7 Smart Tips to Finance Your Next House
So, you’re interested in real estate investment, but you’ve never purchased property before. To cash in on this lucrative form of passive income, you’ll need to finance the house you buy with a mortgage loan, whether to flip it at a profit or rent it out. The top real estate agents Bellevue, WA, residents turn to for expertise offer these tips to obtain financing.
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Work on Your Credit Score
The most important part of the financing process is making sure your credit score is as high as possible. Your credit score, which is assigned by each of the three credit bureaus and may differ slightly between them, is a reflection of your creditworthiness.
Lenders also use this score to assign terms to the loan, such as the interest rate. Applicants with higher credit scores have a much easier time getting financing at more favorable terms.
To improve your credit score, follow these steps:
• Pay off old debts and balances on credit cards.
• Do not close any cards you don’t use. The ratio between your available credit and your debt is used to calculate your score. The more available but unused credit you have, the better.
• Take care of old bills that have gone to collection.
• Examine your credit reports and correct any errors.
• Don’t apply for any new cards or loans.
• Get added as an authorized user on an account held by someone with excellent credit, like a parent.
Gather Necessary Documents
Besides your credit score, you will need other documents for financing. It’s best to round them up before you need them to save scrambling when time is tight. Depending on the lender, you may need to provide the following:
• Tax returns for the last year or more
• W-2s, pay stubs, or other proof of income
• Bank and retirement or investment statements as proof of assets
• Profit-and-loss statements if you are self-employed
• List of regular monthly debts
• Rent payment records
• Divorce decree and documents for alimony or child support
• Gift letters if someone is helping with the down payment
• Proof of identity
• Statement of how you plan to use the property for income
Identify High-Potential Properties
Once you have completed the steps above, you can start shopping for properties to purchase. Search real estate listings in your price range to identify properties that meet your criteria for solid investment properties, such as:
• Rental properties in high-demand areas near large employers or universities
• Homes in the most desirable neighborhoods
• Houses that need work within the limits of your finances and expertise (a house that needs to be stripped to the studs is probably not for beginners)
• Foreclosed properties that might be had for a bargain
For example, homes for sale in Bellevue, WA, that would be a good investment include those with the easiest commutes to Microsoft, Boeing, or Amazon, those near Bellevue College, and those with amenities nearby, like shopping and public transportation.
Do Your Homework
Take the time to do your homework when looking for properties. Is the property zoned for your intended use? Are there hazards in the area, like flood plains, that make it a riskier investment? You want properties in neighborhoods that are trending well for the market and that have historically provided a good return on investment (ROI).
Investigate Options for Financing
Now you can start to think about where to go for your mortgage loan. There are probably many more choices than you realize, including:
• The bank where you are already a customer
• Other local banks and credit unions
• FHA (Federal Housing Administration) loans
• VA (Veterans Administration) loans
• Online lenders
• Bridge financing (if you or your business are coming into money soon)
• Mortgage brokers (third parties with access to hundreds of lenders for a fee)
Terms will vary between lenders, and some have more stringent criteria, so it pays to window shop around.
Apply for a Loan
Once you settle on a property you wish to purchase, it’s time to get moving and apply for a loan. In a competitive market, the seller is likely to accept an offer from the buyer with the greatest financial stability and guarantee of a loan. Most sellers today demand buyers be pre-approved for a mortgage.
The pre-approval process entails submitting a tentative loan application to one or more lenders. The lender then pulls your credit and assesses your request, returning a good faith estimate of how much you would likely qualify for should you want to submit a formal application. You can do a dry run of pre-approval without anyone looking at your credit via the handy pre-qualification process.
Make the Largest Down Payment You Can Afford
Hopefully, you have been working and saving like mad to make the largest down payment possible. The larger the down payment, the smaller the loan you have to take on, and the easier it is to obtain financing.
When you achieve all the steps listed here, lenders know you’re serious about mortgage loans for your new investment property. Take the time to do it right the first time, and not only will you get financing on your first house, but you’ll also be a pro when it comes to buying future properties.