Steps to Pre-Qualify for a Mortgage Online

Pre-qualification is an estimate of how large of a mortgage you can afford.  It is the first step when looking for a home to buy.  It’s important because it helps you narrow down your options and focus on how much house you can really afford. It is based on your financial situation over the past two years. You will need proof of employment, tax returns from the previous two years (if your self-employed) and a credit report from all three bureaus: Experian, TransUnion and Equifax. You can think of it as a free consultation between you and the loan officer.

The lender will review your income to give you a general idea on how much you can borrow.  When you pre-qualify for a mortgage, you are only getting a rough idea of what you can borrow.

You can apply for pre-mortgage approval online by going to the mortgage loan websites.

Here is some example of questions you will need to fill out.

  • First and Last Name
  • Phone number
  • Email address
  • Zip code where you currently live
  • How soon you’ll be applying for a loan
  • Are you currently working with a real estate agent?
  • How you would like to be contacted (phone vs. email)
  • The purpose of the loan (e.g. purchase vs. refinance)
  • The amount you want to borrow
  • How you plan to use the loan (primary residence, income property, etc.)
  • The type of property you are buying (detached home, multifamily. Condo, etc.)

After providing this information, a representative will contact you regarding your request. They will give you a rough idea how much you can borrow, based on the information you’ve provided. Be prepared for some additional questions regarding your income level.

You can also get a pre-qualification letter. This will let the sellers know that you are serious and that you can qualify for a loan to buy their home.  

You can contact other mortgage lenders about your mortgage pre-approval if you want to.

Pre-qualification is not a commitment between you and the lender. The next step is loan pre-approval. Loan pre-approval is a more in-depth version of this process. The lender verifies your income, your debt level, and other aspects of your financial situation. They want to know whether you can qualify for a home loan and decide how much of a loan they are willing to lend you.

Benefits of Using Private Lenders

Private lenders and hard money lenders are very similar but have a key difference.  Private lenders differ from hard money lenders based on where their money comes from when they lend it to you.  Private lenders’ money will come from investments outside of real estate, whereas a hard money lenders’ money is part of a business built around real estate and real estate investing. 

Private lenders can often be new to real estate investing, which may make them a bit naïve.  However, that doesn’t mean you should avoid them.  Rather, be patient and willing to work with them, as their money might just be one of the greatest ways to obtain funding for your real estate transactions.

Here are a few reasons to use private lenders’ money for your real estate transactions:

  1. Private money is quickly accessible.  Because private money comes from investments such as CD’s, stocks, mutual funds and other similar investments, the money can be quickly converted to cash.  This accessibility can allow you great strength and speed when purchasing real estate.
  2. Private money is cash.  Cash gives us strength when making offers on real estate.  Buyers without cash have a hard time competing against those that can offer cash.
  3. Private financing is easy to obtain.  Private lenders often look at the quality of a real estate investment over you, the borrower.  If paperwork, credit checks, and income reviews are not part of what you want in your real estate investment career, private lenders will often over look all of this when the investment is good enough.

Purchasing real estate can be very rewarding and getting financing through private lenders can make the process easy, quick and additionally rewarding.

Tips for Saving for a Down Payment for a Mortgage

Buying a home is typically the largest single purchase a person will make in his or her lifetime. When you are preparing to make a big purchase in real estate, it is important to understand the complexities of what you can afford, what everything will cost, and how to prepare for your purchase.

Before you start looking at homes, your first step is deciding what you can afford and what you want from a home. List your basic requirements such as location, size, and other features.

Then, you will need to save for a down payment for your home.

Different mortgage programs require different amounts for a down payment. If you qualify for a FHA home loan, you can purchase a house with 3.5% down. In addition, many other mortgage programs allow a down payment as low as 5% of the purchase price of the home.

If you are financially able to put 20% down, it can be beneficial. Lenders will not require you to purchase Private Mortgage Insurance (PMI). PMI is an additional cost built into your mortgage that protects the lender in the event of a default.

Here are some tips to help you save for your down payment:

  • Pay yourself first. Make saving a priority by setting aside a certain amount each month.
  • Consider having money automatically transferred in your savings account each month. If you never see the money, you are less likely to miss it.
  • Cut back on your Spending. Choose one item to give up or cut back on and put that money in the bank. This item could be a drink, which is a small expense that tends to add up quickly.
  • If you have the option, consider working overtime and add that money to your savings.
  • Get a second job or do freelance work to earn more money.
  • Sell stuff on eBay. eBay is the ideal place to offload your unwanted household items in return for money. You can convert your clutter into cash.
  • Eliminate the luxuries. For example, put your cable television subscription on hold.  Take your lunch to work every single day. Don’t go shopping for new cloths.

