit card or loan payments divided by your monthly gross income.
Monthly Expenses (as determined in your Expenses-to-Income ratio calculation) Lenders usually want to see a ratio of 28 to 36 percent. But ratio guidelines fluctuate, depending on the strength or weakness of the economy. Most lenders have calculators on their Web sites to help you ascertain how much you can borrow. Using your FICO® score and the two ratios, you can determine exactly how much lenders will offer you to buy your building.
2. When You Speak to Lenders, Compare and Negotiate Fees Once you've seen the list, compare lenders against one another on their mortgage rates and their fees. Most lenders are eager to get your business and will negotiate. You want the lowest interest rate and the lowest fees. If you have to choose one or the other, though, go for the lower interest rate. The interest rate will affect you for the life of your loan. The fees are usually a one-time expense. Also ask lenders to explain any other fees or “points” you may have to pay. Some lenders claim that they don't charge fees. Often, they make their money by earning a percentage of your loan amount. Ask for the fees in advance and in writing.
3. Get Preapproval for Your Loan Amount To sellers, preapproval means that you have buying power. This buying power will enable you to negotiate the selling price of the building, as well as other terms, such as the closing date. (First-time buyers are sometimes confused by the twin terms of preapproval and prequalification. Preapproval means that the bank is prepared to loan you the amount listed in the preapproval letter. Prequalification means that the bank thinks your numbers look good, but it does not verify those numbers and it does not have to loan you the amount stated in your prequalification letter—in fact, it does not have to give you a loan at all. Serious real estate investors go immediately for preapproval.)
4. Before You Look at Buildings, Engage a Mortgage Broker and a Real Estate Attorney A good mortgage broker can compare lenders in advance and advise you which ones charge the lowest fees and lowest interest. As with lenders, compare the fees charged by each mortgage broker and interview a number of them. Ask other landlords which mortgage broker they use. You want someone who is working for your best interest, not someone who is paid by the lenders. Many people, including real estate investors, buy and sell buildings without consulting an attorney. If you plan to buy more than one building, though, a good real estate attorney can alert you to environmental and legal issues and state and local regulations before they become a problem.
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