If you’ve always wanted to invest in real estate, you’re not alone; 29% of Americans share the sentiment. Real estate investment properties are their top picks for money they won’t use in the next ten years.
But with rising inflation and property prices, such investments can be harder to make. For example, experts predict U.S. home prices will increase by over 5% in 2023. They also forecast mortgage rates to remain above 7% this year.
Fortunately, you can still become an investor with the right investment property loan. However, you must prepare accordingly to raise your odds of qualifying for one.
This guide discusses tips and strategies that can help you secure financing, so read on.
Determine Your Creditworthiness
Creditworthiness measures a borrower’s eligibility for a loan. The more creditworthy someone is, the less likely they’ll default on their debts. The lower the risk they pose to lenders, the likelier lenders will qualify them for new credit.
Commercial lenders look at borrower credit scores to measure creditworthiness. They prefer good to excellent scores, ranging from 670 to 800+.
The higher your credit score is, the more likely you are to qualify for investment bank loans. Your odds of securing lower loan interest rates are also better with a higher credit score.
Ask your credit card issuers if you’re unsure of your credit score. Most credit card companies provide this information for free. Use it to your advantage to learn if you’re creditworthy enough or need to improve it.
Boost Your Credit Score
If your credit score falls below 670, improve it before applying for a loan. Otherwise, you’ll likely get a disappointing rejection.
You can improve your credit score by paying down your credit card balances. Then, refrain from using your available credit to keep your balances below the limits. You should also pay off as many smaller debts as possible.
Check Your Credit Report
A credit report contains a borrower’s past and current credit activity. It lists past and outstanding debt, payment history, and credit limits, to name some. All this information is helpful to lenders in gauging a borrower’s loan application.
Unfortunately, credit reports can contain errors that can lower credit scores. Credit reporting errors are so common complaints about them have doubled since 2018. These include inaccurate figures, dates, and even items that shouldn’t be there.
So if your credit score is lower than it should be, there might be an error in your credit report.
You can get a free copy of your credit report from the top three reporting bureaus. These include Equifax, TransUnion, and Experian.
Review each report thoroughly to ensure there are no erratic items. If you find anything amiss, dispute it and have it fixed before applying for a loan.
Lawyer Up
Considering how expensive real estate can be, verifying their authenticity is imperative. This is especially crucial nowadays, with property fraud on the rise.
An example of property fraud is when sellers misrepresent information about properties. There’s also wire fraud, in which scammers posing as bank personnel steal a buyer’s money. Another is title fraud, wherein fraudsters transfer property titles to illicit third parties.
If you’re not careful, you can get scammed, tricked, and victimized by those fraudsters.
Hiring a finance or financial institutions lawyer can help you avoid such problems. These legal professionals can protect you by investigating real estate transactions, including financing. They can also help you negotiate loan amounts and rates with commercial lenders.
Compare Investment Property Loan Rates
Investment property mortgage rates are often 0.50% to 0.75% higher than typical mortgage rates. With the latter averaging 6.25%, you can expect the former to be around 6.75% to 7%.
However, remember that mortgage rates are highly dependent on creditworthiness. So if you’re super creditworthy, you may enjoy some of the lowest rates. The opposite can happen if you have a less-than-stellar credit score.
Another reason to compare rates is that some lenders have lower credit requirements. For example, Lender A may already qualify you for a 6% rate with your 700 credit score, while Lender B may charge you 6.25%. That 0.25% difference can translate to thousands of dollars in interest payments in the long run.
Prepare Your Down Payment
Review each lender’s down payment requirement as you compare loan rates. You may have to put down an amount higher than you’d otherwise pay for a first mortgage.
For instance, you may need to shell out 20% to 30% of the property’s price. So if the property you want to invest in costs $300,000, prepare to make a $60,000 to $90,000 down payment.
Another thing to note is that a down payment for an investment loan may have to be your own money. Luckily, this requirement usually only applies to loans from conventional lenders. Government-insured loans often still accept down payment gifts.
Also, please note that a down payment differs from earnest money.
Also known as a good faith deposit, earnest money is a payment made with an offer to purchase a property. It assures the seller you’re serious about buying their property for investment. But if the deal falls through, you can get your money back.
Complete the Application
The application for an investment property loan is similar to a first mortgage. You’ll fill out forms providing your personal, employment, and financial information. You must also provide a copy of documents validating the details you provided.
For example, you’d need to give photocopies of:
- Valid identification cards
- Employment or self-employment documents
- Bank statements
- Proof of down payment capacity
Your chosen lender will give you a complete list of documents needed. Make sure you submit everything to speed up the application and qualification process.
Begin Your Real Estate Investment Journey
Real estate properties are some of the best investments because they usually appreciate. They can also be ideal sources of rental income and profits. You can also sell them at a much higher price once they’ve appreciated enough.
So, as early as now, consider looking for the perfect property. Don’t forget to follow our tips to help raise your odds of securing an investment property loan.
For more loan guides, check out our post on what to remember when choosing a mortgage lender!
