We’ve seen a lot of transactions close, but we’ve also seen a lot of transactions fall apart at the 11th hour. The thing that we’ve seen cause the most transactions to be cancelled is financing.
In today’s markets, it’s not uncommon for lenders to pull final conditions, or things that must happen before they fund a loan, such as requiring repairs, or needing something on your credit report explained. In other situations, appraisals come in too low and buyers are unable to perform when loans are involved.
There are a few primary ways that deals are financed today, which we’ll list below. There are always different ways to finance a deal. These are just the most popular ones for new investors. The array of loans to acquire real estate is just as diverse as the real estate itself. Talk to a loan officer or mortgage broker to find out what options you have.
Examples of Real Estate Financing Options:
- VA Loan – Buyers can put down 0%. Property and buyer must be approved by VA. Buyer must be a veteran or active military. Property must pass appraisal and inspection.
- FHA Loan – Buyers can put down as little as 3.5%, and credits or gifts can be given to cover the 3.5%. Property must be approved by FHA. Mortgage insurance is required throughout the entire loan if putting down less than 10%. Property must pass appraisal and inspection. Usually there is a requirement to reside in the property for a certain period of time.
- Conventional Loan – Buyers put down anywhere from 0%-3.5%-5%-10%-20%. Property must pass appraisal and inspection. Mortgage insurance is required until the loan to value ratio is less than 80%, or in other words, until you have at least 20% equity in the property, including capital appreciation.
- Hard Money Loans – Typically issued by private investors or companies as an alternative to conventional loans for properties that would otherwise not qualify for conventional financing, and oftentimes at a higher rate.
- Cash – No loan involved to close the escrow.
Loans decrease the amount of money that a buyer has to put up to purchase a property. Like it or not, the more money a buyer puts up, the more attractive they are to sellers. A buyer with 3.5% down on an FHA loan may be much more serious about the property than a 100% cash offer, but the cash buyer is more attractive to the seller because they don’t run the risk of the deal falling through because of financing issues.
Unfortunately, most buyers cannot pay cash. Loans will always be involved in real estate, as its too expensive for most buyers without a loan. You can still make a very serious offer using a loan.
Here are some tips to making a strong offer with a loan.
- Have a pre-APPROVAL letter not a pre-QUALIFICATION letter. A pre-approval letter is a tentative commitment to fund a loan from a specific lender; a pre-approval requires you to give income and expense documentation to your lender. A pre-qualification is essentially an estimate of what you can afford, with no commitment to lend you any money.
- Offer list price, or even a little above. If the list price of the property is in your ballpark, and you’re competing against cash offers, see if the numbers work to be able to offer list price or above. At the end of the day, a few thousand dollars more for the property might not make that big of a difference on your bottom line when financing is involved.
- If repairs are needed, wrap them into your offer. If you do not have the money to pay to repair the property, just add the costs into your offer. If the property is listed at market price, offer market price. Have a contractor give you estimates to make any of the repairs you need to make. (These are not upgrades, these are repairs! Don’t ask for new granite countertops if the countertops that are there are in good shape). Include the repair estimates in your offer as back up. Ask for a credit or ask the lender to pay your contractor at closing.
- Be honest. Nothing is worse than getting into escrow with a buyer and finding out they cannot perform. Only go with the best intentions and be transparent about everything.
Submitting an offer with financing
When submitting your offer, send a copy of all financing documents including a copy of your Pre-Approval letter, proof of all funds needed to close, and a copy of your credit score.
Now you know the differences between and the importance of Pre-Qualifications and Pre-Approvals, it’s time to make this happen. The next step is choosing a loan officer.