All Cash or Financed?
If you’ve decided to purchase an income property for “all cash”, then you can skip ahead to “Step 4: Start the Search“. Or, if you’re undecided, check out our article on “All Cash or Financed?” for some helpful tips on what matters.
Who To Use?
Lenders come in all shapes and sizes. The primary things you should look for in a lender are:
- The ability to understand your personal situation
Without these two factors, the purchasing process will be frustrating and less likely to succeed. We at SMART Real Estate Investing System work closely with an excellent team of lenders with proven backgrounds in successful transactions with high customer satisfaction. Check out our SMART Resource Center for more information on lenders we can recommend with confidence.
The purpose in getting preapproved is to help submit the strongest possible offer. Sellers and their representative agents are looking for elements in an offer package that indicate a strong buyer and buyer’s agent, likely to follow through in the promises laid out in the offer contract. Among these are “pre-approval”, substantial down payment, few contingencies and clear intent.
Pre-Approval vs. Pre-Qualification
“Pre-qualifying” is getting a statement from a lender that says you “look good” for loan approval. Not very strong, is it? “Pre-approval” is a statement that the lender has done a thorough review of your financial records, and will approve you at the terms they state, once the application is received.
That’s still not the strongest position. Some lenders actually complete the “Direct Underwriting” process up front, before an offer is made. If accepted, this is the strongest possible approval you can get. This “DU” approval is still subject to property inspection results, but it’s as good as you can get. We deal with lenders who offer the “DU” approval, and we’ve had great results with them.
The Loan Process
The lender on a “pre-approval” will have looked at your latest W-2s, bank statements and tax records, and will have prepared a detailed analysis of what they believe you can afford in terms of your total monthly housing expenses. This is commonly known as “PITI”, or “Principle, Interest, Taxes & Insurance”. Monthly Homeowners Association (HOA) dues would be added to this, along with other possible loan charges, like Private Mortgage Insurance (PMI – typically added if you want to put down less than the minimum allowed down payment). They will also typically indicate a certain amount of “reserves”, meaning how many months of the PITI you will need in your account. This amount may need to be “seasoned”, having been in your account for several months, and not just suddenly appeared. They really need to know if you really have the financial ability to make your payments.
Your bank statements should show your periodic income. Sometimes lenders allow a portion of the rent you will be receiving from the income property to go towards the “qualifying funds”. Different banks and types of loans have different requirements, but an example might be allowing 3/4 of a fourplex’s rents to be added to your normal income while calculating the lender’s “qualifying ratios”. It may also depend on your real estate investing experience: the more experience you have, the less the risk to the lender, and the more they may allow.
After you have been through the preapproval process, you will get a written letter from the lender that states you, the borrower, are approved for a loan of a certain amount, and have a stated “buying power”, i.e., maximum offer amount.
Now you’re ready to find the best property that meets your financial needs.
Click here to go to SMART Buyers Step 4: “Start Your Search”.