Loans For Real Estate Investing

Now, we are faced with a challenge- the real estate market has declined so there are tons of great deals, however, it's harder to acquire loans for real estate investing since the banks are being more rigid with their requirements. Now more than ever investors need to be on top of their finances. Investors need to stay as liquid as possible in order to survive anything that may come their way. Real estate investment loans are harder to get, but certainly not impossible.

If you are a beginner investor, don't let this scare you or stop you from investing in real estate. You can obtain loans for real estate investing, you just may need to tweak your finances a little. Let's take a look at some basics.

Interest Rates- There are fixed interest rates which means the interest rate will not change during the life of the loan. There are also ARM rates, which stands for Adjustable Rate Mortgage. These type of loans will adjust the interest at some point. For example, an ARM loan will most likely be tied to some sort of index rate and it will fluctuate in accordance with that index. Anything other than a fixed rate might be called a variable or floating rate. Interest is a cost of doing business so it should be kept as low as possible. When the market rates are low, a fixed rate is probably a good idea since interest rates will likely rise at some point. Plus with a fixed rate you can budget more easily for the long term because you know exactly what you will be paying.

Utah Home Loan Pro - Learn how mortgage planning techniques can help you pay less in interest and create a financial plan that works with your situation. We specialize in mortgage planning and Utah home loans.

Loan-To-Value (LTV)- This is the amount of the loan in respect to the value of the property. For example, you are purchasing a $100,000 property and the bank loans you $80,000. This would be an 80% LTV. As an investor you are typically going to get 80-90% LTV loans. It is typically based off of an appraisal.

Appraisals- When you request a loan to purchase the property the bank will want to have an official appraisal done on the property. If you are purchasing a single family home with the intent of renting it out, the appraisal will likely just put a value on the property. A single family home can serve the purpose of an investment, however, it can also just serve the purpose of being someone's home. So the appraisal will just value the property. With income properties such as commercial buildings, apartments, etc, there is more involved in the appraisal. It will value the property, but also the income and cash flow it produces.

Debt Service Coverage Ratio (DSC)- This is the amount of Net Operating Income (NOI) the property produces to make your mortgage payment. Typically banks will require a DSC ratio of 1.20. So if debt service is $80,000 annually, the NOI should be $96,000 ($80,000 x 1.20). This leads me to my next point which is Debt-to-Income Ratio.

Debt-To-Income Ratio (DTI)- If you are applying for a loan on a property that is not considered an income property, such as a single family home or even in some cases duplexes, a bank will look more at your personal income and debt obligations because they will treat the property as not bringing in any income. They will examine whether or not you can afford the debt service based upon your personal income. In this case, the bank will take your gross income and compare to your personal debt obligations such as your mortgage on your personal home, car loans, student loans, credit card debt, etc. Most bankers don't like to put you in a position of having more than 40% of your income in debt. So if you are bringing in $4,000 per month in income, your debt payments shouldn't be more than $1600 (40% of $4,000). There are a few different ways a banker looks at this ratio and the exact percentage will depend upon the banker. What I can tell you is that if you are over 40%, consider getting some other debt paid down. You may be wondering why the bank won't consider the rent as income. Well, basically you have to prove yourself first. After you file your taxes with rent income claimed the bank will then consider it as income. But until they see it on a tax return, they won't consider the rent from a single family home as income. With commercial or income properties this isn't the case.

Now, let's take a look at how to go about getting loans for real estate investing and the different types of loans you may seek. Okay, so you have a great property in mind in a great location. You have checked your credit score and you have ample cash and cash flow. First you will need to put together some data to present to your banker. Remember, loans for real estate investing are not difficult if you have everything in order. That includes having your finances in order and thorough information on the property. You will need

• Address of property

• Size of building and the land it sits on

• Age of building

• Copy of sales contract (if there is one yet)

• Condition of property

• Any improvements that are required and the costs of the improvements

• Tenant Profile

• Occupancy rates for past 5 years

• Current rent rolls

• Copy of appraisal if one has been done

• Pictures of property

• Current owners income/expenses for past 5 years

• Your financial statement

• Your past three years tax returns

• A detailed narrative of your understanding of the property, why it is a good investment, and how you will manage it

• 80% LTV with you putting down 20%

• At least a 1.2 debt service coverage ratio (DSC)

• 25 year amortization

• 10 year note with balloon payment at end

Here is the qualities of a good residential loan:

• 80-90% LTV with you putting down 10-20%

• 30 year amortization

• 30 year fixed interest (if the rates are low)

I am totally okay with seller financing when I am considering the different types of loans for real estate investing. It provides many benefits such as no closing costs, points, or fees.

An individual will be easier to work with (typically) than a bank. Just make sure you pay a good attorney to draw up the paperwork. Also, if they are not the Deed holder find out who is. This would occur if they still owe money on the property. If they do still have a mortgage then what you are actually doing is called a contract-for-deed. Check with an escrow company to see if you can arrange to make your payments to them.

and you can ready about it here.

Then the escrow company will pay the bank or lender who holds the mortgage. Running it through an escrow company can be a way of protecting yourself should the person not make their payment. If they don't make their payment then the bank will foreclose the property and you will lose any money you have been paying them.

Loans for real estate investing are some of the easiest loans to get compared to other business ventures or large investments. The reason banks like to lend money for real estate is because they have tangible collateral and they know how good real estate is over the long term. Getting loans for real estate investing approved is much easier for them.

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