Non-Qualified Loan

How to Evaluate an Investment Home Purchase

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Buying a home to rent out can be a very lucrative investment. However before you purchase just any home, you should know what to look for. Just buying a home and hoping to make good money on it isn’t going to work. You have a lot of legwork to do before choosing just the right investment home.

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Where is the Home Located?

Before you purchase an investment home, you’ll want to consider not only the home itself, but also its location. You could have the most beautiful home that suits a family of four, but if it’s in a rundown area and sticks out like a sore thumb, it won’t likely make you any money. In fact, it could be a sinking investment.

Even when you buy a home to live in as an owner-occupied property, you want to look into the neighborhood. You’re not just buying a home, but an area to live. You want it to be somewhere you feel comfortable and enjoy living. The same is true for an investment home. You want it to be somewhere where there is a large rental market and where people would want to live.

A few things you’ll want to consider is the proximity to major things like shopping malls, churches, and schools. If you are buying a home that is large enough for a family with kids, you’ll want to make sure the area is kid-friendly and that the school district is reputable.

Consider the demographics of the area. Is it better suited for retired people or young families or somewhere in between? This will help you determine if it’s a good place for a rental home. If it’s a good area for retired people, you may not have as large of a market of renters as you would if it’s an area for families just starting out.

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What’s the Home’s Condition?

Next, you want to know the home’s condition. Obviously, this plays a role in the home’s value, but you need to dig deeper than that. You need to know how much work the home needs and around how much it will cost. This will help you figure out the financial aspect of the purchase.

It doesn’t matter how cheap you can get the home or how much you think you can get for rent. You have to figure in the cost of making the home livable and desirable. Remember, you are trying to appeal to an audience that has many other opportunities to rent other homes.

Once you know what repairs the home needs, you should figure out if you can afford the repairs. This means can you afford the materials as well as the labor to conduct them? If you can do them yourself, think about the time commitment. Do you have the time to make the changes within a decent period? Remember, time is money.

What’s the Market Like?

You will also want to know what the rental market is like in that area. You can have the best home at the best rental price, but if there isn’t a market, you won’t make any money. Do your research and determine what the going rent is in the area as well as what percentage of vacancy exists. If there is a large number of vacancies, you may want to look at other properties in other areas.

Figuring out if an investment home purchase is worth is a big task. You have many factors to consider outside of the value of the home. Understanding if the home will be profitable for you requires a little research as well as some guessing. The more input you have and the more time you take, the better the decision you will make.

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Do You Have to Pay Cash to Buy a Foreclosed Home?

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It’s a myth that you have to pay cash to buy a foreclosed home. There are many options out there. The key is in how much you know and how much you prepare. There are certain loan programs that may prove to be a little more difficult to get because of the condition of the property. Overall, though, you can secure financing for a foreclosure.

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Get Pre-Approved

The first step in buying a foreclosed home is getting pre-approved. This way you know how much you can afford. That’s not the only reason, though. You also want to be able to confidently bid on a foreclosed property quickly. Chances are if it is a good deal, there will be quite a bit of competition for the home. You’ll be up against not only others with pre-approvals, but also cash buyers. Not knowing what you may qualify for can leave you in the dust without a home.

You don’t necessarily have to secure financing from the lender that holds the home, but it’s not a bad idea to try. Securing financing from the selling lender gives the lender more confidence in your ability for final approval. Don’t restrict your search to just the selling lender, but always keep it open as an option.

Why Financing is Tough

The main problem with securing financing for a foreclosed home is the home’s condition. If it’s not move-in ready and considered safe and sanitary, most banks will not provide a loan for the home. This means despite your approval, you could still be without financing. Keep this in mind as you bid on homes that went through foreclosure. While you can’t find out everything, try to find out as much as you can.

Do people live in the home now? If so, how long have they been behind on their payments? The longer they have not made their payments, the worse condition the home is likely in. If they don’t have money to pay their loans, they probably aren’t caring for the home either.

If no one lives in the home currently, you have to think about crime, especially vandalism. You won’t know if the home has been invaded and/or if things were stolen. If the lender determines the home is not livable, you could lose your financing source.

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In this respect, cash is the best way to buy a foreclosed home.

