Decoding The Process of Financing Your Real Estate Investment
H.J. Chammas, 4X Best-Selling Author I Publisher
Helping Entrepreneurs and Coaches Publish Their Bestselling Books and Become the Authority in their Field So That They Monetize Their Services
Whenever you apply for a loan to finance your rental property investment, any lender needs to approve both you and the property before the loan is released. This means lenders are required to make sure you are eligible for a loan before they even evaluate any property. So it makes sense to sort out the first half of that equation by getting yourself prequalified for a loan.
Related: Why Is It Important To Get Pre-Qualified For A Loan Before Prospecting For Rental Properties?
Getting Prequalified for a Loan
In fact, getting yourself approved is the most difficult part of the equation. Therefore, before engaging your real estate agents or brokers to search for properties matching your criteria, it would be quite a wise move from your end to make sure you prequalify for a loan. That way you won’t waste anyone’s time.
Getting a preapproval means getting conditional approval from the lender by submitting the financial paperwork that proves the applicant’s creditworthiness.
So, this first half of the equation is all about you ... the applicant.
The whole step by step process, with all the worksheets to compute your creditworthiness, are covered in The Employee to Millionaire Coaching Program.
It is important to understand one basic and simple insider fact: The banks’ primary business is selling loans that will secure them monthly cash flow from interest paid by their clients. This is how banks make money. They make money on the interest their clients pay on loans as well as on loan applications and processing fees. Have the confidence that any lender will do their best to help you sort out your documents in order to qualify for a loan.
Lenders will take the data from the provided documents to look at the following:
- Applicant’s income (earned income and unearned income).
- Applicant’s expenses.
- Applicant’s loan payments.
- Applicant’s assets.
- Applicant’s liabilities.
One of the most important ratios your lender will always study to determine your eligibility for a loan is your debt-to-income ratio (DTI).
Your DTI may be the main measure of your creditworthiness for a loan, refinancing, or credit. The debt-to-income ratio is exactly what it sounds like: the amount of debt you owe as compared to your overall income. Your lenders will look at this ratio when they are trying to decide whether to lend you money or extend credit.
A low DTI means you have a good balance between debt and income. As you might have guessed, lenders like this number to be low, which means your debt is at a manageable level relative to your income. The lower it is, the greater the chance you will be able to get the loans or credit you seek.
A detailed computation of DTI is provided for free with the resources that come with The Employee to Millionaire Coaching Program.
This ratio also helps bankers determine the amount of loan you are eligible for; and therefore, determines the budget of the property you will be prospecting for.
Once you find the right property that meets all your criteria, you will start the second half of the equation, which is financing the property.
Financing Your Property
This is when you submit the property's documents to the bank to kick off the inspection and appraisal process.
The graph below summarizes the necessary steps.
After the appraisal is completed and the lender receives the report from the appraiser, the bank reviews the whole loan file, including the borrower’s financial health, and makes a final decision whether to approve or reject the loan.
If the loan is approved, you will be notified in writing with the bank’s final offer, which includes the details of the property, your down payment, the loan amount, the interest rates, the terms of the loan, the conditions for insurance, and the monthly installments of the loan.
Related: Should You Buy An Investment Property With Cash Or Mortgage?
Once you approve the bank’s final offer, a closing date is determined. During this stage, the loan officer will work with you and guide you on all the steps and payments required for closing and the transfer of title in your name.
