How To Get A Real Estate Loan & Stand Out To Lenders | REIal Talk | EP. 61

Welcome freedom fans, Freedom family, to another episode of Real Talk. We are on episode 61. Today we're going to talk about how to make yourself attractive to lenders. Have them fighting over you and what are some things that you can do to prepare for that process and to make yourself more attractive to lenders. All right, we have with us today, Mr. C.J. hello.

Hey. You guys love talking about this stuff, so I'm excited.

Yeah, I'm glad. This is the first one that we've done together, so I'm stoked. I was excited when I saw it come across. I was like, oh, okay, here we go.

We get to get together. I love it.

Yep, exactly. So I'm just going to go down some bullet points and then we can just chat about them. Okay. So the importance of credit scores, how big of a part does it play in the whole getting a loan lending process?

Yeah. So for getting a traditional loan, it's absolutely necessary to have one and it's going to need to be above a certain threshold. So for the majority of types of loans, conventional VA, FHA, they're going to require it be above 640. Some of the programs such as FHA allow for you to have a lower credit score threshold. I believe it's 580. So those are the absolute minimums. And then to get to the best pricing of the interest rates, right, where you're going to have less, they're going to have less risk because it's a higher credit score is around 740. So that's kind of the optimal. Right. The target, if you can get it to, to that level.

So it's kind of this balancing act or give and take, meaning the higher the risk in the lender's eyes, the more they're going to compensate for that risk or mitigate. There's like charge a little bit more interest or different things. The lower the risk from their perspective, the better terms that you'll most likely get because there'll be lots of competition for your, for your, for the lent, for the borrower, for that borrower. Right, right.

Yeah. So thinking about it from the lender's perspective, they want to borrow as much money as they can with the least amount of people defaulting or, you know, not, you know, not fulfilling their obligation to pay. So they're looking, you know, all these factors we're going to talk about today are just ways they're trying to do that to mitigate the risk on their side just as they see fit.

Right. Non performing notes is like that's a whole nother episode that's a little more complicated. Exactly. Okay, so some other things that a lender might look for is employment and income stability. Again, they're looking for low risk, boring, like they just want somebody stable, not job hopping and things like that. So what are some other things they might look for as far as income stability and employment?

Yeah, so typically they're going to. A lender is going to ask for like your last two pay stubs and ask how long you've been or what all your employment has been from the past two years. And they're looking that you have stayed in the same profession, your income has stayed the same or you know, steadily increased so that they again feel that you are going to be able to continue to perform and pay your mortgage. You know, some may say, well I've been at my job for a year, why aren't they going to take me? Well, you know, if you've switched jobs or it's just, it's less for them to go off of from a data point perspective.

Right, okay, good point. To bring up debt to income ratio. So a lot of people may not realize the percentage the sweet spot that lenders look for. What would the.

Yeah, this is, this is a little harder concept to take in. But basically banks are wanting to know how much of this mortgage is going to make up of all of the costs that you incur also against what income you're bringing in monthly. So for example, if your gross amount monthly is $5,000, typically a lender is going to be wanting to have a debt to income anywhere from about 0.3 and at a max probably 0.45. But that 0.35, 0.4 is the sweet spot. So if you're bringing in 5,000 gross in a month, they're going to say, well for 0.4 of that would be $2,000 a month and that's what they're going to have as your max debt service that you are going to be able to pay. So if you have a certain amount of credit card bills or maybe you have student loans, those would get put into that debt that are your monthly obligations.

Yeah. So if you know that you're about to go house shopping or maybe there's an investment property you're looking for and you want to make yourself look a little more attractive to lenders, maybe there are some things that you can pay off before you start the process and to kind of lower that debt to income ratio and make it a little, beef it up a little bit Pay some stuff off and plan and, you know, start the process earlier to prepare. Next item is the down payment. You mentioned having different programs and different loan types. What's a typical down payment look like?

