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Lenders’ point of view

Based on an interview with Srdjian Gavrilovek, an investment banker in Atlanta, GA.

Lenders only make money when they lend money. Therefore, they want to lend as much money as possible. However, there are qualification criteria that borrowers must meet. Some loans will require high credit scores and a lot of income, while other loans will allow for a lower credit score and less income. For the average buyer, government-insured loans such as FHA or VA may be easier to obtain. But generally, your mortgage lender will ask you to meet certain underwriting requirements for your loan.

There are four C’s of credit. 1 – your credit history, 2 – cash flow; as in, what is your ability to pay the debt; 3 – Collateral- as in which item (s) they are going to guarantee the loan. (the collateral will help determine how much money you can borrow)

4 -Character, it comes down to stability. Someone who has been at your job for 10 or 20 years is considered a lower risk than someone who started a job last month. Ideally, they will have some assets in retirement accounts, brokerage accounts, or cash accounts.

But this is being seen less and less in today’s world of automated scoring systems that provide answers very quickly.

Let’s tackle these four Cs one by one. Credit history – In today’s world, that’s the main thing to focus on. A good credit history will allow you to ask for the best deals. It will allow you to get declared income or no medical loans, get better interest rates, higher loans to value deals, etc. Understanding how credit history works is probably the first thing you can do to help your investment career.

In the state of Georgia, we are entitled to two free credit reports per year that can be obtained from any of the credit reporting agencies. The free ones do not provide the credit score.

I would definitely recommend anyone spending $ 33 to get a “triple merger” report once every six months and see what their average score is. is a very useful website that beginners can go to to learn a little more about how the scoring system works and what will make their scores go up or down.

I have looked at literally thousands of credit files in my career as a lender. I have noticed many errors. One of the most common mistakes I’ve seen is a $ 30 charge for a phone bill, the gas company, or a medical bill. When you move out, be sure to leave forwarding addresses and get these final bills, because a $ 30 charge on an otherwise perfect credit can lower your score by 50 points and can have a drastic impact on the type of loan. for which you may qualify.

The cash flow will translate into what they call the debt / income ratio. The debt-to-income ratio is basically all of your debts added up, every car payment you have, every credit card payment you have, mortgages you have, and every item in your credit file.

The things that will be counted against you that will not be on your credit file are contractual obligations to the government or court-ordered payments, such as child support.

If the lender is doing its job well, it should include property taxes and insurance and count them in the debt-to-income ratio because that’s part of the real cost.

To calculate your own cash flow or your own debt-to-income ratio, check out your credit file. There will be three columns in your credit file. High credit, current balance and minimum payment.

High credit on credit cards would be your credit card limit, your current balance would be what you owe to that specific lender, and the minimum payment is what that lender reports as your minimum obligation.

Most of today’s lenders will go as high as 50% in the ratio of gross debt to income, as long as all of your debt, including the loan you are applying for, does not exceed 50% of your gross monthly income.

There are exceptions to that when you buy residential real estate. If you are actually going to live in the house and have excellent credit, the ratio can be stretched.

If you are already in real estate investment and have a variety of homes; Let’s say you have four rental houses. Let’s say those home rentals add up to $ 2,000 a month. What does that mean for you when you apply for a loan? Rentals are generally never taken literally.

Let’s say you receive $ 2,000 a month in rent for your properties. There are several things that your lender will ask you to verify. The first thing is if you have just started receiving these rentals. Many lenders will not allow you to use new rental income. At a minimum, we are going to need leases on each property along with checks to show that the rent is actually being collected.

I highly recommend that you cash your rentals in the form of a check so that you can show a canceled check as proof of payment. If you receive it in cash, make a deposit separately from other deposits. I have seen many clients who get cash from their tenants and put something in their pocket for daily expenses. When I pull out your bank statements, I can’t find a consistent pattern of depositing that rent. Therefore, I cannot prove that they are actually receiving the rent for that property.

The lease is great, but if you have a lease with an inactive worker who doesn’t pay you, it won’t help the bank or you. A copy of the lease along with the last three checks you received for that property would be the basic minimum that will count towards counting this as income.

Collateral – There are two ways to look at credit and two ways to borrow: secured and unsecured. Unsecured loans are increasingly becoming the realm of credit card companies. Banks aren’t really in the market for unsecured loans because they just aren’t that profitable. There are not many incentives for banks to make unsecured loans.

By using a rental property as collateral, depending on the strength of your credit, you can get a loan of 80% to 90% of the value. Generally, for buyers with good credit, 90% is not a problem in their real estate investment. When it comes to multi-family homes, many people want to have them in their business name. This means that you should look for loans that are for your business. Business loans are a completely different product, and these deals are evaluated for loans differently than single-family homes.

Regardless of where your credit is now and how much cash you have, it is clear that having access to good sources of financing is the key to a successful investment company.

While seller financing and other creative options may allow you to buy a property without cash or credit, professional investors know that good credit and cash are king. If you want to be successful in the long term as a professional investor, you must take steps to build your access to good sources of finance.

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