Get mortgage finance

Get mortgage finance "Pre-approved" not "Pre-qualified"

Without mortgage finance, investing in real estate for most people wouldn’t make sense. It is the finance, or someone else’s money, that let’s us leverage what money we do have to accelerate wealth creation.

Look at this example;

Let’s say you have $25k to invest. You buy a property worth $50k and you borrow half i.e. $25k. The property increases in value for whatever reason by 10%. How much money have you made? That’s right $5k (10% of $50k).

Now if instead of borrowing only half you actually borrow 90% of the value, so you borrow $45k and the same property goes up by the same amount i.e. 10%, how much money have you made? Yep exactly the same $5k. Even though the bank has put in 90% of the mortgage finance for this property, you get to keep ALL the capital growth.

So it doesn’t make sense to keep YOUR money in your properties when you can get the same return using someone else’s money.

Now if you could use your $25k to invest in 5 properties instead of one, and they all have the same growth how much money have you made? Yes that’s right; you’ve made $5k times 5 or $25k. In this case you are using the bank’s money wisely to accelerate your wealth creation.

Click here to see get "Pre-Approved" and to see what you can borrow. There are even product for self employed people and people with credit problems...

US Residents click here... Finance Pre-Approval

Australian & NZ Residents click here... Finance Pre-Approval

Now what are the things that I need to know when looking for mortgage finance.

Here are the 10 golden rules for real estate mortgage finance;

1. What you need for a mortgage loan: To get a loan for a property when using standard lending products you need three fundamental things;

a) A good credit rating,
b) Cash for your contribution, say 20% of the purchase price and
c) Proof of your ability to service, or pay for, the loan.

These days there is a multitude of lending products out there so that even if you have difficulty in any of the three elements you’ll still be able to find a loan.

2. Get a Mortgage Broker: Find yourself a Mortgage Broker who specialises in finance for investment properties. There are specific things that these brokers know how to do.

For example when a bank does a calculation on your serviceability, they use a computer program. One of the key finance figures that the look at is the DSR (Debt Service Ratio) which is a ratio of your deposable income to your total outgoings. Now if you already have an investment property, and even if it’s paying for itself, the interest payments will bring down your overall DSR. So you’ll get a loan for the first property no problem but when you go to get your second, even if the financials for the second property are exactly the same as the first, your DSR will drop and you won’t get the loan.

A good investment focused finance broker knows all this and knows how to structure things.

3. Worry less about Interest and more about terms: Don’t worry so much about the interest rate. Remember we will find properties that pay for themselves (more about that later). If interest rates go up so too will rents, albeit with a slight lag.

So you may need to fund a cash shortfall for a while. Take some equity from your house, personal loan or whatever and put it into your Stock Market ATM machine that we discussed earlier. This will easily cover the shortfall. Remember too that even though you might have a slight cash shortfall the property is still powering ahead through capital growth.

4. Never cross-collateralise properties: This means never give one property as security for another. Each property must stand on its own feet or it’s not worth having.

5. Use different institutions: Don’t put more than one property with any one financial institution. Even though the property may not be formally cross collateralised the bank will still go after both if something happens to one; and they will win.

6. Get yourself "pre-approved": Your broker will show you how to do this. This is not "pre-qualified" which simply means that you’ve met some of the basic bank criteria i.e. you’re alive. Pre-approved means that you can sign contracts without a finance clause if you want to (more about that later).

Once pre-approved, the only issues that can prevent you from getting a loan are:

a) if the property is in an area that the bank doesn’t like, e.g. in an area where the population is low (you wouldn’t want to buy there anyway), or

b) if the bank appraisal is lower than what you offered. Both these situations are completely manageable as we’ll see in a minute.

Do not hand over any money to get "pre-approved". Although some banks with ask you should not pay anything until the Valuer is engaged (which you should do yourself anyway, see next item).

7. Contract the Valuer direct: Once you have spoken to your broker and you’ve selected a financial institution, find out which Valuers are on their panel i.e. which Valuers are approved. Make sure that the financial institution you choose lets you engage the services of the Valuer (that’s one on their panel) directly. This puts you in control and if for any reason you need to go to another bank then you can take the appraisal with you.

If you let the bank organise the appraisal then they won’t give it to you even though you paid for it.

8. Not too many applications: Do not submit applications to more than two institutions. Each time a bank recieves an application they will do a credit check and this will appear on your credit history. If there are several recent checks on your record for property then the lender may simply say no thanks. Several checks can be interpreted as you shopping around after not being approved for a loan.

9. Know who the Mortgage Insurer is: Talk to your broker about mortgage insurance. In some states virtually all loans are sent to a mortgage insurance company and it’s actually the mortgage insurance company that decides if the loan is approved. Note that I’m not talking here about whether you are asked to pay for mortgage insurance.

Most loans are insured. Sometimes the insurance is paid by the bank and sometimes the bank asks the borrower to pay. There’s an extreme example in Australia where there are just two mortgage insurers (PMI and GE). This means that even though there are loads of lenders you actually only get two chances to get your loan approved (unless you go for something like a commercial loan).

10. Watch the exit clause: Remember we want to buy, then re-value and re-finance so don't get stuck in a loan that you can't get out of easily. Keep your options open.

So the bottom line is to work with the broker to find an institution and get pre-approved. Once you’ve done this you’re streets ahead of the average person buying property.

You should try and learn as much as you can about finance because after all our Personal Investing Business depends on it. The richest people in the world use other people's money all the time. That's how to grow wealth really quickly.

Go to Step 3 - Sorting your Contract

Disclaimer: The information provided herein is NOT FINANCIAL ADVICE. It is educational material only. You must make your own decisions when investing and seek appropriate qualified investment advice. The author is not a financial adviser.