There are more loan financing options than ever before. Between hard money, private money and personal capital it is easy to forget about traditional lender financing. Even though banks have gotten a bad rap over the years they are still a very attractive financing option. The near record low interest rates alone make them a worth a look. The biggest knocks on bank loans have been the massive amount of paperwork required and the length of time to close. Banks have recently taken measures to cure these problems. The application and submission processes have been much more streamlined which has led to quicker closings. The loan process may have been tweaked but the same basic guidelines are in place. Here are a few items needed for approval on every bank loan.
1. Strong Credit Scores. Investment loans have some of the most stringent guidelines of any loan program. Due to the fact they are not a primary residence they are considered a much greater risk factor. Because of this they require many items that a primary residence loan does not. One of the first items required is a strong credit score. The floor on investment loans is much higher than any other loan type. Most banks require a minimum 720 score. In terms of credit score rating a 720 is considered excellent. You can pay everything on time and very easily have a score below 720. Not only do you need timely payments but low balances on almost every account. Your 720 score has to be the middle of the three reporting credit bureaus (Experian, Equifax & Transunion). Simply having one of these three over 720 may not be enough to move forward. You can have significant down payment and low debt but if your credit scores are excellent you may have trouble getting approved.
2. High Down Payment. There has been an increase in the amount of loan programs for buyers with limited down payment. FHA and certain conventional loans offer programs as low as 3% down. Unfortunately these are for primary residence borrowers only. With an investment property the down payment is much higher. Depending on the exact credit score you will need anywhere from 20-30% down. Unlike with other loans these funds are required to come from only the borrower’s accounts. No gift funds or non-borrower contributions are allowed. Another potential problem is that the down payment needs to be in an existing account for at least 60 days. This “seasoning” of the funds is done so that no outside money can be used to contribute to the transaction. Any transfers to accounts need to be supported with full statements showing funds going to and from accounts. Documenting of funds can be a tricky process often times filled with multiple statements of paperwork. On these statements if there are any large deposits or withdrawals they will be questioned. Simply having the down payment funds is not enough to move forward. With an investment loan they have to be seasoned and every dollar explained and documented.
3. Low Debt To Income. The third hurdle for loan approval is the debt to income ratio. You may think that having strong income alone is enough to grant loan approval. Strong income is just a part of the process. To calculate the debt to income ratio lenders add up all of the minimum monthly payments listed on the credit score. They will add this number to the proposed monthly housing payment. This is the total debt number. From there they will take the annual gross income and divide that number by twelve. With this they divide your debt by your income. With an investment loan this number typically needs to be around 40%. Calculating income comes with a few hurdles. The first is that you may not document all of the income you receive. Secondly the lender will only use 75% of your total rental income. Even if you have sufficient income to support the loan your debt to income needs to fall under this number. Long gone are the stated income and low documentation loan programs. There may be a lender or two that still does them but the interest rates are nowhere near traditional bank levels. Before you start your loan application you should get a copy of your credit report and see where your monthly liabilities are.
If you have received a pre-qualification letter and loan approval is not an issue you need to consider the benefits. The first is that banks offer by far the lowest monthly interest rates. If you are considering a hard money loan you can expect interest rates two or even three times as high. You also need to think about how long you plan on holding the property for. If the purchase is a quick rehab interest rates may not be as big of a factor. If it is a rental property that you want to keep in your portfolio for years a 30 year fixed mortgage is the perfect option. Think about how quickly you need to close and what hurdles you may have to deal with. If you are looking to close in a short timeframe a bank loan may not make the most sense. The first step is to talk to your local lender or mortgage broker to see if you are qualified. From there take each deal on a case by case basis to determine the best financing option. You never know when you will need, or want, a bank loan.
