So you want to go investment property shopping. Let’s scratch the surface. We’re not even going to get into commercial, VA and FHA loans. In this article we’re only going to look at the most basic qualifications for pre-approval of a mortgage loan so you can go shopping and see what’s out there.
Don’t be a Liar
One local loan officer stated that in the real estate game; “Buyers are liars”. You won’t be taken seriously unless you have what it takes to buy. How would you like to be the real estate agent that spends the greater part of a day showing someone properties only to find out that that person was only fishing? If you want to be taken seriously you have to be in a position to make a legit offer.
For now you’re only going to get through, generally, what credit score you will need and what debt to income ratio you need to have. These numbers only work for a property with one to four units. That means a single family dwelling to a fourplex. Don’t glaze over. I’ll explain it.
Credit Scores and Debt to Income What?
When applying for a loan you may find out that you’re not a good candidate for purchasing a property. Most of us haven’t lived perfect lives and bad things happen to good people. The combination of those truths can add up to a less than stellar credit score.
What’s a good credit score? The minimum credit score for one local Idaho Falls lender is 620.
Having a decent credit score isn’t enough either. You need a debt to income ratio of 45% or less to go with that minimum 620 credit score.
What’s a debt to income ratio? It’s the percentage of your monthly gross income that goes toward making payments against your debt.
To have a 45% debt to income ratio you spend 45% of your monthly income before taxes to pay toward debts. For example; if you earn $1000 a month before taxes and you spend $450 on debt payments you have a 45% debt to income ratio. $450 divided by $1000 = 45%.
Your DTI; What a Loan Officer Cares About
When a loan officer looks at your debt to income ratio they aren’t going to look at what it is. They’re going to look at your debt to income ratio when you’re making the monthly payment on the mortgage you’re applying for. The rabbit hole goes deeper.
The new mortgage payment is only part of the story. The new debt to income ratio also includes monthly payments on property taxes and homeowner’s insurance for the property you’re applying for. Here’s the bright side. If you’re renting or you’ve sold your existing home, that payment comes OFF your list of monthly payments.
Your Debt to Income Ratio
Look at it like this; subtract your current rent or sold house payment from your total monthly debt payments. Take the result and add the new mortgage payment with homeowner’s insurance and property taxes. That’s the debt to income ratio the loan officer will look at.
Break it Down
- In simple numbers:
- Total gross monthly income $1000
- Total monthly debt payments now including rent $500.
- Your current debt to income ratio is $500 divided by$1000 = 50%
- Subtract current rent payments of $200 from $500 in step 2. The result is $300.
- Don’t let the $200 throw you. It’s made up. I needed a number to work with.
- Add; a new $100 mortgage payment, new $30 monthly property taxes and $20 homeowner’s insurance payment. $100+$30+$20=$150.
- $300 (from step 4) + $150(from step 5) = $450 total monthly payments.
- $450 divided by $1000 = 45% debt to income ratio.
Don’t you wish you had a $100 a month mortgage?
These numbers only work for single family dwellings through fourplexes when you live in one of the units. When you move beyond that you’re getting into commercial loans and that’s a whole other ball of wax. Also, this doesn’t cover specialty loans one would get from the Federal Housing Administration, The Veterans Administration or others.
That’s enough loan stuff for now. Sheesh.