Real Estate Finance
The real estate finance industry has taken some hits over the past few years. However, whenever you are looking for financing for an investment, you should consider that the people you are working with want to give you a loan. Your job is to make it as easy as possible for them to do so. Due to the credit crunch, the real estate finance sector has been getting crushed. However, this is starting to turn around now and I expect it to be in full swing by the end of next year.
Real Estate Finance Information
Banks and Credit Unions: Consider that 95% of a bank’s lending decisions are computer based. The computer program looks at a few things:
Personal Credit Score: In general, if you don’t have a real credit score of over 700, you will have to go with an FHA loan. This isn’t a bad thing and the terms are often much better than you would receive with a traditional mortgage. The only issue is you must occupy the home after you close. However, there is nothing saying for how long so you only have to move in for a day then you can do whatever you want.
Property Value: This is a simple equation that determines how much the home is worth and how much you are looking to borrow. The smaller the ratio the more likely you will be approved for the loan. There is obviously a bit difference between putting $10k down on a $500k home and putting $10k down on a $100k home. When you are not approved, this is usually the section that can be manipulated for approval. Often, when your credit is borderline the bank will ask you for more of a down payment to reduce the above ratio.
Debt to Income Ratio: This is another simple equation that is used to determine if you can afford the home or investment property you are looking to buy. The real estate finance application is given criteria that adds up all of your current monthly bills and makes sure you can afford the property, and spits out what your mortgage payment will be as a percentage of your overall income.
Real Estate Finance Summary
There are a few situations where a real estate finance transaction will involve an actual bank officer. If your credit problems were no fault of your own, and you can prove it, most banks have a process to waive credit requirements. In addition, nearly every bank has a process to appeal a negative decision to actual human people. This often comes up if a property is appraised for much less than you think it is worth or you have other forms of income that were not considered by the system.
When you are putting together any real estate finance deal, you have to make sure all of the above is in order. There are a million tricks to raise your credit score temporarily by a few points or squeeze a little extra out of an appraisal. However, you should really consider if the property is a good idea if you will require these tricks to get approved. The banks have safeguards in place for a reason, to protect them. However, these same safeguards can inadvertently protect you too if you don’t try to get around them. Real estate finance is complicated and can be painful, but if you understand the process you should happily sail right through.