Lenders are in the business of lending people money because they make carefully calculated decisions based on your risk. Here is a lender’s perspective on loaning money. They have two expectations; that you will repay them and that they will make a profit. To judge if you are capable of meeting those two criteria, lenders look closely at your current financial position and your historical financial situation.
When judging your financial past, lenders will look at:
1. Credit history. They’ll review the size and number of previous loans and the repayment history on those loans. They’ll also look at your FICO scores and various other raw data.
2. Income history. What is your profit history on your other investments? Over what length of time? They’ll look at the last three years of income statements and tax returns, your debt, and any legal judgments that may impact your financial standing.
3. Your experience with loans. Basically, the lender wants to know that you are trustworthy and will hold up your end of the loan agreement. This means you need to be reliable and make good business decisions.
4. Current holdings and financial situation. Lenders are most interested in liquidity – your cash flow and income.
When lenders are looking at your ability to make a profit, they’ll want to know about your total expenses related to the property. How much will it cost you to take care of the property? What will your insurance rates, taxes, and cost of repairs be? The lender wants to see that you can cover your costs associated with homeownership, as well as their interest charges.
Lenders often want short repayment periods, while it is usually more beneficial for the buyer to have longer periods. Longer repayment periods mean that you can avoid origination fees, additional appraisal fees, and other costs. When it comes to loans for investment property, a 20 year fixed rate loan is considered a long loan. Normally this includes a balloon payment five to ten years into the loan.
If your lender tries to push you into a shorter repayment period, you can set up an arrangement that you re-price after five years, instead of having to pay a large amount of cash in one lump sum. A common alternative is the prevailing prime interest rate plus 1%.
Keep in mind that most things in real estate investing are negotiable and that your lender can be your partner in real estate investing. Developing a positive long-term working relationship with your lender can only help you.