Prospective real estate investors often think getting a mortgage is the only way to acquire a piece of property. After all, most home purchases occur through mortgages backed and funded by large corporate banks.
But banks are often reluctant to issue multiple mortgages, especially if you’re fairly new to the world of real estate investing. Depending on your credit history, current available assets and investment track record, you may find it difficult to get a standard mortgage from a traditional source.
If you’re a real estate investor applying for financing for your next acquisition, you may be wondering what steps you can take if you’re denied traditional mortgage lending. Thankfully, there are many creative financing products that creative real estate investors can leverage to acquire their next property.
Improving mortgage eligibility
If you’re concerned about getting approved for a mortgage, consider ways you can work on improving your eligibility before you begin the application process. Proactively working on becoming a better mortgage candidate before you apply could significantly increase your chances of receiving a loan.
Here are a few things you can do to make yourself a more appealing mortgage candidate, and catch the attention of lenders:
•Raise your credit score: Take a look at your credit score, and determine if it needs work or not. If your score is lower than 740, lenders are going to heavily scrutinize your application. Additionally, you’ll likely end up paying a higher interest rate or more money in fees if you have a lower score.
•Make a larger down payment: Offering to make a large down payment will reduce the amount of money you’re borrowing in the form of a mortgage, thus reducing the amount of risk the lender is assuming. If you’re struggling to find financing, try increasing the size of your down payment (if you have the capital).
•Reduce existing debt: If your debt-to-income ratio is too high, lenders are unlikely to issue you a mortgage. Most banks establish a debt-to-income ratio of 40 percent to 50 percent as their limit. Reducing your existing debt burden can make your application appear less risky, while also boosting your credit score.
•Go local: Big, national, corporate banks are rarely the best places to find financing for your real estate investment. Instead, try applying at a locally-owned financial institution, or taking your business to a credit union. They may be able to offer your more flexible or creative financing terms. And, you’ll be participating in your local economy.
If you’re still unable to secure a mortgage even after working on ways to improve your eligibility, it’s time to start exploring alternative options to traditional mortgages.
It’s worth noting, traditional mortgages aren’t always the best investment vehicle, either. Sometimes, you may be better suited with a more creative mortgage product designed for investment in a specific class of real estate asset. Depending on your needs as an investor, some of these alternatives may actually help you achieve your financial goals more quickly.
Carefully analyze all of your financial options to be sure you’re pursuing the best course of action. Always keep your long-term investing objectives in-mind. Some of the mortgage alternatives worth looking into if you’re a real estate investor include:
•Owner financing: Many sellers are now willing to offer owning financing solutions – after all, it allows them to claim the fees that may otherwise be offered by a bank. Talk to a real estate attorney about drawing up a prospective owner financing agreement you can present to the owner with your purchase offer.
•Hard money loans: Hard money loans are specifically designed for real estate investment purposes. Rather than exclusively considering your credit score, hard money loans look at the value of the prospective purchase property. Hard money loans are short-term, lasting only as long as 36 months. The downside? They come with very high interest rates.
•Private money loans: These loans are not issued by a traditional financial institution, but rather a private investor who’s hoping to make a relatively high return on their investment. People typically borrow private money loans from family members, friends or fellow members of the local real estate investment scene.
•Home equity loans: If you’ve built up equity in your home or in another investment property, you may be eligible to take out a home equity loan (HEL). This allows you to borrow against the equity in your house to finance the purchase of another real estate asset. HELs are one-time loans with a fixed interest rate and repayment schedule.
•Commercial investment property loans: You can’t get a mortgage for commercial real estate – instead, you’ll need to obtain a commercial investment property loan. Because commercial real estate is often more expensive than residential real estate, you’ll need an outstanding credit score and a thorough business plan to qualify.
•Fix and flip loans: A type of hard money loan, fix and flip loans are usually provided by financial institutions and online lenders. These financing products offer very high interest rates and short repayment periods. If you’re planning on flipping a home, however, they may offer more flexibility compared to long-term lending options.
For creative and determined real estate investors, there’s no shortage of lending products available to make the real estate market accessible. While traditional mortgages may be out of reach for you at the moment, there are likely other financing options you can leverage to make your next acquisition and begin reaping passive income.
Creativity and the ability to think outside the box are often what differentiates successful real estate investors from those who barely break even. Learning how to take advantage of the most strategic opportunities available to you allows you to dominate your target market and establish your own unique vision for your financial future.
Whether you’re pursuing a mortgage or some alternative form of lending, make sure it’s the right one for your situation. Regardless of where the investment money is coming from, it needs to come backed by the right terms. The last thing you want is to overleverage yourself and burden your investment outlook!