Yeah, so I think one of the big misconceptions that's out there is for any type of property or any loan, you need to put 20% down. I think that's the old mantra that still is carried today. But a lot of people are doing different types of programs. So maybe if it's a home that you're going to reside in or a small multifamily, they are programs like FHA or conventional that you can put as little as 3, 3.5% down depending on the program. You're going to have to pay a private mortgage insurance for putting such a low piece down. The second main loan type is a second home mortgage. So maybe it's a vacation home or something that you're going to use part of the year. An airbnb that's typically 10% minimum as a down payment. And then for a lot of the investment properties, it obviously depends on if it's a national bank, a local bank, credit union. But a lot will ask for 25% as a down payment. Especially on these smaller, like single family home investment properties, there are lenders that will do 20%, but that 20 to 25% is what you should expect.

Okay, those are good. Just general guidelines. That's great.

Yeah.

And how closely do lenders look at cash reserves? Like how much you have on hand? It's dark and I'm going to turn my light really quick. Hold on.

Yeah, of course. So I think it just depends how you, you know, they want to see that you not only have enough, you know, enough for that down payment, but that, you know, should something happen to your job situation, that you have a couple months of reserves to continue to be able to make that payment. So typically with investment properties, you know, for ours example, we sell on average around that 100 to $120,000 price point. They're going to want you to have a couple months payment. So 3, $5,000 for those CapEx and, you know, just mortgage payment expenses to be on hand.

Makes sense. You never know. Like you could be in a car accident and be out of work for a couple months or lose your job or, I don't know, a pandemic hit. Who knows, right?

And I think especially, you know, I know our specialty is investment properties. And when things hit, they hit big. Right, because you maybe a tenant is moving out of the property. So you're going to have a month where you don't have any rent coming in. I'm actually going through a turn right now and I don't have rent coming in. I am redoing the bathroom and then I'm resetting, ripped up the carpet and refinishing the sand floors. Right. And so I'm having thousands of dollars of expenses while also not bringing any rent for that unit. And obviously I'm improving the property and I'm excited about it. It's going to be nicer. I'm going to be able to get a higher rent afterwards. But it is, you know, it's a couple months where I need to have that backup rent or other properties that can help counterbalance that.

Yep, that's very true. And always remember, those things are tax. There's tax advantages to those as well. So don't always look at it as, oh, I got to pay this out of pocket.

So.

So there are benefits for it being an investment property. All right. Some tips on finding the best mortgage rate. Do you have any?

Yeah, I think this just depends on your situation and what makes most sense. If you're looking to take advantage of, like, the FHA program or, you know, a very traditional convention loan, some of the big banks are going to be able to service that. But if you are looking for, you know, maybe creative financing or maybe your income situation is unique, there's a lot more flexibility with credit unions and local banks, and that's because they are going to continue to hold your mortgage or note, they're not going to sell it to a different bank. So when the big banks do that, they sell it. And it needs to fit very strict parameters in order to be exchanged. But these local banks have a little bit more flexibility. So, you know, once one bank pulls your credit, it's not going to hurt to go to other banks and definitely recommend, you know, going three to five and really going down the process to understand what that rate will be. Because if you do even really want to go with, maybe it's where you're checking and savings is. If you are able to show them another, they may be willing to match that rate to then allow you to continue with them. I had that happen with me. I was like, hey, this person is giving me 20 basis points lower than you. You know, I have a relationship. I'd love to continue that. And many times they do have a slight flexibility or wiggle room. And also maybe the rate has changed over the week that you've been going.

Through this, yeah, that's a good point. You can, the more information that you're armed with and have at your disposal, that could even turn into a negotiation tool for you. I never even thought about that. But yeah, it's a very, it's good. So the more information you have, the more educated you are about what your options are. Those are all key tips in helping you find the best loan type for you. It may not always boil down to the lowest interest rate. It could be other factors as you mentioned, depending on, on relationship and different things like that. A couple of other thoughts that popped in my head as we were going down the bullet list was speaking of, we mentioned debt to income ratio and paying some stuff off and that made me think of our first bullet point of credit score. I would suggest checking your credit report and looking for things because that's exactly what the lender is going to do. They're going to look at your credit report.

So pull it so you can go to Credit Karma. And it's not going to be an exact report but typically it's on within 20 to 30 points. And so you just know, am I in a good spot right to where I'm going to be getting approved? No problem. It's a soft pull when, when they do that just based on your profile. So definitely recommend that. And I think, you know, the biggest thing is you have to understand it from the lender's perspective too. Right. They are looking for a safe, sound investment and they want to, you know, they don't want to be pulling, trying to get documents to you. So if they say, hey, here's everything I need, get it all in one email, get it organized, have your financial profile just ready to share and kind of all put together so you can produce that to them quickly and move the process as quickly for you as well.

