Investment Real Estate Financing Information

The most time-consuming, yet absolutely essential, phase of the home buying process is the obtaining home financing.  This procedure requires a strict review of your financial situation to find out what property you can afford, getting pre-approval to buy property, then forwarding all this information to your bank to decide whether they want to grant you a home loan.   

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Getting a Credit Report

The first step in the financing process is getting your credit report.  Through federal law, you can obtain one free credit report per year through reputable online agencies.  Steer clear of websites that ask for a fee or those who try to coerce you into signing up for extraneous services.  These are usually scam artist who you do not want to grant access to personal information like your social security number.  Credit scores typically range from 340 to 850 (with the higher score being the better) and consist of the information from your credit report analyzed by computer software.  Each aspect of your credit report comprises a certain percentage of the credit score, as follows;

• Payment History - 35%
• Owed Money – 30%
• Credit History Length – 15%
• Type of Credit Used – 10%
• New Credit – 10%

See the sidebar for further breakdowns of these sub-categories.

Credit scores are important to home lenders because the higher your score, the more likely you appear to be to repay the loan in full, thus the more financing options you will be offered.Credit scores are important to home lenders because the higher your score, the more likely you appear to be to repay the loan in full, thus the more financing options you will be offered.  Banks take credit scores generated by the three major credit reporting agencies—Transunion, Experian, and Equifax—and generally use the middle score when processing your loan application. 

Since your credit score is important in many endeavors—buying a home or a car, and even renting an apartment—raising your credit score is essential and can be achieved through several techniques that will take effect with a great effort over a long period of time. 

There are Several Ways Through Which You Can Maximize Your Credit Score

• Pay your bills on time: Work out payment plans with creditors if you know you will have trouble paying on time and pay off your past due bills.
• Minimize debt: Keep credit card balances low, pay off debt, don’t open new accounts to quickly alter debt-to-credit ratios, and don’t close unused accounts because a zero balance is better than being in debt.
• Don’t open multiple new accounts in a short period of time.
• Carefully manage new credit: Pay accounts on time and do not max out credit limits.
• Mix up the types of credit you use: Manage all accounts responsibly and don’t open new accounts just to have variation as this appears suspect to credit reporters.

After you have taken care of your credit report and score, it is time to approach your bank to apply for the home loan.  As a preliminary measure, you may want to get pre-qualified by a real estate agent, a lender, or just do it yourself.  Pre-qualification only means that someone has taken a broad look at your expenses and income and calculated a debt-to-income ratio.  Pre-qualification is just a general term that gives you a basic idea of the price range for a home that you may qualify for.

Getting Pre-Approved

Pre-approval is a far more intricate process that means that a home lender has carefully dissected your credit report and given you an exact figure of the maximum loan that you qualify for, thereby letting you know exactly what home you can afford.  Getting pre-approved can save you a great deal of time in your real estate search by allowing to you streamline your search early to only include properties that you are qualified to buy.  And buyers also have a much shorter closing period since they don’t have to wait for loan applications to be processed at the end of the sale.  Being ahead of the curve can increase your bargaining power if the seller is in a hurry to get rid of the property.

After the home is appraised, the lender will have to formally approve both you and the property for a loan, based on your financial situation mentioned above and the condition of the home.  Physical problems noted in the home appraisal will affect the lender’s willingness to approve a property as will negative conditions in the surrounding area.  The lender will also perform a title search to find any problems associated with the home, such as legal issues and money owed on the property.  Finally, the lender will ask for proof that the home will be insured upon purchase and review all the aforementioned information before issuing the loan commitment.

Special Types of Home Loans

Although every prospective homebuyer must follow the aforementioned steps, there are several different avenues one can pursue when securing the actual loan.  Other than standard home loans, buyers can qualify for several different financial assistance programs, including (but not limited to) FHA loans and VA loans.  The former operate with less dependence on credit scores, so buyers with less than perfect credit or those who filed for bankruptcy at least two years prior may qualify.  FHA loans also allow the buyer to finance 97% of their purchase and only pay 3% upfront, and allowable debt ratios tend to be higher than those imposed by traditional loans.

VA loans are a far more exclusive financing system, only applicable to specific war veterans and their spouses.  The eligibility method for obtaining a Veterans Administration (VA) loan is complex, so YAERD recommends checking out http://www.homeloans.va.gov/ for more information on VA loans, the policies, and the guidelines for qualification.  Benefits of this type of loan include;

• 100% financing
• Opportunity for no down payment
• No penalties for prepaying the loan
• Often easier to qualify for (if you’re a veteran) than conventional loans
• Sellers pay closing costs
• No PMI (Private Mortgage Insurance)
• Competitive interest rates

Due to the longer length of time to process, some sellers are hesitant to do business with someone who has a VA loan.  And they can also be reluctant to pay the closing costs.  However, these concerns are quickly becoming moot as the loan procedure expedites and buyers increase their negotiating power.

 

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