Continuing from yesterday’s rental property investment post, this is second of the two post series on real estate investment/ownership. If you are shopping for a home loan, it is only natural that you want to find a low interest rate mortgage loan. The surest ways to find the best deal are to:
- Be a prepared borrower
- Shop around
How to Be a Prepared Borrower
It takes time and effort to find and qualify for a low interest rate mortgage loan. Being prepared is important whether you are looking to buy a home or refinance your current mortgage, but it is even more important when you are buying a home. If you aren’t prepared in advance, you may see the home you want to buy disappears, because you couldn’t secure financing in time.
To make the process as efficient as you can, start your loan shopping after you know where you stand on each of the following factors:
- Finances- Making a lot of money may improve your chances of getting the best rate available on a loan, but it is not enough. The key is your debt-to-income ratio (DTI). Your DTI is a comparison of your gross monthly income to certain monthly expenses. The main monthly expenses included in your DTI are: your new mortgage’s principal and interest, property taxes, and homeowner’s insurance; your required minimum credit card payments, your monthly payments for auto loans, student loans, or other loans; and any required payment for child support or alimony. To calculate your DTI, divide your gross monthly income by your total monthly expenses in the categories listed above. In general, you want a DTI of no more than 36% in order to qualify for the lowest interest rates on the market.
- Credit Score– Your credit score and credit history are very important factors in qualifying for a low-rate loan. For conventional loans, you need a FICO score of 720 or greater. If you don’t know your score, find it out before you start shopping. Also, review your credit report for errors and dispute any inaccurate information you find.
Quick Tip: If your credit score is just below the level needed to get the lowest rate, speak to your loan officer about the rapid rescore program. In a Rapid Rescore, you take a few quick actions, based on recommendations of your loan officer. Then, your credit report is pulled again, usually with very positive results.
- Loan Size- Your loan-to-value ratio (LTV) is another crucial component in determining your interest rates and the total costs of your mortgage payment. To calculate your LTV, divide the fair-market value of your home by the size of your loan. For example, if you want a $150,000 loan on a home worth $200,000, your LTFV would be 75%. The lowest rates are offered to borrowers with an LTV below 80%. Not only will your interest rate be lower, but you avoid the need to pay for Private Mortgage Insurance (PMI), with an LTV below 80%. If you’re looking to buy a home, the lowest interest rates and costs will be available if you have a down-payment of 20%.
How to Shop for a Low-Interest Loan
Once you’ve taken the steps to be the best prepared borrower you can be, it is time to focus on how you go about finding the lowest interest rate loan you can. Here are some basic tips:
- Don’t Focus Only on Your Rate– While it makes some sense to search for the lowest rate you can find, you need to pay equal attention to the costs associated with your loan. You need to compare the rate and all the fees the lender charges you. Some loans come with a lower interest rate because you pay fees to buy down your rate. That may or may not be a good decision. You need to think about how long you expect to keep the loan. The longer you hold the loan, the more sense it makes to pay fees to bring down your interest rate.
- Shop Around– You need to comparison shop, in order to find the best loan. Only by comparing different lenders side-by-side, will you see what is actually offered to you. The rates you see in advertisements are often “teaser rates,” published to grab your interest. Your task is to find the best loan for yourself that you can. The low rate that your friend or co-worker gets may be better than the rate that you can get. If that happens, don’t let that bother you. Focus on the different offers you receive. If you can improve your financial position, that is more important than whether you got the best deal of anyone you know.
Quick Tip #2 Compare different lenders and different loan options for free, without obligation, by using the Bills.com lending network.
- Don’t Be Paralyzed– It is easy to get so focused on finding the best rate possible. Different lenders apply different lending standards. When you have a loan approval in hand from one lender, it can be tempting to move to another lender if rates drop below the rate at which you locked your loan. Keep in mind, however, that something could occur that causes the new, lower rate loan to fall apart. Maybe a collection account will appear on your credit report from out of nowhere or the new lender simply has a stricter underwriting process. Only a lucky few are going to get their loans at the absolute bottom of the market. Don’t let a good or very good deal disappear because you’re chasing the best deal out there. Remember, rates rise faster when they start going up than they fall when they’re going down.
Paul @ The Frugal Toad says
Great tips SB! I agree that you should start getting your financial house in order several years before you start looking for a house. Your total debt ratio should not exceed 36% and your housing cost (principal + interest), plus 1/12th of annual real estate taxes, plus 1/12th of the annual homeowners insurance premium, plus 1/12th of the annual association fees, should not exceed 28% of gross monthly income.
Oh Man! here is south Florida property is not cheap. That rule may not apply here for many. 28% towards home ownership is a optimum number people should try for without having to stretch their pockets by choosing bigger home. Live below means, as they say it.
Being in the real estate industry for 26 years as an agent and investor, your tips are logical and good. I have retired as an agent but worked primarily with investors most of my career,I have had the opportunity to see the type of individual that succeeds, as well as fails. Because of this, I have changes my philosophy over the years as to the best way to make money on real estate as an investor.
1) Do not invest in R.E. unless you are debt free(NO cc debt or revolving loans)
2) Utilize CASH to purchase rental property, don’t use loans, especially if you have a plan of purchasing multiples.
3) If you must use a loan to buy rental, do not use a HELOC on your primary home(Your personal home should be paid off-remember no debt) Do not putyour personal home at risk to fund rentals. If things go south in the market, at least your primary home is safe.
4) Open an LLC or sub chapter s corp to finance and maintain the rental properties. Again if things go south, you will not be held personally liable-again potential of loosing main home.
These ideas may sound “extreme” but when the market collapsed in 2008-I saw way too many investors loose everything because they did not buy right. Remember in real estate, you make your money at the “Buy Table” not at the “Sell Table”.
There is GREAT opportunity right now in real estate-IT IS THE TIME TO BUY, but be sure to do your homework first and become a well educated investor.
Very valuable tips! Thank your for taking time and add value to this overall post. The advice to create LLC is a golden one, never read that anywhere. Let me know if you want to do a guest post here to put other points related to R.E. With your 26 years of experience I am sure you have a lot to share.
Save Green Team(Save Green Going Green) says
Several of my investors use the LLC for each indvidual property, which I personally think is overkill, but I have always recommended no more than 3 properties per LLC. This adds another layer of protection and only a portion of the entire porfolio is at risk. Setting up an LLC is fairly simple and in most cases can be done by an attorney for around $300(at least in the Baltimore/DC area) Individuals can set up their own LLC and save money. Maybe have an attorney do the first, then set up others on your own as needed. Truthfully, anyone who is in business-even as a sole-proprietor-in many cases can benefit from an LLC.
Would love to do a guest post sometime. Will consider the topic and post and contact you.
Broke Professionals says
I find it very annoying that many lenders won’t look at the LTV on a home purchase, just the down payment. I feel like if you are getting a GREAT deal on a house (like a short sale or foreclosure) and are buying a house for 80, 75, 70% of its appraised value, you shouldn’t have to put down 20% – after all, isn’t the equity you’re buying enough? Can somebody explain that to me?