As any seasoned real estate investor will tell you, qualifying for a mortgage with preferable terms is essential. Before seeking real estate investment financing for your property purchase, planning ahead should be a key part of your overall strategy. The goal is to position yourself to not only qualify for financing, but to show yourself to be a ‘low risk’ client.
8 points to consider when seeking real estate investment financing:
1) Game Plan
What are your mid to long term investment goals? Are you planning on buying only one property? Interested in investing in several different areas? Do you want to finance one property or ten, and over what span of time? You’ll need to have a good idea of your goals before seeking financing. A good team of qualified advisors will be able to help with this first and very important step.
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 650 to 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 (see how to do this elsewhere on this site). 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 (although some alternative lenders [hyperlink to my blog post about B 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. For example, are you getting your down payment from a bank or brokerage account? Then you will need banking statements to confirm that the full down payment has been in your account for at least three months. 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. Many investors choose to use a HELOC (Home Equity Line of Credit) secured by their home, or money in a savings / brokerage account. This is a provision to ensure that you have funds set aside in the case of an emergency.
6) Existing Property Details
If you have other properties, you will need to provide the lender with mortgage statements and property tax statements for all of them, as well as lease agreements if they’re rented. Ideally, you need to show that existing properties either carry themselves (i.e. that they are “cash flow positive”), or if they aren’t cash flow positive, that you can afford to cover the shortfall on an ongoing basis.
7) New Property Details
In addition to the MLS listing, Agreement of Purchase and Sale, and applicable waivers, you will need to provide either a lease(s) for the new property, or a letter from an appraiser confirming the market rental price that can be expected from your property.
8) List of Experts
To ensure that you get the very best results from your investment efforts, you will want to work with a good mortgage professional, real estate agent, property insurance broker, home inspector, real estate lawyer, property manager, and accountant. Don’t panic! If you don’t know people in these categories, your real estate agent or mortgage professional should be able to recommend someone. Remember; don’t hold back any information from your advisors, no matter how negative you feel it might be. Finding out something unexpected partway through the process can add significant challenges and interfere with your attempts to get financing.
Now you are armed with the knowledge you need to make yourself an attractive client to lenders. Happy investing!