Finding a great lender can be a real challenge for real estate investors. The good news is that there are a number of lenders, variety of terms and creative ways to finance investment properties available.
Favorable interest rates might mean that you have to bring more money to the table. Quicker access to financing might mean more stringent or specific property criteria. Finding the right mix of terms, advantages, and costs will depend on your investing goals and your experience level.
Here are some key questions to ask lenders.
5 Questions Real Estate Investors Should Ask Lenders
1: What are your terms?
There are three key terms to look: Loan to Value (LTV), interest rate and points.
In real estate investing, loan to value is a ratio that compares the total size of the mortgage you take out to purchase a property compared to the market price of the asset. For example, if I purchase a property for $100,000 using an $80,000 loan, my loan to value ratio is $80,000 to $100,000. In percentage terms, my financing is at 80% LTV. As a rule of thumb for investors, the greater the LTV, the more advantageous the financing. My purchasing power increases with lenders that offer higher LTV ratios. Interest refers to the cost of money from any lender. Interest expense is a large part of most real estate investors’ monthly payments and can significantly impact monthly cash flow. Real estate investors are looking for the lowest interest rates possible when it comes to financing investment properties. Points can be thought of as interest that is paid in lump sums on a loan. One point is 1% of the total loan amount. For example, if I were to get a loan for $100,000 and the lender charged 3 points, I’d pay $3,000 on top of any other interest.
2: Are there any additional fees outside of interest and points?
In addition to points and interest discussed previously, many lenders charge other, additional fees. These can be called “documentation fees,” “underwriting fees,” “legal fees,” etc. These fees are sometimes overlooked by investors. Significant fees can certainly impact total return on any investment, and investors need to understand any expenses beyond interest up front.
3: What does your funding timeline look like?
The next factor that investors should consider when looking for a quality lender is how fast that lender can turn around a loan. Does that lender pre-approve loans? How quickly will the lender be able to process documentation and guarantee access to financing?
4: What are your loan and property criteria?
Some lenders will only fund certain types of properties, while others only work in certain geographic locations. A lender that only funds deals in certain areas of Southern California may have very different property criteria than a lender that only offers financing on properties in the Midwest. The California lender, for example, might not even be willing to look at short term financing requests for less than $150,000, while lenders in the Midwest might not want to look at anything over $150,000. Additionally there may be restrictions on where the lender can lend. A California lender may not lend in Texas.
5: Do you provide funds for rehab costs?
In deals requiring extensive rehab, financing those repairs is a critical part of the investment. If the lender will not finance rehab costs or offers strict terms on rehab financing, investors will have to weigh those disadvantages with the other terms of the loan. It’s a good idea to ask what rehab costs the loan will cover, how you must document and present the rehab process to the lender, and how involved they will be in the construction or rehab phase of the investment.
Conclusion
Like most things in real estate investing, there is no one-size-fits-all approach to choosing the right lender. Every lender has its unique advantages and disadvantages, and finding the right one to work with will depend on your specific goals, geography, and the deals that you find. I hope that these five questions provide a basis for investors’ research into lending partners.
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