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What You Must Know About The Lender's Point of View Before You Invest In Real Estate
Although lenders may be friendly -- maybe you want to take your lender out for BBQ -- they are not your friend. This is business, like any other. On borderline issues, a lender may be willing to lean in your favor, and it may well seem like charity. I assure you it is not. Long-term business relationships are solidified through judgment calls of this nature. This is not to say that lenders are in any way immoral, or corrupt. A great deal of American business is reliant upon an individual’s ability to cater attention to specific interests, while remaining firm on those that will drive profits.
For these reasons, it is often a difficult job, to be a lender. Lenders require absolute assurance that each loan will be repaid in full, with reasonable expectation of profit. The first way to do this is to look at each borrower’s credit history. You will need to supply your lender with any previous or outstanding loan information, including the size of the loan, repayment history, and so forth. And credit scores such as FICO will help lenders to determine the likelihood that you will be able to repay your loan.
Nor does it stop there. Your income history will be the subject of scrutiny -- your investments, profit you have made per capita. Income statements and tax returns (generally about three years’ worth) are also fair game, as well as a full account of outstanding debt from any legal judgments gained or issued.
This information will be amassed for one purpose -- to determine whether you have previously shown that you can and will repay your debts promptly and in full. Real estate is a competitive market, because of its potential for high-yield profits. A lender will need to be certain that you can make some, because that will determine whether or not they can.
In addition to credit and income history, a lender will examine the current property with equal care. Generally speaking, banks are concerned much more with cash flow than collateral. For this reason, they’ll usually finance no more than 75% of the appraised value of a property.
Your lender will want to know what type of property you wish to purchase, and how it will be used -- whether you will receive rent from a multi-dwelling apartment complex, or lease income from small business owners. Subtracted from maintenance costs, insurance, repairs, taxes, and a host of other associated costs, this will determine what kind of positive income they can expect. Before signing over a healthy check, lenders must be certain that you can cover these costs, in addition to their interest charges.
Once you have been deemed worthy of a loan, its terms and conditions must be settled. Most lenders strive for short repayment periods. As a borrower, longer terms provide opportunity to avoid new appraisal costs, origination fees and other financing costs. Plus, smaller individual payments will free up some extra cash for quick repairs and cosmetic housework (i.e. paint). Make certain that you are comfortable with the conditions of your loan beforehand.
In short, a lender is a sort of business partner. They may not be your best friend, but neither do they have to be an enemy. Work with them to get the sort of loan that you desire. And keep in mind, everything is negotiable.
About the Author: Paulie Sabol, often called the ‘legal bank robber’ for his real estate financing and bank owned foreclosure investing, is a nationally recognizedreal estate investor trainer and financial thinker. Sabol, has personally completed 100’s of real estate investments, and helps real estate investors learn to make more money with creative investing. Visit his site at http://www.reiunion.com/rei.html
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