In order to qualify for a real estate investment financing planning is very important. As one of the key aspects of the qualification process it is very crucial to ensure you seem a ‘low risk’ client to the financial institution before you
Top 5 pointers to consider when seeking real estate investment financing:
1) Goals: How many investment properties are you planning to buy? What are your considerations in terms of long and short term goals with this investment property? Before looking at a mortgage having a sound knowledge about your goals is important as this will help you communicate better qualified advisors.
2) Credit: You need to demonstrate a great track record of payments to other creditors, to make you a good bet with the lender. Not sure how your credit measures up? Check your own credit (see Equifax.ca for free or paid ways to do this) and see how your credit looks. A credit score of at least 680 is the minimum you should aim for. If you aren’t quite there, don’t let it stop you – take action to improve it. The better your credit, the more options you will have for financing.
3) Proof of Income: The lender will be looking for evidence related to how you will be paying for the mortgage. For example, if you are a salaried employee, you will need a recent (less than 30 days old) letter of employment and pay stubs. The lender may also ask for copies of your most recent Notice of Assessment NOA from CRA, and possibly your completed T1s or tax returns. If you are self-employed, or if commission income comprises a large portion of your income, you will need to provide proof of income for the last 2-3 years in the form of NOAs and possibly T1s and/or Financial Statements for your business, as well as proof of business such as business registration or a website URL. If you receive income in some other way, every piece of documentation that you can provide will help put you in the best possible position for qualifying to borrow money.
4) Proof of Down Payment: In most cases, you will personally need to provide a down payment of at least 20% of the purchase price of the investment property sometimes lenders will allow a 15% down payment, but might charge you a bit more in interest and lender fees. Your lender will be looking for proof that your down payment isn’t borrowed. Alternatively, if you are planning on advancing funds from your home equity on your principal residence using a Home Equity Line of Credit or increasing your mortgage amount, you will need to get this set up first. You’ll then need to provide statements showing the amount advanced and deposited to your bank account and the most recent statements showing the amount now owing. Or, if the money for your down payment is coming from the sale of another property, the lender will be looking for documentation such as an agreement of purchase and sale, together with a recent mortgage statement showing how much money will be coming to you from the sale.
5) Emergency Funds / Closing Costs: In addition to the down payment, you will also need to show at least 1.5% of the purchase price in closing costs to the lender. You will also want to have a contingency fund set aside that will help you deal with unexpected expenses.
Now you are armed with the knowledge you need to make yourself an attractive client to lenders. Happy investing!