When Cash is King

As we stated above, cash reigns supreme when buying a foreclosed home that is in poor condition. It’s not unusual to see foreclosures in non-livable conditions. Banks sell the homes as-is, meaning they don’t make any changes to the home. You get what you get, unlike when you buy from a private seller. You may find holes in the walls, run down appliances, and non-working utilities, just to name a few issues.

If this is the case, finding financing could be difficult. This is when paying cash pays off. You don’t have anyone that must approve the home – you can buy it and do what you want with it. However, there’s one exception to the rule. It’s called the FHA 203(K).

FHA 203(K) Loan

The FHA 203(K) provides you with funds to purchase and rehab the home. You’ll have to involve a 3rd party FHA Loan Consultant who will help you determine what it will cost to fix up the home. He will also determine the mandatory changes that must be made in order to make the home livable. The good news is that you can borrow up to 110% of the ‘improved value of the home.’ This is the value the Loan Consultant and/or appraiser determines the home will be worth after you make the designated repairs or changes.

While you don’t have to pay cash for a foreclosed home, it’s often the easier route. Looking at the flip side, though, lenders have your back. They don’t want you to invest in something that is going to be a money pit. They want to give you a loan on a home that they have confidence you can afford to buy and care for. They also want to protect their own investment in the property as well though.

It’s almost like a Catch 22. Cash does get you into the property with fewer restrictions, but a loan from a bank has restrictions that could protect your investment in the end.

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How Lenders Look at Self-Employed Income

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Lenders need to verify your income beyond a reasonable doubt. They do this with paystubs and W-2s. What if you don’t have those items because you work for yourself or are a contractor? Are you out of luck?

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Luckily, the answer is ‘no.’ You can still get a mortgage with self-employed income. However, different rules apply to you. Because you don’t have paystubs and W-2s, the lender will need more verification of your income. They need to make sure it’s legitimate and that it’s consistent – these are two very important factors.

Two Years is Crucial

The first step is the time you receive your self-employment income. Working for yourself for six months isn’t going to get you an approval. The magic number is 2 years – that’s how long lenders want to see you self-employed.

Why two years? It shows consistency and legitimacy. If they took your income after just six months, how are they to know if you’ll be successful? You have not even seen the ups and downs that an entire year can create yet. Two years is the time that things settle down and you can show a pattern of the ups and downs throughout your business cycle.

Calculating Self-Employed Income

Once you prove your job is legitimate, you need to determine how to prove your income. It starts with your tax returns. This is the easiest way to prove your income. However, it can also be the most damaging. As a business owner, chances are that you claim expenses that take away from your income. Your lender must take your net income claimed on your taxes. If you claim too many expenses, it can hurt your chances of getting a loan. If you know you’ll apply for a mortgage in the next couple of years, you may want to lay off the write-offs to keep your self-employed income looking as high as possible.

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So what do lenders need to calculate your income? They’ll need the following:

  • 2 years of individual tax returns
  • All schedules of your tax returns
  • W-2s if you pay yourself
  • 2 years of business tax returns
  • All schedules of your business tax returns
  • A Profit & Loss Statement for the year up to the current date

The lender will then take an average of your income. A 2-year average is best because again, it shows the ups and downs of your income. They will collaborate with your YTD P&L to make sure you currently make the same or nearly the same income that you claimed on your taxes.

Less Than 2-Year Self Employment

What if you have been self-employed for less than 2 years? You may be able to use your income, but only if you have a history in the same field. Say for example, you opened your own accounting firm. You have owned it for 1 year. However, before opening your own firm, you worked for another firm for 4 years. That shows the lender that you have the experience in the industry. Your likelihood of success is higher knowing that you have that experience.

In this case, a lender may take your 1-year income. However, if you did not have that experience as an accountant working for someone else before, you wouldn’t get that luxury. The lender needs proof that you know what it takes to be a successful accountant today.

Taking the Average

Basically, lenders will take an average of your 2-year income. Let’s say you claimed $75,000 income 2 years ago and $100,000 last year. The lender cannot use the $100,000 as your average income. Instead, they will use the average of the two years.

Here’s how that looks:

  • If the lender used just last year’s income, you would have an average monthly income of $8,333
  • If the lender used an average of the last 2 years’ of income, you would have an average monthly income of $7,292

While the latter income is lower, it’s more realistic of what you should base your mortgage payment on. If the lender used the higher $8,333, you might take on a mortgage you cannot comfortably afford year-round. The average helps account for the ups and downs your income likely experiences, ensuring that you can afford your mortgage payment no matter the time of year.

