Considerations Before Applying for a Real Estate Loan
One of the most critical ways to grow your money is through investing in real estate. That provides profits that are potentially much higher than what you would earn from other investment products. However, it also comes with more risk. To mitigate this risk, most investors look for additional funding to help cover large investments. Before getting started on looking for a loan or line of credit, there are several considerations to take into account. Here are four major considerations:
1) Does the property meet program guidelines?
The first step when applying for a real estate loan is determining whether or not the property meets all criteria set forth by loan programs available in your state. Loan programs will have specific guidelines about acceptable properties, which you need to confirm if your property falls under their mandate.
2) Type of Loan that Suits Your Investment
The next step is determining the type of loan product that would be best suited for your investment needs. Loan products offered by banks and credit unions will vary based on the financial institution, but some common types include:
Conventional loans: Conventional loans can be used to purchase or refinance one- to four-family homes, as well as condos and co-ops (the property must meet certain requirements). You can use these loans to buy multi unit buildings – but only if they're owner-occupied – and commercial properties with up to four units.
Construction loans: Acts as an intermediary financing mechanism; only offered on new construction projects where money is lent to fund the project until it's complete, at which time you take possession and complete repayment of the loan.
Commercial mortgages: Typically offered at a higher lending rate to offset the additional risk of this type of loan. You can use them to buy or refinance commercial property. However, lenders will consider when assessing your application beyond just rates, such as tenant turnover and vacancy rates.
3) Your Credit Score
One part of being approved by a lender starts with proving that you're responsible enough to repay the money they lend you. In most countries, almost all financial institutions use credit scoring to help them determine whether or not they'll meet their threshold for repayment. That includes banks and other private companies that offer loans. Therefore, you should begin by getting your credit report so you know where your credit score stands. Then work on improving your credit by paying bills on time, not maxing out your credit card, and keeping a low debt to income ratio concerning how much you earn per month.
4) Your Maximum Borrowing Capability
In most cases, you might be tempted to get a loan to find the highest amount possible or one that would cover 95 percent of the property's value. However, this is dangerous territory as it means you'll have little wiggle room financially if something goes wrong with your investment. In real estate investing, things can go wrong, and knowing what kind of risk you're willing to take will help determine what kind of loan product is best suited for you.
The above considerations are essential if you're planning a real estate project because they provide a realistic outlook on how much money you'll need, for what duration, and at what interest rate. Knowing these basic key points will make it easier for you to assess whether or not your lender's offer is financially feasible and properly secure.