Mortgages 101 For Real Estate Investors
First-time real estate investors who need to borrow money to finance their property purchase may be surprised and mystified by some of the lesser lesser-known aspects of investment financing. Here are some pointers:
Non-owner occupancy. Lenders typically charge higher interest rates on real estate loans to borrowers who don't intend to occupy the property as their principal residence. That higher interest rate is intended to compensate the lender for the additional risk that's involved, since borrowers who live elsewhere are statistically more likely to default on their loans. Investors who feel tempted to check the owner-occupant box on the loan application to spare themselves the added interest expense should know that such misrepresentation could be considered fraud.
Creditworthiness. Lenders expect real estate investors to be creditworthy and able to make monthly payments on the loan. That means the borrower's credit history, credit score, personal assets, and down payment, if any, will be examined and must meet certain minimum requirements. Savvy first-timers make an effort to review, and, if need benecessary, clean up, their credit report before they submit a loan application. Investors who are self-employed may be asked to provide copies of professional licenses, financial statements, income tax returns, and other documents related to the business.
Investment objectives. Investors should be ready to answer a number of important questions about their investment objectives and plans for the property. Examples These questions might include: How long do you expect to own this property? How much cash flow do you expect the property to generate to service the debt? How much money do you have in reserve for maintenance and repairs?
Loan terms. Investment property loans may be fixed rate, adjustable rate, or interest only, among other variations. Fixed-rate financing is typically more expensive, but may be appropriate to because it allows you to lock in an attractive interest rate for a longterm investment. A variable-rate loan may be less expensive and could be appropriate for a shorter term hold, especially if the initial rate were attractive and not expected to tick upwards. Interest-only loans mean lower payments, but only because none of the principal is being repaid. These loans give the borrower more leverage and flexibility, and may be appropriate for very short-term needs.
Other options. Not all commercial lenders originate small-balance loans, so investors who want to borrow only modest sums may need to tap private sources. Investors who aren't able to qualify for financing on their own terms may need to join forces with one or more investment partners, or purchase a property for which the seller is willing and able to offer financing.
Copyright 2007. Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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