Self-employed income is complicated and takes more work to verify than employer-based income. It’s not impossible to get a mortgage, it may just take more time and more verification. The lender must verify beyond a reasonable doubt that you actually make the income you claim. They may ask for several bank statements, a business license, or letter from your CPA stating that you are self-employed and make what you claim. All of these steps are to make sure that you truly can afford the loan you asked to receive.

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Advantages of Buying a Multi-Unit Home

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Buying a multi-unit home might seem like a daunting idea. Not only do you own one unit; you own several of them. This often means a larger mortgage payment and more area to maintain. While these thoughts are scary, there are other things it is as well – more cash flow, an investment for the future, and easy appreciation.

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If you’ve thought about investing in real estate, consider a multi-unit property is one of the easiest ways to go. Not only will you get help with your mortgage payment, if you live in one of the units, but you have access to many loan programs including FHA loans.

Cash Flow Helps You Grow

If you start out with a multi-unit home as part of your primary residence, you have the fortune of buying a home that you can live in and rent out. You collect rent which you then put towards your mortgage. This lowers the money you have to pay out of your own pocket. As your cash flow increases and you are able to buy your own home, you can further your rent by renting out the unit you occupied.

As time goes on, you can increase the rents you charge, keeping them comparable to others in the area. Luckily, though, your mortgage payment will never change. Higher rents means you can pay more of your mortgage off each month. Eventually, you’ll own the home faster than you would if you lived there. You then own a rental unit free and clear and have even more cash flow coming into your life.

Less Competition

Real estate investors, especially the novices, are more likely to invest in single-family homes. Not everyone is looking for a single family home, though. Whether due to cost or just the space to maintain, multi-unit properties often rent faster. With less competition on the horizon, you stand to make more money in the end.

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Tax Breaks Help Make it Affordable

When you own a multi-unit home and rent it out, you often get tax breaks you wouldn’t get if you owned a single unit for yourself. Essentially, owning a multi-unit property means you own a business. You rent out to others, so you get the deductions that many businesses get. The largest deduction is often depreciation, but your tax advisor can help you determine which deductions apply to you.

Government-Backed Loans are a Possibility

When you buy a single-family home for investment purposes, you generally have two options – conventional and subprime loans. When you buy a multiple unit property, though, you have more options. VA and FHA loans are both a possibility as long as you live in one of the units.

This means you can buy an investment property with little money down. If you qualify for a VA loan (meaning you are a veteran), you won’t need any money down. Even though the programs are essentially for owner-occupied properties, there is a loophole as long as you live in one of the units. You can rent the remaining units and collect the rent. While you can’t use the rent for qualifying purposes, you can use it to help you pay your mortgage every month.

All Properties in One Place

Perhaps one of the largest benefits is the convenience of the multi-unit home. It gives you the opportunity to rent out more than one home, but keeps them all under one roof. You don’t have to run all around town trying to fix things or find renters in various areas. Everything happens in one place. It cuts down on the craziness and lets you keep things more organized as a landlord.

Investing in a multi-unit home can help you make money without the headache of investing in several single-family homes. If you play your cards right, you can even use government-backed financing, helping you get a home with a small down payment. You’ll also be able to take advantage of the relaxed guidelines. As always, discuss your options with your tax advisor so you can determine what is right for you and your family.

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Risks Involved in Buying a Non-Warrantable Condo

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When you buy a condo with mortgage financing, you are at the lender’s mercy regarding whether you can buy it or not. Just because you fell in love with a specific condominium does not mean you can use your approved financing on that unit. The lender must determine if the condominium is warrantable. If it’s a non-warrantable condo, you’ll have a tougher time getting financing.

What is a Non-Warrantable Condo?

In basic terms, a warrantable condo meets Fannie Mae, Freddie Mac, and HUD guidelines. A non-warrantable condo does not meet one or more of the requirements.

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A non-warrantable condo usually has one of the following:

  • The development isn’t completed yet
  • At least one investor owns more than 10% of the units
  • The development allows the units to be rented for the short-term
  • There is pending litigation against the development
  • The development does not carry proper insurance
  • There are a large number of non-owner-occupied units
  • There is not a proper budget in place

What is a Warrantable Condo?

