If you’ve been thinking about investing in real estate, getting your finances in order is an important first step on the journey.
Real estate investments could be one of the largest investments in your lifetime, and unless you are an all cash buyer, you’ll need a plan for financing and future cash flow. Here’s a few things to think about to get you ready.
1. Create A Financing Plan
If you have strong credit, consistent W-2 income, and a sizeable down payment, traditional financing could be your best option for your real estate investment. However, after talking with a lender, it may become apparent to many buyers that they need a plan to set themselves up for success.
A. Saving money
Buying a home is not cheap, and unless you have equity from your current home, or have a large savings account, many buyers will need to diligently plan to make buying a home a reality. A lender will be able to give you an accurate picture on what you'll need to save for a down payment, closing costs and future for renovations and upgrades.
If you are not a "saver", learning how to put money aside each month will be a valuable tool beyond the purchase of your new home.
B. Review Your Credit Report And Keep It Healthy
Your lender will also be able to provide you a credit report and advise you on ways to improve your credit score. You may be able to dispute any errors or provide an explanation for any derogatory issues or late payments. You can increase your credit score by reducing your credit usage to under 30% each month (don't max out your credit cards), avoiding any new credit inquiries (don't get new credit cards or go out and finance a new car) and ensuring timely payments on all of your accounts.
C. Budget
Creating a monthly income/expense report in advance can give you a more accurate picture of how you want your life to look with a mortgage payment. It's important to understand that even though you may qualify for a higher loan, you may prefer to have your money go towards other things besides a mortgage. If you want to do the extra circular activities on the weekend, travel, or pay off debt, you might opt for the less expensive home. Other people may be homebodies, plan on living in the same place for the next 30 years and expect future raises and promotions. They may opt for a for a higher mortgage knowing inflation levels will rise and desiring a better home. The point is there is no right or wrong answer. What's important is that you make an educated decision about your budget and your life.
2. Get Mortgage Pre-Approval
Once you have achieved your needed credit score and set aside enough money in your savings, it's time to get pre-approved so you are ready to push the green light when you find the house you want. Many sellers won't let you submit an offer, or tour their home, without a pre-approval.
To get pre-approved for a mortgage, you’ll need work with your lender to get the following documents in order:
- Personal documents: Two forms of government-issued ID, your social security number, as well as proof of ownership of other property, including your primary residence or other investment properties.
- Tax returns: For the previous year, and potentially for the last two years.
- Proof of income: W2s, paycheck stubs, 1099s, or if you’re self-employed, a year-to-date profit and loss statement.
- Proof of assets: Bank statements, 401Ks, IRAs, and money held in stocks or mutual funds.
- Summary of all debt: Primary property loan(s), credit card balances, student loans, and all monthly payment amounts.
- Miscellaneous: There is always something else they'll need. Believe me, it's annoying and not fun. But knowing another request is coming somehow makes it a little less worse.
3. Stay Competitive By Doing Your Homework
It can be worth checking with multiple lenders to see what kind of interest rates and programs they are offering. Some lenders offer "in-house" loans for a shorter loan period, which may have less bureaucratic hoops than traditional financing. Other lenders have special programs and financing options for first time homebuyers. It's also important to like the communication style of your lender as they will be educating you and helping you make important financial decisions.
A few percentage points might not seem significant, but can save tens of thousands or more over the lifetime of a loan and affect your monthly cash flow.
In the end, consider checking with a bank other than the one you bank with and see if your realtor has a few recommendations.
You're Ready!
Mapping out your financial plan will give you actionable tools and steps to prepare you to buy a home. Without this step, many people will never get their ducks in a row to even have the opportunity to purchase a home. It takes planning, forethought and dedication. If you're thinking of buying a home in the next few years, now is the time to educate yourself and see what you need to do to make it happen. Reach out to a Pathway broker and let us help you get started.