Over a period of twelve months, you could easily save a few thousand dollars. 

Why Hard Money Financing is an Option for Investors

Every investor must start investing somewhere.  If you are like me, you likely purchased a program, saw an infomercial, or went to a seminar and saw the great potential real estate can offer you.  You discovered that you can change your life with real estate investing. 

Investors often start with a “quick” cash method to “get money coming in.”  This quick cash method often involves starting their real estate investing business with a wholesaling technique, such as assignment of contract, double closing, or even bird dogging.  However, if you are like me, you have the goal to get into purchasing properties to rehab and then sell on the market for a significant profit.

As investors begin they may feel that investing in buy, fix and sell properties is out of reach for them.  However, it does not have to be.  Hard money financing can provide an opportunity for you or any investor to begin purchasing properties to repair and resell.

Hard money financing has a stigma that comes with it, which is that financing is extremely costly and extremely dangerous for an investing business.  Though it is true that hard money financing does carry with it a 12-18% interest rate, it is very important to understand that the financing obtained through a hard money lender is likely only going to be used for three to six months.  Hard money loans are short term loans; you want it that way.  It is also important to understand that you can, and should, deduct the costs of a hard money loan in your offer formula.  Deducting the costs in your formula helps you afford the financing and still make the profit you were hoping to make.

If you use a creative hard money lender, you can potentially get into properties with little out of your own pockets.  If you account for the additional costs of the lender you can still purchase real estate, even in the beginning, to fix and resell and, the best part, make far more money than you would likely make wholesaling properties.

Three Ways to Obtain Owner Financing

As we look to build our real estate portfolio we need to learn what we can about the different ways to finance a property or other income-producing asset.  Understanding owner financing can help us grow our portfolio.  Understanding what to do in order to obtain owner financing can be an important tool in our quest to be a successful investor.  Let’s consider some things we can do to utilize this important tool:

  1. Perhaps you have found a property where you don’t have the cash for a down payment, but your credit would allow you to finance the rest of the house.  Talk to your seller.  She may be willing to carry a note for your down payment.  Let’s say she sells you the house for $100,000 and the bank is willing to loan 80% loan to value.   The appraisal shows the loan can be made for $80,000 from the bank.  The seller could finance the other $20,000.  The key is to not be afraid to ask.  You could amortize the loan and make the payments over time or arrange to make a balloon payment.  Always be thinking of ways to get a deal done.
  1. Though not technically owner financing, lease options are a creative way to finance a deal.  Look for an owner who is having a difficult time selling a property.  (This really works in slower markets.)  Approach the owner and ask them if they would consider a lease option.  Let’s use the following as an example: Perhaps you could offer an option of $5,000 and agree on a sale price of $100,000.  You agree to lease the property from the owner for $800 per month.  Try to negotiate the longest possible time you can get to exercise you option.  For our purposes let’s say that option is for two years.

You will then look for a buyer who will lease the house from you.  Offer your buyer the opportunity to purchase an option from you.  For example, your buyer leases the property from you for $1,100 per month and offers a $10,000 option.  Now, let’s say your buyer exercises his option after one year.  You would then exercise your $5,000 option.  You would make $5,000 on the option and another $3,600 on the rents.  Your total profit would be $8,600 for the year you were involved with the property.  We didn’t even consider what you could have made if you offered the property at a higher price than what you had optioned. 

  1. Finally, let’s look at what you could do with mobile homes with a property owner who would be willing to work with you.  Quite often in older mobile home parks there will be homes that have been abandoned.  These homes are often left with repairs and renovations needing to be done.  They are often an eyesore in the trailer park.  It is costly for the owner to do the repairs and costly to move the mobile home.  This is where we can take advantage of a situation and make money.  Ask an owner to allow you to take ownership of the mobile home with the stipulation that you will find renters or find someone to buy the mobile home from you.  Quite often you will find owners who are willing to consider and execute such an agreement.  You are now in for the cost of rehab and the owner has a decent mobile home in their park.  You will then sell or rent the mobile home.  You have just created an income or a profit.

Use your imagination and do not be afraid to talk to people and propose your ideas.  These are some effective creative financing tools that allow you to use a seller’s money.  Best of luck in your investing!

