July 22, 2010, 6:40 am

Real Estate: Time For The Mortgage!

by: MD    Category: Properties
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I wanted to steer our previous real estate discussion in a different direction today. We talked about rental properties, negatives of real estate, positives of real estate investing, and various other sub-topics. I just missed one CRUCIAL STEP. I completely neglected the fact that getting a mortgage these days isn’t that simple!

For today let’s look at what needs to be done so that you even get approved for the actual mortgage:

Excellent credit score.

Without a high credit score (in the 700s) you’re an extremely risky loaner in the eyes of the lender. Why would anyone loan you hundreds of thousands of dollars if they’re not sure that you’ll pay it back? Great point. This is why you need to ensure that your credit score is up to par before you even attempt to go in for a mortgage application. Years of late credit card payments may come back to bite you in the know what here.

Hefty down-payment.

The days of leveraging a real estate property with 5% or 10% are pretty much long gone. Unless the underwriter working at the bank is your buddy John from third grade, chances are that you’re going to have to put down a serious down-payment to get approved for a mortgage these days. What’s a hefty down-payment? Well I don’t work for a bank, but it’s fair to assume that at least 20% is recommended. Anything less than that and you’re going to have a difficult time with your mortgage approval application.

Savings/assets.

If the home property is going to eat up 100% of your savings, how will you survive? How will you cover your mortgage payments if you lose your job? It doesn’t matter if you need the mortgage to pay for a rental property or your primary residence, you need to show the lender that you’ll have sufficient savings “just-in-case.” If not, then you simple become another risky client. Being in possession of additional savings/assets shows the lender that you have money to cover any surprise expenses that may come your way.

Steady work.

Do you have a steady source of income? When being loaned a large sum of money, you need to prove that you’ll have enough of an income to consistently make your payments. If you’re an entrepreneur or someone that has a difficult time proving their financial situation, the lender may not be too eager to loan you money. It’s not that they don’t believe in your potential to earn lots of money down the road. They simply want a guarantee of this.

Paper work.

Saying that you make X or do X for money is irrelevant. You need to back everything up with extensive paperwork. This never happened to me thankfully. Unfortunately, many readers have informed me of stories where their place of employment was called 3-4 times just for verification. Apparently, there were no errors with the actual application form, but the lender wanted to double check a few pieces of documentation. Are you prepared to deal with this?

Have any of you gone through the mortgage approval process recently? If so, how did it go for you?

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Comments

Are there strategies that can be used, that are legal but that many people do not know about?? And I’ve heard that banks still are willing to give up loans much greater than what is “safe” to accept, any thoughts on that?

Great post, I think the whole process of mortgages is fascinating. One question I have is why there is such a big discrepency between quoted rates and what you can actually get in most banks…

@BMSP Mike works in the financial industry, I’m sure he could share some innovating tips with us 😉

@IS A few years ago my corp. finance professor said it best, “the quoted rate is the most irrelevant number in the world.” Not sure why it is like this but the rate I got on my mortgage a few months ago, was very far from the advertised figure on the nice window poster.

People don’t understand that these guidelines are put in place to safeguard not just the bank but themselves as well.

Having seen a situation where two people were living in a 6000 square foot house with 7 bedrooms, two living rooms, one family room, kitchen and dining room, but kept the heat at 50 degrees to save money. Most of these rooms were useless to the occupants and unfurnished.

Just because you can do something doesn’t mean you SHOULD!

by: The Financial Blogger | July 22nd, 2010 (4:52 pm)

As a banker, I can tell that the level of requirements is pretty heavy since we want to make sure we are being victim of a fraud.

You better be ready to supply a tons of paperwork ;-0

I have created a portfolio binder. Every time I need to apply for a mortgage for any of my rental properties, I have everything I need in one binder!

As well as mortgages there are lots of private lenders that are willing to lend money. I have also just discovered how to use other peoples RRSP’s to invest in real estate and pay them a higher return than what they are presently getting.

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