A warrantable condominium meets the following requirements:

  • One owner does not own more than 10% of the units in the development
  • At least 85% of the current homeowners are on time with their homeowner’s association dues
  • There isn’t any pending litigation against the HOA
  • More than half of the units are owner-occupied
  • If there is any commercial space in the development, it’s not more than 25% of the total area

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The Risk You Take

If you can find financing from a subprime lender that writes their own loans, you may be able to buy a non-warrantable condo. But should you? There are some risks involved.

  • Resale will be difficult since most lenders will not provide financing on a non-warrantable condo. This means you’ll have to wait for a cash buyer or someone with a portfolio loan.
  • You’ll likely pay a higher interest rate on your loan because of the risk of the development.
  • You may have to put a much higher down payment down because of the risk.

Finding Financing

Perhaps the hardest part of buying a non-warrantable condo is finding financing. You won’t find it with any conventional or government-backed program. You’ll have to contact individual lenders to see what portfolio loans they offer. Because these are often considered ‘subprime’ loans, you’ll likely pay more for the loan. This could mean:

  • A high down payment
  • High closing costs
  • A high interest rate

The lender could also have their own requirements that are different from any other loan program. Since the lender is not selling the loan on the secondary market, they can make up their own rules. Because condos and especially non-warrantable condos are risky, the lender needs to make up for that risk. They want to make sure that they make money even if you default on the loan.

The risk of default is so high because of the low resale value the condo will likely have. Most people that buy a condominium are first-time homebuyers. They often have FHA or conventional financing, neither of which will accept this condominium. This could leave you with a property that you no longer want. You’ll either settle for a lower price just to get rid of the property or you’ll walk away from it, letting the loan go into default.

Lenders safeguard against this by charging more for the loan upfront and charging higher interest rates to make sure they make money no matter what happens.

The non-warrantable condo is not something you should purchase if this is your first home purchase. If you are an investor and have the cash to buy it outright, it might be a good investment. Otherwise, it’s worth it to find a condo that is warrantable. You’ll get more favorable financing options and have a better chance selling it when you are ready to do so.

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5 Steps Borrowers Can Take to Avoid Mortgage Process Delays

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The last thing you want is a delay in your mortgage process, especially if you are purchasing a home. You have a deadline to meet, but you must comply with the lender’s rules in order to meet it. If you don’t follow the rules, you could seriously delay your mortgage processing.

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Are you afraid of falling in that bought? Use these five simple steps to help you avoid any delays in your mortgage approval process.

Be Honest With the Lender

It’s easy to embellish a little bit when the home of your dreams is on the line. Here’s a bit of advice though – don’t do it. The truth will come out eventually. With all of the red tape mortgage lenders must go through today, they verify everything. They cannot take your word for anything. If it’s not on paper and documented several times, they cannot use it for qualifying purposes.

So what does that mean for you? Be upfront with the lender. Honestly, it helps you in the end anyways. The more honest you are, the more likely it is that the lender will line you up with the right program. For example, if you fib and say you only have a ‘little’ debt, when in reality, you have more than you can handle, it could derail your loan approval.

No matter how risky you think a factor is, tell your loan officer. He’ll tell you upfront what you might face. But, he may also have other loan programs that you’ll qualify for easier given the circumstances. Wouldn’t you rather know this information up front?

Provide All Documentation Right Away

It’s impossible to know every single piece of paper your lender will need, but there are some basics you can get ready immediately:

  • Last month worth of paystubs (4 if you are paid weekly, 2 if you are paid bi-weekly)
  • Last 2 years of W-2s for every job you have held in that time
  • All schedules of your tax returns for the last 2 years (especially if you are self-employed)
  • All pages of all investment or asset statements (even the blank pages)

If you own a business, be prepared to provide all financial statements pertaining to your business. You’ll also need to provide proof of a fully-paid homeowner’s insurance policy before the closing.

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Providing the lender with a full package up front can help speed the process along. However, when the underwriter asks for more documentation, act fast. The longer you take, the longer it takes for your mortgage process to go through.