3 Ways to Make Money with a Home Equity Line of Credit

When investing in real estate most people don’t realize that their home can be a great source for funding deals.  Using a home equity line of credit or HELOC can provide the cash needed to do real estate deals. Here are 3 simple ways to use a home equity line of credit to fund deals:

  1. Flips – If you have enough cash from your HELOC you can buy a property for a fix and flip.  Another option, if you do not have enough money available to do a fix and flip, is to use the cash you have available to get a hard or private money loan.  Hard money and private money lenders are much more willing to lend you money for a flip if you have some cash available to put into the deal.  They usually like you to have 20%-30% of the purchase price of the property plus rehab costs. 
  2. Rentals – If you have enough cash you can buy rental property outright.  With interest rates as low as they currently are, the rent you collect from a rental will cover your HELOC payment and give you a good cash flow as well.  You could also use your HELOC for a down payment on a rental property.  The down payment is usually 20%-30% of the purchase price.  Keep in mind you will still have to qualify for a loan to cover the rest of the purchase price.
  3. Lease option or seller financing – These work for those who have a limited amount of money available from their HELOC.  Lease options and seller financing allow you to get into deals with a smaller amount up front and without having to qualify for a bank loan. 

Another benefit of using cash from a HELOC is that a cash offer is a much stronger offer and will give you a better chance of getting your offer accepted.  You still need to do your due diligence to make sure the deal makes sense.  Keep in mind that there will be a monthly cost to repay the HELOC so factor that in when you are running your numbers on the deal.   Interest rates are at all-time lows, which makes a HELOC some of the cheapest money you can tap into. 

Qualifying Hard Money Lenders

There would be instances when a real estate property owner or investor would find himself hard pressed for cash and time to finance his investment. As opposed to going to the banks to apply for a much needed loan, some would-be borrowers go to a hard money lender. For whatever reasons real estate investors can choose to go to hard money lenders for a loan. One big attraction to these lenders is how quickly you will be able to get the loan.

Requirements for Hard Money Loans

Hard money loans are considered as mortgage loan since the lender will be using a real estate asset as the collateral for the loan. The amount of money the borrower will be able to get is primarily based on the value of the property itself and not on the credit standing of the borrower. However, it is wise to take note that hard money loans are short term loans and are usually expensive compared to bank financing. The interest rates for this type of funding varies – ranging from 10-18% with additional charges called points.  It is often that hard money lenders charge 3-8 points (points are an percentage of the loaned amount.  For example: $100,000 loan charged 3 points or 3% would be $3,000). Although the higher interest rates would seem to be scary for first time borrowers, seasoned investors are less daunted by it. They would simply reason out that the benefits of being able to get the much needed financing quickly outweighs the higher cost it entails.

Qualifying the Lender

Not all lenders are created equally.  Also, not all lenders lend the same.  Unlike traditional bank financing that have similar interest rates, similar costs and similar qualification methods hard money lenders are quite different.  Think of it this way: Lender 1 is your neighbour and Lender 2 is an unfamiliar person from a real estate investment club you attend.  They will both lend differently and will charge you different interest rates while also having different lending requirements.

Get to know the Lender

The absolute best thing you can do is to determine how the lender will do business.  A ten-minute conversation can give you great insight into how they will lend to you and what their requirements would be.

Questions to Ask

Here are a series of questions that will help you understand what the lenders will consider.  However, before you go running and calling the lenders keep in mind most lenders are not asked this many question so they may   But, these questions will also show that you know what you are doing better than most the lenders may speak with.

  • What are their points?
  • Can points be charged at the end of a loan?
  • What interest rate do they charge?
  • What is their LTV?
  • Will they lend the LTV upon the value or purchase?
  • Will they fund repairs?
  • Can you pull cash out of a loan?
  • Do they lend in residential financing?
  • Do they lend in commercial real estate?
  • Do they have a pre-payment penalty?
  • Do they offer a Proof-of-Funds?
  • Do they check credit?
  • Do they look at the property more than you?
  • Do they have an application fee?

Hard money lenders are widely used in real estate but when you use them think: “Are they good enough to work with me?”  This will help you understand the purpose of qualifying the lender and find the best funding for you and your business.

Private Money Lenders

What is a Private Money Lender?

A private money lender is a company or individual that loans money, usually secured by a note and deed of trust or mortgage, for funding real estate deals. Private money lenders are typically considered more relationship based in comparison to hard money lenders.

Three places to Find Private Money Lenders

  1. Real estate investment clubs

Real estate investments clubs are a great way to find any part of your power team including private money lenders. Be proactive in networking with as many people as possible when you attend. The point is to let people know you’re doing deals and looking for more possibilities on raising capital. This is a great way to find out if the person you are speaking with is a private money lender. If they aren’t you may get a referral to people that are.

