It’s often said that if you want to make money, then you need to have it. Investing in anything requires a certain amount of capital. For a lot of people, the answer is simple: get a loan! But with real estate investing, it can be quite a bit more complicated than that. Banks and other lending agencies sure don’t make it easy to get a home loan.
Going the traditional route to obtain a home loan is a bit messy and time consuming. You’re looking at several months of process only to find out you don’t have every “I” dotted or “T” crossed, and suddenly your wait turns into a big fat ZERO. There are several reasons why you might be denied a home loan. Here are several:
1) Your credit score might not be as good as you think. A lot of people don’t realize they have three credit scores, so when they investigate what theirs might be, they only pull from one, not all three. When banks look at your credit, they look at all three numbers and choose the middle one as a good indication of your risk.
2) You don’t have a lot of cash. Getting a home loan often requires a hefty closing cost and down payment. This means you’ll need to pay as much as 6% of the home’s value upfront, and that’s just the minimum. You’ll find each closing will be different, which means you could be expected to pay more than 6% of the value. No cash means no reward.
3) It’s difficult to track your income. Your lender will take a long look at your work history and average together what you made during a 24-month period. Have you had a different, lower-paying job in the last two years? It doesn’t matter that you’ve recently been hired in the last 12 months and make a lot more money now than you ever have before. What you made at your last job will be averaged in, lowering what you may think you’re qualified for.
There are a few other income related issues to be aware of. Every bit of income you wish to claim requires 24 months of history. You’ll need 24 months of overtime if you want to use that to prove what you’re making. If you worked two different jobs, you’ll have to show you worked at both of them for 24 months straight.
Also, if you have a job gap that’s six months or larger, that will raise a lot of concern about your ability to pay it back. Lenders want to make sure you will be able to pay them back at the rate agreed upon. If you can’t prove you’ve had steady employment for those two years, they will be less likely to work with you.
Hard Money Loans
You might be thinking that someone who invests in real estate should get a home loan, but there are much easier and faster ways to find the capital you need. Those who get home loans plan on paying it back over the next 30+ years. What the investor needs is a hard money loan. Hard money loans are absolutely perfect for short term needs!
If you plan on flipping a home, you’re not going to spend longer than a year renovating and remodeling. This is where hard money loans come into play. They are privately acquired, so all the red tape and regulations that come with lending from the bank isn’t there to muddy the waters.
The investors are more interested in the potential value of the home and property once it has been flipped, not so much making a profit off long-term interest rates. Due to this, they are willing to lend money to riskier buyers who don’t have the perfect work history or a lot of money to get started.