Work Closely With the Seller

If you are buying a home, the purchase contract is a vital piece of information for the lender. No matter how well you qualify for the loan personally, the home must pass the requirements as well. The fully expected purchase contract will give the lender some information. However, you also need to work with the seller to get the appraisal and inspection done right away.

You can’t control when the seller allows the appraiser and inspector in the home, but keeping a good relationship with the seller can speed things along. The longer the seller delays, the more the mortgage process is at a standstill. The lender cannot move forward until they know the value of the home as well as its condition.

If you have an inspection contingency on the home, you’ll need to complete the inspection within the allotted time. If you miss the expiration date, you miss your chance to back out of the contract without financial consequences. This gives the lender the chance to review it as well to make sure the home meets the specific requirements of the loan program, such as FHA or VA requirements.

Don’t Use Your Credit Cards

If there’s one golden rule while you go through the mortgage process, it’s to freeze your financial life. Don’t make any large purchases during that time. You might think the lender would never notice since they already pulled your credit, but you’re wrong. The lender will pull your credit a minimum of one more time before you close. You have no way of knowing when that final time will be. It could be on your closing date.

How will you know if your credit card reported your new purchases to the credit bureau yet? You won’t. You live your loan approval to chance this way. If your credit card balance increased, your credit score may drop. The lender will also have to go back to the drawing board and figure out your debt ratio to see if you still qualify for the loan.

The entire loan process could be interrupted with just one purchase.

Don’t Make Large Deposits in Your Bank Accounts

Along the lines of freezing your credit is the need to avoid adding funds to your investment accounts. Small deposits are okay. Large deposits send up a red flag. The lender will ask to track those funds. In other words, they need to see where they came from if they cannot be tied to your income.

Basically, the lender wants to know if someone lent you money, if you got a gift, or if you took a cash advance on your credit card. Any type of loan affects your debt ratio and possibly your mortgage loan approval.

Avoid making any deposits other than your standard income if you can. If there is money you must deposit, talk to your loan officer about it beforehand. This way he can tell you what you need to do if you must use the funds for your mortgage.

These simple steps can help you avoid a serious delay in the mortgage process. Even delaying your closing a few days can cost you hundreds of dollars. In some cases, it could even cost you the home if the seller cannot wait. Take these steps seriously and move your process along as quickly as possible!

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Co-Borrower Vs. Co-Signer: How Does it Affect Your Home Loan?

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If you can’t qualify for a mortgage on your own, you might look to someone for help. You have two options – a co-borrower or a co-signer. They can both help increase your chances of getting a loan. However, they both have different impacts on your home loan. We discuss them in detail below.

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What is a Co-Borrower?

A co-borrower is commonly your spouse or someone you plan to live with in the home. This person applies for the loan with you as the ‘joint applicant.’ He/she must answer the same questions the main borrower must answer.

The lender will evaluate all of the following from the joint borrower:

  • Credit score
  • Income
  • Assets
  • Liabilities
  • Debt ratio

Your co-borrower can help or hurt your chances of loan approval depending on their financial situation. For example, many lenders take a borrower’s middle credit score from all three credit bureaus. If there are two borrowers, though, they take the lowest middle score between the two borrowers. If your joint applicant has a lower middle score, it could hurt your chances of approval.

Another issue arises if a co-borrower has significant debts. They get worked into your debt ratio. If the ratio is too high, it could ruin your chances for approval.

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Before you apply for a loan with a joint applicant, make sure you know enough about their financial life. Discuss their credit history and their current labilities versus your combined income. This will give you a good idea whether the joint applicant will help or hurt your situation.

What is a Co-Signer?

A co-signer is different from a co-borrower. They do not live in the home. They are a ‘back up’ for the main borrower. They let the bank know that they will pay the loan if you become unable. The main role of a co-signer, however, is to help your application look better. This person generally has a higher credit score and/or income. Both of these factors are meant to help you get approved for the loan.

In the eyes of the lender, this person makes it less risky to lend you the money for the home. It may help you get approved for a higher loan amount or even secure a lower interest rate. This person does not make mortgage payments on a regular basis, but will become responsible if you stop making the payments yourself.

The Main Difference

You might think the co-borrower and co-signer sound similar. They both help you get approved for a loan. That much is true. However, there is one main difference.

