Five Things You Need To Get Approved For Any Loan

Getting approved for a loan can be nerve wracking, even for seasoned pros let alone first timers.

I'm currently in the process of buying my third building and these are things I need to remind myself of.

There are thousands of little things that can go wrong and take up valuable time and emotional energy.

So lets see what they are.

Credit

I recently had a client with the all the makings of a qualified borrower.

He had a great credit score, no outstanding debts, money saved up for a big down payment, and decent income between him and his wife. Yet he still couldn't get approved because his wife, his co-borrower, did not have any credit history.

Think about it: would you lend a large amount of money to someone with no history, positive nor negative, of paying back borrowed money?

In this case, he had two options: buy a cheaper house he could qualify for on his own, giving up his dream home, or get his wife credit history quick.

Fortunately he opted for the latter and added his wife as a pre-authorized user on one of his credit cards, allowing her to claim his credit history as her own in about 30 days.

But what do you do if you don't have a family member whose credit history you can borrow?

Well, you can pay someone to add you as a pre-authorized user. It's not illegal, but it is unethical. With a family member, they have to vouch for you and risk their own credit history by agreeing to add you as a pre-authorized user. Family members with good credit history are unlikely to add family members who are bad borrowers, even if they love them.

But with a stranger, there's no risk on their part by adding you as a pre-authorized user. There's also no vouching for you because they don't know you or your borrowing habits. They only care about getting paid. So the sudden boost in credit score and credit history is meaningless to a lender.

Other than that, the only way to build good credit history is to actually build good credit history. Secured credit cards and credit builder loans allow you to get noticed by the credit reporting agencies and start tracking your borrowing and repayment habits.

They work because they don't risk the lender's money. You have to "secure" the worries by placing a security deposit with them in the amount of your loan, ensuring they never lose a penny while allowing you to start building a history of repayment. This process takes about 6 months to do.

Capital

When I was first looking for multi-families to buy, they were going for $750k and up in the South Bay area.

However, I only had about $60k saved up for a down payment. While I could have bought it if I was willing to occupy one of the units, as an investor, I did not have enough money saved up for a down payment. Lenders require investors put down at least 25% of the home price.

So I ended up buying out of state in the midwest, where properties were going for about $100k to $150k.

My cash saved up didn't change, but the percent it represented of the house price changed. As a result, I was able to qualify for a loan and buy my first investment property using even less cash than I originally planned to spend.

Having enough cash saved up for a big down payment, even if you choose to pay less goes a long way towards assuring investors.

Capacity

Going back to my first rental purchase, even if I had enough money for a down payment for a place in the South Bay area, I did not have enough income to make the monthly payments to service the loan.

You need enough income to pay the monthly payments. And this is even more true as an investor, because if you're not living in the property and collecting rents is your only source of income, then the rents from the property you're buying must be enough to cover the loan.

Fortunately, there are many products like DSCR loans which allow both long term and short term investors to buy rental properties based on projected rents from the property itself.

Your other option is to have a job that pays about 3 times whatever the mortgage is.

Lenders verify this in a number of ways from looking at tax returns to looking at the past 12 months of bank statements depending on the type of loan you apply for.

Collateral

Have you ever rented a place and they ask you for a security deposit? That security deposit is collateral. Meaning if you fail to pay the rent on time or damage the place, the landlord who is lending you his property will take it. But if you return it in good condition, you get it back.

With mortgages, it's similar. If you complete all your payments on time, you get the title, clean and clear. But if you don't, the lender takes control of the house and you have to move out.

But they wouldn't be willing to do that on just any house. They house has to be worth at least what they're letting you borrow.

That's why appraisals are so essential to the home lending process, even for investors.

Conditions

Have you ever been unwilling to do something? Like drop a stranger off at the airport in your own car?

Yet millions of people around the world do it every day through an app called Uber. That's because Uber established the conditions, or contract, under which both people would be happy doing just that, something they would be unwilling to do otherwise.

Lending is similar. While you think you may need a high credit score, a lot of money in the bank, or a high paying job, there are lenders who under certain circumstances would be willing to lend you money even if you had none of that.

One example is a DSCR loan. You may not earn a lot of money, but if you can identify a property that pays more in rent than the monthly mortgage costs, the lender would be willing to let you borrow their money. Those are the right conditions.

Conclusion

If you're looking to qualify for a home, if you get these 5 things (credit, capital, capacity, collateral, and conditions) right, it's unlikely you will be refused when you apply for a loan. It does take some prep work, but everything worthwhile does.

For a free strategy session, get in contact with me and we'll figure out how to get you qualified ASAP.