Financing!  What options do I have when financing a property? Financing and property purchases comes in different shapes and sizes, just like humans! Are you purchasing an investment property, land, farm, ranch, a single-family house, a duplex, or maybe you are building a new home or building an investment property? What type of investment property are you purchasing or building? Are you a land developer?  Perhaps you’re thinking about financing a commercial building, rental property or Airbnb.  Maybe both!

First time homebuyers have a few options for financing their property. First time home buyers that are employed as professional educators, which includes full-time positions in a public school district: school teachers, teacher aides, school librarians, school counselors, and school nurses. Additional heroes include: nursing faculty and allied health faculty, corrections and juvenile correction officers, EMS personnel, fire-fighters, police officers, public security officers and veterans/active duty military, may qualify for Homes for Texas Heroes Program. This program assists with down payment assistance and fixed rate home loans. Find out more about this program at the following website: https://www.tsahc.org/homebuyers-renters/homes-for-texas-heroes-program there are lenders that facilitate this program and your Broker/Realtor should refer you to a reputable lender that facilities and knowledgeable.

Are you a veteran or active duty military? You may qualify for a VA loan which requires zero money down and generally a lower interest-rate than other financing programs. I am personally a veteran, and I took advantage of my VA loan and refinance when interest rates were extremely low with the VA IRRRL refinance program with no documentation. One of the many perks for serving our great country. Just for your knowledge, Another perk for Veterans, they are allowed to make their home into a rental property and then purchase another home they will reside in, with the same VA loan benefits. A veteran may also build their home with a VA interim construction loan as well! Are you a Texas Veteran? If so, you may qualify for a Texas Land Loan through the VA. The VA requires a minimum of 5% down and an awesome low land interest rate! There is a cap on the amount of money that can be funded for the land.  Once again, ask your Broker/Realtor for a trusted VA Mortgage Loan Officer. I like to steer away from .com lenders because you never know who you are going to get and do you really know their integrity? It’s best to have a referral and someone you can actually pick up the phone and be able to call, in my opinion.

Typically first time homebuyers receive financing through a conventional loan, FHA loan or a USDA loan. FHA, USDA and VA loans are government backed and/or guaranteed loans. Not all government loans are funded by the government, but all government loans are secured/guaranteed by the government.  FHA loans are more lax on debt to income ratio and down payment. The minimum down payment for FHA is 3.5%, the down payment and/or closing costs can be gifted to the buyer. The gift has to be documented and placed in a checking and/or savings account. FHA offers loans for single family homes and up to 4 unit dwellings. One of the criteria is the borrower must intend to occupy the property as their primary residence. Think about this, especially brand new first time home buyers! You could purchase a multi-unit dwelling and receive rental payments on the other units you are not occupying. This is a perfect way to start building wealth through real estate.

USDA and VA loans require zero percent down. So a first time home buyer accrues more cost than just down payment? Yes they do! Closing costs  are the expenses over and above the property’s sales price that buyers and sellers usually incur to complete a real estate transaction. For example, origination fees, discount points, appraisal fees, survey fee, escrow fee, title searches, title insurance, taxes, deed recording fees etc. Closing costs for conventional, FHA, USDA and VA loans can be gifted or even paid by the seller! Your Broker/Realtor and trusted lender should be fully capable to go into a lot of depth in regards to closing costs. Government loans are more strict on appraisal requirements versus a conventional loan. 

Conventional loans require at least 3% and up to 20% down payment. Conventional loans also require a good credit score. The interest rate that a client qualifies for is dependent on many things and one pertinent detail is score. If you are not sure of your credit score, some credit card companies offer free credit score monitoring. My personal favorite to monitor credit is through a paid service called identity IQ. I do not get paid to promote identity IQ. I just happen to feel like they are the most reliable source with credit score monitoring. For more information: https://www.identityiq.com

You also have the right to have a free credit report annually. You can go to: 

https://www.annualcreditreport.com

Be careful, because a lot of sites promise credit reports for free. The site above is the only official site explicitly directed by Federal Law, as stated on their website.

My advice is to print your report and check the report thoroughly along with your credit scores. Credit Scores range from 300 to 850. In order to qualify for a mortgage, typically, you need a minimum credit score of 620. The majority of lenders prefer a score of a minimum of 640 or higher. If your credit score is not up to par, you may still qualify; however you will more than likely receive a much higher interest rate. There are a plethora of ways to improve your credit score. Experian offers a free service called Experian Boost. You link your checking account source to the site and it boosts your credit score with timely rent payments, utility bills, auto insurance payments, cell phone payments, etc. It is a self reporting option and I have Clients that were struggling with their score to purchase a home, boosting their scores 25 points in one day with this amazing program. I covered Experian Boost; however your credit score is derived from three credit bureaus. So what about TransUnion and Equifax? Equifax and TransUnion offer similar programs as well; however those are a paid service. I do suggest you pay for those similar programs if you are struggling; so in turn, your credit score can rise. A couple of tips for good to excellent credit:

  • Always make your payments on time. Anything over 30 days late, will cause a late payment on your credit. A late payment takes a very long time to recover from. If you are ever late on a mortgage payment, some lenders will not be able to lend in the near future, even refinances. Typically, lenders need to see on time mortgage payment history of at least 12 months.
  • Keep your credit card utilization 30% or under. For example, if your credit card limit is $500, you should not spend more than $150 and it is best to pay off the balance every month. Another pro tip – make your credit card payment on the due date (ALWAYS) and then research what your statement date is. Pay the remaining balance off before the statement date each month. That is two payments a month, but it will help your credit score tremendously. 
  • If you apply for credit, your credit score will be hit with hard inquiries. Hard inquiries lower your credit score and they generally fall off your credit report in two years.
  • Seek a credit score specialist. Someone that is absolutely reputable. Again, do not always trust a .com company. Ask family and friends for referrals. Some credit score specialists will drain your bank account quickly and will not give you the results you anticipated.

To purchase a property as a business owner and EIN number, one should be working on their business credit score. One of the first things business owners should implement is to apply to receive a free D-U-N-S number for your business through Dun & Bradstreet. This process helps you as a business owner, when you are building credit for your business.Visit https://www.dnb.com to research and learn more! Typically, lenders still want a personal guarantee, especially in the beginning of your business venture. There is a wealth of information all over the internet and social media about business credit! 

Investors, have you heard of a DSCR loan? DSCR acronym means Debt Service Coverage Ratio. The loan is based upon the ratio of operating income available to debt service for interest principal and lease payments. This is popular because the loan is measured by the property’s ability to produce enough cash to cover debt payments. In layman terms, the loan is based on the projected rent schedule of the property you want to purchase. An appraisal will be ordered and the Appraiser will determine the rent schedule. You are required to put 20% down payment and have excellent credit. The phenomenal value of this type of loan is it doesn’t go off your personal or business income. Lender will require a certain amount of months of bank statements to your lender, but other than those items, the loan is based on the rental projection.

Of course there are a ton of other financing options I have not covered. ARM Loans aka Adjustable Rate Mortgage Loans are not as scary as they sound! They got stereotyped during the 2008 frenzy. Believe me, I was in real estate during that time. If you could breathe on a mirror, you could get a loan. There are caps for the amount of percentage the interest rate can go up and down. Typically, ARMS have lower interest rates and lower closing costs. Please do not be scared of the stereotyped word ARM Loan; because statistically people buy and sell every 3-5 years. Weigh all your options and research your options, have a trusted loan officer and of course a trusted Broker/Realtor. Until next time…happy home selling and buying!