Co-signers do not have interest in the property. They do not have any right to the property or any say if you decide to sell it. You do not have to share the profits from the sale with this person either. They do not sign all of the documents at the closing, including the deed.

Co-borrowers do have an interest in the property. They have equal rights to it. You cannot sell the home without first getting the co-borrower’s consent. The co-borrower signs every document at the closing that you sign, including the deed.

Alternatives to Having a Joint Applicant

If you know you have bad credit, you have another alternative. You can wait to apply for a loan and try to fix your credit. There are a few quick fixes you can apply to your credit that will help your score increase:

  • Bring all accounts current and keep paying them on time
  • Pay down any high balances so your utilization rate is lower
  • Don’t close any current accounts
  • Don’t open any new accounts unless you don’t have enough accounts to help your credit
  • Clear up any collections or other negative events on your credit report

The choice is yours when determining whether a co-borrower or co-signer is necessary. They both have their pros and cons. Anyone that takes on the responsibility with you, however, should know they are liable for the loan. They should prepare themselves for the worst case, just so they are taken off guard. If the loan does go unpaid, everybody that is on the loan will have a damaged credit score. If everyone is on the same page, the process can go smoothly though.

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Should you Opt for Lender-Paid Mortgage Insurance (LPMI)?

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If you can’t put 20% down on a home, you’ll have to pay Private Mortgage Insurance. If the thought of paying yet another insurance makes your skin crawl, you can consider lender-paid mortgage insurance or LPMI. As the name suggests, the lender pays the insurance for you. What’s the tradeoff? Is it worth it? We take a look below.

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What is Mortgage Insurance?

First, let’s look at mortgage insurance. This policy covers the lender, not you, the borrower. If you were to stop making your payments, the lender is stuck with your home. They stand to lose a lot of money. When borrowers put down less than 20% on a home, the risk of this happening is high. In order to offset the risk, lenders require mortgage insurance.

You pay the insurance premiums, but the lender reaps the benefits. The insurance company pays the lender if you default on the loan.

How Does Lender-Paid Mortgage Insurance Work?

If you don’t want to pay the PMI mortgage insurance premiums, you can opt for lender-paid mortgage insurance. With LPMI, the lender pays the premium in one lump sum at your closing. However, there’s a tradeoff. You’ll likely pay a higher interest rate. Most lenders charge between 0.25% and 0.5% more to pay for your insurance.

What’s the Difference?

You might wonder what benefit there is if you opt for LPMI, you still pay more for the loan. With a higher rate, is it worth it to have the lender pay your mortgage insurance?

Let’s look at the two scenarios:

Let’s say you need a $150,000 loan. You are buying a home worth $160,000. Since you are not putting down 20%, you need Private Mortgage Insurance.

If you pay the PMI yourself, your payment would include principal and interest of $716 and PMI of around $111. This is a total payment of $827. The exact amount you pay for PMI depends on your credit and LTV. This amount is based on average credit.

If the lender pays the PMI, they may charge you a rate of 4.5%. Your payment would be just the principal and interest of $760. This is $67 less than if you paid the PMI even though you have a higher interest rate.

How do you Decide?

The bigger question is how do you decide between lender-paid mortgage insurance and borrower paid? It all comes down to your situation. Are you going to live in the home for the long-term? If so, taking a higher interest rate may not make sense. PMI is temporary. Once you hit less than an 80% LTV, it falls off your payment. You are then left with the lower interest rate.

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If you take the lender-paid mortgage insurance, your payment remains the same. You pay the higher interest over the life of the loan. Let’s look at the difference between the 4.0% and 4.5% over the life of the loan.

  • 0% you pay a total of $107,804 in interest
  • 5% you pay a total of $123,610 in interest

If you were to stay in the home for the entire 30 years, you’d pay $15,806 more in interest! Chances are you have something much better to do with $15,000.

Offsetting the Cost of LPMI

Luckily, there are ways to help you afford the higher cost of LPMI. First, you can negotiate with a lender. You don’t have to take the initial rate they quote you. Talk to the lender and see how much wiggle room they may have. You never know when they may bend and even lower the rate 0.25%.

If your negotiation skills are rusty, you can also pay a discount point or two to buy the rate down. This will cost you more upfront, but will give you the benefit of the lower interest rate over the life of the loan.