Right. The easier you make it on them, the more likely they'd be in a better mood to help you.

Yeah, I mean they deal with so many people and you know, I've gone through the process of getting a number of loans and there's so many different documents they need and it can be a little bit of a process, but just, you know, knowing that it's coming and you just need to be as responsive as possible.

Plus pulling your credit report, you may find something on there that you didn't even know was on there and it could be a mistake, it could be something that needs to be cleared up. So again, in the spirit of having more information, just knowing what is on your name, you know, on your report, take that opportunity to look for mistakes. Look for things that, oh, I forgot about that, that's a pretty low balance. I could just pay that off before I even start this process. Or you know, just start thinking about it from the lender's perspective as well. Like you mentioned and you said a soft pull. So soft pull versus hard pull. So soft pull is like something that's not going to affect your score. But another thing to keep in mind when you start this process is looking for a mortgage and starting to contacting banks. Don't incur any new debt, don't open up a new credit card, don't go buy a new car. Don't, you know, just keep things as they are until you get that mortgage. And then afterwards you can, you can do what you need to do. But because I think that's going to affect your credit score.

Right. And you know, one thing I'd just like to also say is we've talked only really about lenders. There's a lot of other ways to get capital to, you know, invest in real estate. Right now I'm using an equity line of credit against my stock portfolio. We work with a lot of investors who have self directed IRAs or solo 401ks, you know, pulling from a life insurance policy, home equity line of credit. There's so many ways, right, to utilize capital. And you know us, we use private money lenders where we pay a higher interest than the banks but the terms are a lot more flexible for what we need as a company. So there's a lot of ways out there to get money to buy real estate. And it just depends on the strategy. So just something else to think about that depending on your strategy, there's always money out there for a good deal. Right?

People want to find exactly for a good deal and a good safe bet. Just think of it, would I loan myself money? Just think about that.

Yeah. And I mean that's what we say to our, we have private money lenders, right? We have over 100 lenders that let us borrow money from them in order to pay them an interest percentage. And they do it because they know we are doing a hundred of these a year. Right. And we have a track record of 500 in the last five years. So people feel really safe that, you know, it's their money is being backed by real estate. But also that we have the experience. We're not a first time home flipper or something like that.

Yeah, exactly. Okay. All very good tips. And one thing I did mention in the vlog also was credit unions. So we had a mortgage with a credit union and the reason we chose them was because there was no penalty for early payoff. So I was like, oh, done, done, done, done. Not that, you know, you know, there's two schools of thought of whether you pay something off or not, but we wanted to just. It was a smaller mortgage, so we wanted to pay it off in order to, you know, use home equity or line of credit or something against it in case we needed to later. But anyway, credit unions, don't forget about those, folks. All right. Okay. Any last thoughts before we end this episode number 61?

No, I think this is great. It's a very exciting time. And the only thing I would say is begin talking to lenders before you need that mortgage. Right. In the very competitive environment we are with making offers on properties, there's a lot going over asking and, you know, being changing up the terms a lot. How quick you can close is a big piece and that's only going to come if you know who your lender is. You're pre approved there, you're ready to go. So having those conversations before you found that dream house, whether that's an investment property or a property you're looking to live in, it's just going to help things down the road that much more.

Yeah, that's very true. There is a difference between being pre qualified and. And pre approved. You know, pre qualified is the cursory, you know, take a quick look. Okay. You look like you're good to go.

The.

The pre approved is when they've actually gone through your. All of these items that we've mentioned and that you are definitely going to be approved for a loan and you feel confident in making an offer in house quick. So with that, we will end this episode. Thank you so much, C.J. for your time. I know I had some Internet issues earlier, so thank you for your patience, sir and meeting with me again. So.

Yes, of course. Good luck everyone and please feel free to reach out if you have any questions about the lenders and the lending process.

Always. And if you are interested at all in multifamily investing, always check out our Freedom Through Passive Income podcast as well. So we are here to educate you and to share value and just share what we know. So thank you again and everyone. Have a wonderful rest of your week. Bye bye.

Take care. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice, opinions and information on this show. Are not guaranteed. All investment strategies have the potential for profit or loss.