Choosing the Best Mortgage Lender for You Choosing a lender to finance your new business, investment property or home is going to require some shopping around as you compare rates, terms and even lending scenarios.
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Securing the necessary financing for the purchase of any type of real estate, be it an apartment building or a single-family home, can be a long and sometimes frustrating endeavor. The best way to reduce that stress and confusion is through top-notch preparation. That means getting your own financial picture in focus and doing the research into identifying the best lender for you.
No matter what type of property you intend to purchase, it's all about understanding your options and knowing how to apply them to your particular situation.
For example, applying for an apartment building loan is not much different than funding any other type of real estate purchase. You find a property you like and secure the financing with a lender who is willing to give you the money — but you'll have a few extra hoops to jump through, like deciding how many tenants can live there and finding the right location for an apartment.
Applying for a loan on a single-family home will not have those concerns, but there are other issues to consider, especially when it comes to the question of whether you will be turning this into your own primary residence or a rental property. That will require a specific type of home loan that is called an "investment property" loan. If you plan to live there, great. If you plan to rent it out, you will need to be transparent about your intentions.
Choosing a lender to finance your purchase is going to require some shopping around as you compare rates, terms and even lending scenarios. At the end of the day, the borrower and the lender will need to feel comfortable working with one another.
Let's take a look at what that kind of situation might entail for both parties.
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Your choice of lenders
Yes, you do have a choice. Too many borrowers think that just because they're looking to purchase an investment property they have a limited number of choices. Not true, many lenders are ready and willing to finance prospective landlords and property owners who want to enter the housing market.
Depending on your financial health, you may find it much easier to secure a loan for a single-family residence than an investment property. For those who may be facing some shortcomings in that department, I urge you to make your foundation much stronger before you begin this process.
Purchasing an investment property comes with additional criteria like what I mentioned above since the lender will likely try to determine if the income generated from the property will be your main source of revenue for paying off the loan.
You need to take some extra precautions into consideration as to the standards and practices of these lenders when you apply for a loan. You can break it down to three basic types of lending entities — credit unions, banks and brokers. Here's how they each work.
Related: How the Mortgage Market is Opening Up to Brokers
1. Credit unions
You will typically find the best rates for investment property and home loans with these institutions. Credit unions service financing opportunities to a specific group of customers who are members of the institutions. You will often find that credit unions provide financial services to particular memberships from active duty/retired military, religious groups, even actors working in Hollywood. Since these memberships are restricted, it can be tough to secure financing from a credit union — unless of course, you are an eligible member of that specific group.
Some credit unions service a certain community which makes membership somewhat easier to obtain but you may still have to meet specified criteria to enjoy the benefits of working with that financial institution.
The option that a majority of you will likely be dealing with is a banking institution. Whether you're working with a small municipal savings bank or you're applying to one of the larger nationwide retail lenders such as Chase or Wells Fargo, banks can pose a number of challenges when it comes to getting the best rates and favorable terms. Since most banks are direct lenders, they will originate the loan and fund it upon approval.
The rates to which you might be subject could vary depending on the size of the bank, smaller institutions will often have more competitive rates and a willingness to work with first-time buyers as opposed to the nationwide conglomerates.
A broker is going to work as a middleman between you, the borrower, and a network of lenders whom that broker represents. This is an option for borrowers who may not prefer or simply are unable to qualify for the loan programs that banks or credit unions offer. Brokers do a lot of the legwork in finding the best loan program that fits what the borrower is seeking. These brokers usually work with wholesale lenders who offer discounted rates from a group of lenders who naturally compete with one another for your business.
Keep in mind, this is a service for which the borrower pays a fee. This is an extra expense that you would not be paying if you worked directly with the lender who will ultimately service your loan. But the appeal here is receiving a series of competitive rates and having someone else do all the work of shopping around for lenders for you.
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Getting pre-approved for investment properties
As with any loan, you're going to want to take every step possible to make that approval process go by quickly and easily. If you're in the market to purchase an investment property, the same basic factors work in your favor when it comes to your personal finances and credit history. If both are in excellent condition, you will find it much easier to secure the financing.
But you can also improve your chances of getting the best deal on the loan you need by taking these additional factors related to the property you wish to purchase into consideration. Remember, this is an investment property, not a home in which you plan to live, therefore you will have further criteria to meet.
- Occupancy. Some lenders will require a minimum occupancy to be met in order to qualify for a loan. You may need to maintain this minimum occupancy before you apply for that loan.
- Property location and condition. The street or neighborhood where the apartment building is located can also factor into whether or not you are approved for the loan. The lender may prefer the building to be located within a certain number of miles from a branch location of the financing institution servicing the loan. Some lenders may also take the crime rate and median income of the property into account when considering whether or not to approve the loan. The condition of the property you want to buy can also have a positive or negative impact on your ability to secure the loan. If the building is in need of repairs, you may be facing a tougher road to approval.
- Leasing options. Lenders will also take the leasing options of the property into account when they're working with potential borrowers. They will examine if month-to-month leases are available or if tenants have to sign leases at longer terms such as six-month or one-year leases. Longer leases provide a greater potential for financial stability instead of month-to-month arrangements where tenants move in and move out with regularity and there is a greater chance for units to remain unoccupied for extended periods of time.
Getting pre-approved for a private residence
You're going to face a whole lot of questions from any lender about the property you plan to purchase and how much money you plan to borrow. Make it easier on yourself by knowing how to best simplify the process and get approved quicker. Consider your particular situation and eliminate anything that will complicate the process.
Lenders would prefer that you can prove steady employment with a steady income instead of working in a capacity that could interrupt your revenue, such as contract work or being self-employed. Keep an eye on your debt and the number of credit cards you own, make sure they're not maxed out or your debt to income ratio is a red flag. Be very clear about where your down payment will be originating from as borrowing it will make the approval process almost impossible.
Finally, borrow only what you need and try to avoid a "cash-out" arrangement. This is seen often with refi's, the borrower will seek out a loan to refinance a mortgage but also expect to apply some of that cash to other purposes. It's not a dealbreaker but you will need to jump through a lot more hoops and prove your financial worthiness during the application process.
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Let me leave you with this
Do your due diligence. Borrowers who want to get the best deals are going to need to shop around to find the loan product they want. But when you can meet the criteria of these lenders, you are in control.
My advice, as always, is to make it much tougher for lenders to say no by putting yourself in the best possible position to get approved. Whether that's improving your credit score, offering a higher down payment, having a reputable property management team in place to protect your investment, or gathering as much pertinent information on the building as possible when you are ready to apply, it always makes sense to wait until you are completely ready to fill out that application.
It is far more advantageous than rushing things due to impatience or fear of losing out on what seems like a smart investment opportunity or a great deal on the price of a residence at that moment in time.