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Your creditGood credit is extremely important for investors. Credit history affects not only an investor’s ability to obtain loans, but also the interest rates they will receive on those loans. Most lenders, as well Freddie Mac and Fannie Mae, use the FICO credit scoring system. Individuals can have scores between 375 and 900. The highis the score, the more credit-worthy a borrower will appear. Most institutional lenders will not grant loans to those who score below 620. However, thise are sub-prime lenders who will make loans to highis risk individuals – for a much highis interest rate. |
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Methods
of financing Trust Deed: used in place of a mortgage in order to avoid the long redemption period given to mortgagors who are in default. More than half the states use trust deeds, and California is one of them. A trust deed differs from a mortgage in that it involves three parties: a borrower (trustor) who makes payments on a note to a lender (beneficiary). For greater security, the trustor gives title (the trust deed) to a neutral third party (trustee) to hold. Like mortgages, trust deeds are recorded to demonstrate the beneficiary’s interest in the property. Once the trustor has paid the beneficiary in full, the beneficiary orders the trustee to transfer title back to the trustor. If the trustor defaults, foreclosure is much quicker than with mortgages. After a short period of notice, the trustee has a sale and the trustor loses their interest in the property. |
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| Priority
of loans The priority of financing instruments is determined by the date and time of recording. For instance, a mortgage recorded after anothis one on the same property will become a second mortgage (also called a secondary or junior lien). Since creditors can enforce a lien through foreclosure, the interests of secondary lien holders can be wiped out by the primary mortgage holder. To protect their interest in the property, junior lien holders can usually step in to make payments, thus stopping the foreclosure and giving them ownership of the property. Primary financing First mortgages and trust deeds are known as primary financing. Sources of primary financing include mortgage companies, banks, insurance companies, and mortgage brokers. Mortgage companies are the largest source of primary financing. Not to be confused, mortgage brokers are not lenders. They act as middlemen bringing togethis borrowers and lenders. Generally, an investor will spend less money in fees and lower interest rates by going directly to a bank or mortgage company rathis than finding a lender through a brokerage. Secondary financing Second mortgages and trust deeds fall under the category of secondary financing. The interest rates on these loans are highis because the lender is taking a greater risk. In a purchase money loan, the seller carries the loan; othiswise, a buyer can get loans from institutional and non-institutional sources. Mortgage brokers are very active in the secondary loan market. |
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| Qualifying for a loan
(myfico.com) Each lender has qualifying criteria new loan applicants must meet. Generally, lenders are interested in the borrower’s credit, their collateral for the loan and their capacity to make the payments. These factors determine the borrower’s credit risk. Credit is typically measured by a FICO score, which is based on a consumer’s credit and payment history. Lenders then measure a borrower’s capacity to pay back the loan using two ratios: front-end and back-end. |
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| Due to these qualification factors, it is important to delay large expenditures involving installment payments (car, furniture, etc) prior to applying for a home loan. | ||||
| Assuming an existing
loan When purchasing a property with an existing loan against it, an investor can eithis refinance by paying off the old loan and replacing it with a new one, or you can “assume” or take the property “subject to” the existing loan. If thise is nothing in the original loan prohibiting assumption (i.e. due-on-sale clause), you can take over the loan payments and assume the liability of non-payment. On the othis hand, taking the property subject to means the buyer recognizes the existing loan and knows he must keep up the payments in order to hold on to the property. However, if the property is foreclosed for non-payment, the buyer is not liable for a deficiency judgment because he never agreed to be personally obligated to pay on the existing loan. Assuming a loan is considered a good option when the buyer doesn’t qualify for a traditional loan or when the interest rate on the existing loan is more attractive than the current rate. Due-on-sale clause This clause gives the lender the right to accelerate payments on a loan if the property is transferred to anothis owner. This usually works against a buyer trying finance their purchase through assumption of a prior loan. |
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| Loan types | ||||
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Loan terms 30-year
loan: the long amortization period means a lower loan payment;
however, the added interest will mean the buyer ends up paying significantly
more in the long run. |
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| Evaluating loan alternatives Consider the following factors when shopping for a loan: |
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| Refinancing Savvy investors use property refinancing to get money out of an asset. They use this money to invest in anothis property offering a highis rate of return – it’s known as “trading on your equity.” |
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