Here is another post on the Real Estate Apprentice series. After Jason set up his system to save for his
Take it away Jason!
Following the spirit of my last post, this post on obtaining the money you need to purchase your first rental property will also be based more on what’s actionable and easy for a new comer to accomplish. This post will aim to compliment a previous post on financing.
“Seller Financing - Yes, it does exist, but you have to find these deals – they aren’t typically on the MLS. To obtain a deal like this, you’ll have to actively market to landlords, out of town owners, distressed owners, etc. This is absolutely doable, but it will require a lot work on the front end. My recommendation is to hold off on this approach for now and focus more on learning your market and seeing what financing you qualify for. “ ~Arthur Garcia
You can find great deals yourself through walking around neighborhoods, talking to people, and mailing home owners who might be in distress, but it is not necessary to do all those to find a good deal to get started in rental investing. You will most likely find your first deal through a real estate agent, but they will not be interested in working with you unless you have a source of financing, mainly a pre-approval letter from a bank. So this post will document the approach I took to get pre-approved by a bank.
1. Fill out an application on LendingTree.com
I actually followed Arthur’s advice to create a list of 20 direct lenders and started calling a few every day during lunch at work, but what lead me to the bank that offered my pre-approval letter was through a website called LendingTree.com, which I filled out an application just out of curiosity.
LendingTree.com is a website where home buyers in need of financing can place their information and banks will screen for prospects from this pool of home buyers. Their motto is “When banks compete, you win”. This process takes about 5 minutes so I would suggest you to try it out yourself and see what you get.
After you complete your application, you will begin to get calls and emails from various lenders, especially if you have good credit and saved cash for the down payment, which fortunately was the case for me.
2. Speak with lenders
Some of these people who are calling you might not be direct lenders, and so you will have to ask them to make sure. A simple “Are you a direct lender?” will suffice.
I got my pre-approval with Mortgage Lender of America, they are a direct lender despite the fact that they sell their loan soon after closing. My pre-approval allows me to borrow 175K with 20% down on a 30 year term.
Getting my pre-approval gave me tremendous confidence in taking on the next step, and I wish to share with you a few things I learned.
- If you think like a loan officer, it’s easy to understand their actions. Loan officers are liable for who they lend to, so if the borrower probably can’t pay back the money, they will go with someone else qualified. (Fortunately I am one of them)
- A pre-approval only lasts for 90 days, but you don’t lose anything if you don’t purchase a property because it is relatively easy for the loan officer to do the pre-approval process again.
- At first I was worried that I would be ignored because I have a short history of employment (one year of internship and recent college graduate) but I was wrong. Lenders believe I am able to repay my debts because of my credit score of 700 and an annual salary.
- A loan officer asked me where I lived before I moved to St. Louis and I gave them my parent’s address because I thought they wanted to see stability and to hear that I don’t rent. That was wrong, I should’ve told them that I have been renting for the past two years and had never had a problem with payments.
- If you are working with a bank, do not expect to work out a low down payment deal unless you intend to live in it. Expect to have 20% or 25% down payment. (Arthur’s note: Jason is correct, however there are certain mortgage products that do allow investors to put down 10% for rental property. These types of mortgages are only available with approved houses within the HomePath program.)
- Some lenders only lend to owner occupant buyers and will not speak with investors, don’t be surprised if some people just quickly hang up on you if you mention the work “investment” or “rental”.
- Make a habit to call just one lender a day instead of two or three. If you do it every day, in two weeks you will have called 10 different lenders and will have learned more about real estate investing than reading a book. Once you go through the numbers, you may be surprised with how eager some lenders are for your business.
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