Regardless of how grand your real estate aspirations are, you will never be able to realize them without the proper financing to back them up. There is no other way around it; financing is the backbone of today’s real estate landscape. Those with access to money will find that things tend to fall into place. However, those unable to acquire funding will find themselves in a desperate position. In reality, funding is readily available to those who know where to find it, but not everyone qualifies for it. While the process is slightly longer than it has been in the past, the criteria are still the same. That said, the following factors will have the largest role in determining whether or not you qualify for your next loan:
Your credit score is the first thing lenders will take into consideration when applying for a loan, and for good reason. It is essentially a track record of your lending history, and the best thing they have to go off of. That said, almost every loan you apply for will take your credit score into consideration.
Credit scores are calculated by three independent bureaus: Experian, Equifax and Transunion. Each company accounts for your timeliness of payments, available balances on each account, the total number of new accounts and a few other factors. Credit scores can range from 350 to 850, with the latter being the one you want to shoot for. Loan programs, however, typically require a minimum score of anywhere between 500 and 550. Conversely, anything over 720 is considered to be excellent. The higher your credit score, the better position you will be in to capitalize on an opportunity.
Outside of your credit score, your debt-to-income ratio is one of the most important factors when deciding whether or not you receive a loan. As its name suggests, the debt-to-income ratio represents the amount of debt you currently have as compared to your overall income.
In the past, lenders would entertain debt to income ratios around 60 percent. Today, with the recession still fresh on our minds, that number is well below 45 percent. To calculate the ratio, a lender will take your monthly-adjusted gross income and divide it by all of the minimum monthly payments on the corresponding credit report, not excluding the loan you are currently applying for.
A lower debt-to-income ratio suggests that there is a healthy balance between the two, meaning the debt is easily manageable with the amount of income provided. Not surprisingly, lenders will appreciate lower ratios – somewhere in the neighborhoods of 36 or lower is considered safe.
The down payment, otherwise known as the initial payment when something is bought on credit, heavily influences lenders. Subsequently, lenders will be more inclined to give you money if your down payment is rather sizeable. Smaller down payments, on the other hand, will make it more difficult to receive a lone.
Typically, the stronger your credit score is, the less money you would need to put down. Depending on your credit score, you will need anywhere from 15-25 percent down. It is not enough to simply pull this money from a business account, however. This money needs to be in your personal account for at least 60 days prior to starting the loan application process.
Additionally, you may need to provide a certain amount of reserves. The amount of reserves needed varies based on specific loan criteria, but the average number is at least six months of your new total mortgage payment.
Than Merrill, the CEO of FortuneBuilders, contributed to this post.