  1. Online searches

You can find just about anything with online searches. There are several websites out there that have lists of private money lenders or lenders that have their own website. A good place to start is www.privatemoneylendingguide.com and browse the lender directory. When contacting a private money lender, you could say “Hi, my name is John Doe and I found your information on the Private Money Lending Guide directory website. I have a deal that I’m working on that I would like to discuss with you. Do you have a few minutes?”. If they have a few minutes to speak, this is the time to start asking any and all questions about the potential loan you need (points, interest rates, terms, etc.) and how the lender operates. If they don’t have enough time, schedule an appointment with them so you’ll have the time to discuss things.

  1. Referrals

I briefly touched on this with real estate investment clubs, but don’t underestimate the power of referrals. Typically, referrals come from people you trust that have had dealings with the private money lender they are referring to you. The great thing about referrals is you can get them anywhere. Family and friends, co-workers, social media (LinkedIn, Facebook), Realtors, etc. The old adage goes “if you don’t ask, you don’t get”, so don’t be afraid to ask for what you need.

Using these methods can help you find the private money lenders you need to make your real estate business a success. Having Private money lenders lined up can also give you confidence in your deals knowing the money is there when you need it.

How to Qualify Private Lenders

Private lenders can be a great way to start your “fix and flip” real estate business.  Typically, a private money loan is meant for short term lending purposes and then the property is either sold or refinanced.  Private money lenders base their loan on the equity of the property and not the purchasers credit or income credentials.  Private money lenders are typically a private individual or group, not an institution.  When speaking with private money lenders it’s important to qualify them to find out what you can expect from them and what they expect from you.  You’ll want to know the terms, the conditions and just how much they are going to be involved in your project.  They will also have their own qualification process of you and your property but for now we will focus on the information you will want to obtain from your private lenders.

First of all, you will want to know the terms of the loan you will be getting from your private lender.  Typically, the interest rate will be quite a bit higher than if you were to go to a conventional bank, don’t panic, as long as you run your numbers correctly and there is a profit at the end of things, this is a win-win for everyone until you can make enough profits to buy the property with your own capital.  Also, make sure you ask if there will be any points charged in this transaction.  It is very common for a private lender to ask for 2-3 points when the property is sold.  These points are equal to 2-3% of the purchase price.  This might seem like a lot but it’s all about running the correct numbers.  Keep in mind that once you prove yourself to your private money lender, they may be willing to negotiate the terms of your next “flip” because they now trust that you will be able to renovate and sell the property and they want to keep you as a customer.  The next thing you will want to know about the terms of your loan is how much the private lender is willing to lend to you.  For example, they may be willing to give you 90% of the purchase price but you will need to come up with the final 10% as well as the rehab costs.  In other instances, you might find a private money lender that is willing to give you the rehab costs for a higher interest rate and you will approach another source for the majority of the purchase price.  You will also want to discuss if and when any payments will be due during this process.  Keep in mind, because this is a private individual or group, they get to set the terms.  Some will require monthly payments and others will not require a payment until a certain number of months have passed.  It is imperative that you understand exactly what terms your private lender is giving to you, so that you can make sure you are running your numbers correctly and ensure you will make a profit.

Another thing you want to find out from your private money lender is what will happen if you go past the agreed upon number of months they are lending.  In some cases, the interest rate will go up.  Other times, payments with penalties included will begin.  In the rare occasion that the property is not sold within the allotted time you need to know what your private lender is going to require.   This is a rare situation but it’s better to have this conversation up front and know what needs to be done so that there are no surprises for either party if the situation arises. 

The last thing that you want to talk about with your private money lender is how much they plan on being involved in your project.  Some private money lenders want to have a say in the plans, the colors and the selling of the property.  They feel because their money is involved they have a right to some of the decisions.  Then there are other private money lenders that will quietly let you run the project unless they see a huge red flag and need to step in with their opinions.  Either way, you want to prepare yourself for which type of “partner” you are teaming up with so that you will not be insulted if your private money lender wants to have a say in your project.

At the end of the day, a private money lender is an excellent way to get your foot in the door as a “fix and flip” real estate investor if you don’t have the capital yourself.  Getting creative about using other people’s money to help you get started is a great option to begin this process.  There are a lot people out there with money that want to make their money grow and you want to make your new “fix and flip” real estate business grow.  By using their money to start your business, it’s a win-win for both of you.  Just make sure you communicate clearly the terms, the conditions and what expectations you have of each other so that the relationship can continue through many more projects.