Regardless of where you are in your investing business or how you currently finance your deals, you may have a need for lender financing. It is no secret that lender guidelines for investment programs have gotten tougher, but the application process is still the same. Approval is still based on a few core items that every prospective borrower must have. Having these items available when you need them will improve your odds at getting approved and make the process much easier. You never know when you will have a need for lender financing. Having the following items in place before you apply for a loan will make things go much smoother:
1. Credit Score: Everything in the loan application process revolves around your credit score. You can have strong income and low debt, but if your credit scores are low you may not get approved. Your credit is based off of the three reporting bureaus: Experian, Equifax and Transunion. Most lenders will take the middle score out of the three. To determine a score, they will look at payment history, availability in accounts, time opened and recent inquires. Payment history is the most important factor, but certainly not the only one. Your score will suffer if you are maxed out on all your accounts – even if you pay on time. Scoring is based on a range from 350 to 850. Most investment programs need a middle score of at least 700. Any score over 620 is considered good and anything below 580 is poor. It is important to monitor your credit and always know where your scores are. You may not think that one small credit card will not have an impact on your credit scores, but they can make all the difference. Falling below 720 or 700 can change your interest rate and even your approval. Everything in the loan process starts, and could end, with your credit score. It is that important.
2. Debt-To-Income: If you have excessive debt, your loan approval will be affected. The second item that lenders look at is something called your debt-to-income ratio. As the name would indicate, they take your debt and divide that number by your income. Instead of taking all debt, they only take the minimum monthly payments on the credit report and add that to the proposed total loan payment. That number is then divided by your gross monthly income to get your debt to income ratio. This typically needs to be under 45 percent with some lenders making exceptions up to 50 percent. If you are self-employed or receive rental income, you should talk to your lender and see how they calculate it. Lenders will typically only use 75 percent of rental income received and may not use all your self-employment income. It is much better to make less money with less debt, than have a higher salary and higher debt. Gone are almost all of the stated income programs that investors and business owners used in the past. If your debt is too high or you can’t show all your income, you may have a tough time getting approved for a loan.
3. Down Payment: Your credit score and debt-to-income ratio will dictate the amount of down payment required for loan approval. Most investment programs need a down payment of anywhere from 15-25 percent, depending on the number of units of the property you are buying. This money needs to be in an established account for at least 60 days to be used. It is not enough to simply have the money you need to put it in the account you are using. There are an increasing number of purchase programs that allow for down payments as low as 3 percent, but those are for primary residence purchases. If you are using money from a business account, you should ask your lender or mortgage broker the best way to go about things. With any down payment money, you should be prepared to produce two months of bank statements showing the withdrawal of any deposit money on the contract. Some buyers may get annoyed at the amount of paperwork needed, but it is just part of the process in today’s lending environment.
4. Employment: Where you work is not as important as how long you have been there. Lenders frown about applicants who constantly switch jobs and professions. They will ask for a two year job history. If you change careers frequently, you may not get approved. The same is the case if you are a self-employed borrower. Typically lenders need a two year history of self-employment accompanied by a business license or accountants letter. Because there virtually no stated income or stated employment loans available anymore, the length of employment is critical.
Many of the lenders and programs that were around before the market collapsed are long gone. With the exception of a few lenders, most lender programs and guidelines are virtually the same. If you are weak in any one of these four areas, you will have a difficult time getting approved. Fortunately, you can quickly increase your credit score just by paying off some items or transferring balances. Paying off certain cards can do wonders for your debt-to-income ratio. The loan approval process is more difficult in today’s environment, but these four factors still have a huge impact. Before you apply for a loan, make sure you know where you stand in all of these areas.