Some lenders also offer partial payments of the mortgage insurance. This way you meet the lender halfway, so to speak. They pay half of the insurance for you and you cover the remaining half in your monthly payments. This way you can obtain a slightly elevated, but not too high interest rate.

Other Options

Of course, PMI isn’t your only option. If you don’t want to deal with it at all, you have options:

  • Make a 20% down payment either with your own funds or gift funds (approved by the lender)
  • Take a government-backed loan, such as a USDA or VA loan (the USDA loan does have mortgage insurance but it’s often less than conventional loans)
  • Find a less expensive home
  • Take subprime financing (lenders that make their own loans don’t charge insurance premiums)

Before you decide, look at the big picture. How much will the loan cost you over its entire life? What will the insurance cost you? Is the interest rate one you can afford? What is the APR for the loan? This is usually one of the most important factors you can consider. It looks at the full implication of the loan, not just the interest rate. This way you’ll know how much the loan will cost you over its entirety.

As you find the right loan for you, talk with different lenders. You may receive different interest rate quotes as well as PMI quotes. Some lenders won’t offer lender-paid mortgage insurance while others do but for a cost. Weigh your options and figure out which loan works right for you.

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How do Lenders Verify the Down Payment?

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You found a home and now it’s time to get your loan cleared for closing. Your credit score, income, and the home’s value play important roles. However, don’t overlook the importance of the down payment. You can’t just tell a lender you are going to put 20% down and expect them to take your word for it. You have to prove where the money came from and that it belongs to you first.

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Keep reading to learn the proper procedure to verify your funds.

Your Own Savings

If the down payment money comes from your own savings, the lender will require the last 3 months’ of bank statements. On these statements, they will look for irregular and large deposits. If there are regular deposits that occur on a consistent basis, they will not question it.

But, say for example you sold your motorcycle and put the money in your savings account. That’s not a regular deposit and it’s likely a large deposit. The lender will need to know where that money came from. If you have any large deposits similar in nature, you’ll need to provide a paper trail showing where the money originated.

In the example of the sold motorcycle, you can show the deed of sale and the check from the buyer. You can also keep your deposit ticket showing the deposit so that it matches the amount of the check from the motorcycle buyer. Any transaction you conduct should have a paper trail.

If you don’t have a paper trail, the lender will assume the money is a loan. They will then include a monthly payment amount in your debt ratio. This can affect your loan approval. It’s to your advantage to keep as much paperwork as possible for proof.

Stocks and Bonds

Liquid investments can serve as a valuable down payment tool as well. Just like your savings account, the lender will need the last 3 months’ of statements. They will determine the value of your account to ensure that it meets the amount you need to put down on the home.

However, you will also need to show the lender the proof of the sale of the asset once you sell it. You’ll provide the lender with the paperwork you receive for the sale. You’ll also need to prove that you transferred the funds into your account. Keep the deposit ticket from the transaction and provide it to the lender alongside your proof of the asset’s sale.

401K

In extreme cases, you may borrow from your 401K. This isn’t a recommended method because it depletes your retirement funds. Even though you’ll pay the money back, you lose the time value of the compounded interest you would have received.

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If you go this route, you’ll need your latest 401K statement. You’ll also need proof that you are eligible for a 401K loan. You’ll need your employer’s approval along with proof of the required payments. Some lenders may count the payment against your debt ratio. It varies by lender. Even though you are paying yourself back and you don’t owe interest, it’s still a debt. Lenders give you a specific timeframe to pay the debt back. This is the same as if you took out a loan from a bank, so the lender will likely count it.

Gift Funds

Many loan programs, including FHA and conventional loans allow gift funds for the down payment. You must follow a specific procedure in order to have the funds count.

The donor must provide you with a gift letter. The letter should be signed and dated by the borrower. It should state the amount of money they are gifting. It should also state the reason (home purchase) along with the address of the home. Finally, it should state that this is a gift and not a loan. This is the most important statement to the lender. Again, if it’s a loan, it could count against your debt ratio.

You’ll also need to provide the lender with proof of receipt of the funds. Some lenders also require proof of where the donor received the funds. They may ask for the last 3 months’ worth of banks statements from the donor. The lender will look for any large deposits that throw up a red flag. They’ll also need proof of the funds transfer. You can do this with a canceled check from the borrower and the deposit ticket into your account.

Verifying the down payment isn’t difficult, but it does require a paper trail. Lenders are on the lookout for any red flags that make them think the money is a loan. Even if it is a loan, it doesn’t always mean you’ll lose your mortgage approval. If it fits within your debt ratio, you may still have an approval.

Be honest with your lender about the source of your down payment funds. Ask what proof they will need to source the funds and what timeframe they must cover. Some lenders require more than 3 months’ of bank statements just to make sure the money wasn’t stuffed in your account just to make it look like you had more money.

No matter the case, keep a good paper trail and you’ll get your down payment verified in no time.

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How to Invest in Residential Real Estate With Bad Credit

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You have a burning desire to invest in real estate, but you have bad credit. Do you have to stash your dreams away or is there a way to make it happen?

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Luckily, there are ways you can still make your dreams happen. You may not do it the ‘standard’ way, but you can get it done. The best way is to work on your credit first. If that’s not an option, we’ll help you discover other options below.

Improve Your Credit

Start by determining if you can fix your credit. It may seem impossible, but if you take it one-step at a time, you can make it work.

  • Bring all payments current – If you are behind on payments, get caught up. If all of your bills are paid on time, your credit score will start to increase. This looks better to mortgage lenders too.
  • Pay old debt down – If you have a lot of revolving debt, get the balances down. Even if you can’t pay them off in full, get the balances as low as possible.
  • Don’t open new credit – The older your accounts, the higher your credit score. Keep old accounts open and refrain from opening anything new for a while.

These simple steps can help your credit score increase. If you have too many of one type of account, you’ll need to diversify your credit as well. For example, if you have too many revolving accounts, add in an installment loan. This helps diversify the risk and increases your credit score.

Working Around Bad Credit

If your credit score doesn’t increase fast enough, there are a few ways you can work around the bad credit and invest in real estate:

  • Get a cosigner – Someone with good credit that is willing to go into ‘business’ with you can help the situation. You both bring something to the table. Maybe you have the income/assets to qualify for the loan. Your cosigner can bring the credit score. Together you can create a good risk for a lender willing to let you invest in homes.
  • Go subprime – Conventional and government-backed loans are not the only options. Try subprime lenders or credit unions. They often have their own programs. They make up their own rules, which may even allow lower credit scores.
  • Get seller financing – Depending on where you are investing, you may find a seller willing to provide the financing. Since you are investing in the home, you may be flipping it. The seller will know that you will pay the loan off quickly. If they can make a quick buck on the interest while selling their home, they may be willing.

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Should You Invest in Real Estate With Bad Credit?

The bigger question is if you should be investing in real estate with bad credit. You already have issues, should you compound them with an investment in real estate?

Today, the average US credit score is 687. Anything much below that and lenders are leery. Shouldn’t you be too?

If you have a bad credit score, you should ask yourself why. Are you in over your head in credit card debt? Did you let a mortgage or installment loan default? Did you file for bankruptcy? These are all questions you need to ask yourself. Really determine why you have bad credit. Is it something you are overcoming?

Investing in real estate isn’t a ‘get rich quick’ scheme. It takes time and money. You have to either fix the home up and sell it for more than you bought it. If you keep it, you’ll need to maintain the home and rent it out. There’s no guarantee that you’ll make a profit flipping a home or that you’ll find renters. Then you are stuck with this home and its subsequent mortgage. This could put you in a further financial bind.

Consider Your Options

You must consider your options very carefully. If having another mortgage will make you sacrifice if things don’t go your way, it might not be the right choice. If you have a partner splitting the costs with you, though, it may work. Again, you must consider all of your circumstances to see what will work.

The bottom line is that you can find funding to invest in real estate even with bad credit. It may not be rock bottom interest rates. It may even cost you a few points on the front. Investment mortgages aren’t as borrower friendly as mortgages for a primary residence. They pose a risk to the lender. If you are in a bind, you’re more likely to stop making payments on an investment property than your own home.

Consider the costs and shop for a lender that will work with you. Paying high fees or inflated interest rates can only ruin your chances of making money. Look at the process from all angles before deciding that buying another home is the right choice. Once you do your research, you’ll be better prepared for what lies ahead if you decide to invest in real estate.

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