Question: Where can I get financing for residential real estate? I heard it’s easier to get financing for commercial real estate- is that true? Also, I would love some information on what variables affect a lender’s decision to give financing.
Answer: Many lenders are thought to prefer lending to commercial real estate investors rather than residential real estate investors. While that may be true, there are plenty of lender possibilities for residential real estate investment. In fact, here is a list of banks and lending institutions that provide loans for both commercial and residential real estate investment:
Lending Institutions for Real Estate Investment
- Wells Fargo
- PNC Real Estate
- Prudential Mortgage
- J.P. Morgan Chase & Co.
- Strategic Alliance Mortgage (SAM)
- KeyBank Real Estate Capital
- CBRE Group Inc.
- Northwestern Mutual
- Cornerstone Real Estate Advisers
- NorthMarq Capital
- CWCapital LLC
- Red Mortgage Capital LLC
- Walker & Dunlop
- Natixis Real Estate Capital LLC
- Pacific Life Insurance Co.
- Grandbridge Real Estate Capital
- Citi Community Capital
- Starwood Property Trust
- Beech Street Capital
- ING Investment Management
- M&T Realty Capital Corp.
- Principal Real Estate Investors
What a Lender Looks for in a Borrower
Lenders seem to ask borrowers almost anything before considering them for a loan. The requirements are even tougher for first time borrowers. While some questions are predictable, lenders are becoming more inquisitive these days in order to minimize the risk of defaults. Lenders aggressively ask more questions so that they can provide reasonable proof to the underwriters that the borrower will actually manage to repay.
Except your family planning and health issues that are forbidden by the law, lenders want to know the following in a borrower:
- Credit rating- a lender is first interested with your FICO or credit score. The score ranges between 350 and 850. The lender wants to know your outstanding debt in different types of accounts, the total outstanding debt and how well you’ve been paying your bills. Missed payments raise doubts with respect to risk of defaulting. Your credit history is very important to a lender and for this reason you should ensure that your credit report does not have any errors.
- Debt income ratio- a lender wants to know the ratio of debt compared to your monthly income. The lender explicitly wants to know how much you have to spare each month after you’ve paid out all other debts excluding the mortgage. The debt income ratio disqualifies many people for a loan. You should therefore pay down many of your credit cards before applying for a loan.
- LTV- this is the loan to value ratio which enables the lender to determine risk. LTV is determined by dividing the value of the home by the anticipated loan amount. In simple terms, it’s the amount of money a borrower is willing to pay for the house. The lower the amount put down by the borrower, the lower the level of doubt the lender will have about their creditworthiness.
- Cash- lenders also love hard cash because it keeps them running the company. The lender will want to know how much a borrower has saved; this is not for purposes of down payment alone but also for meeting monthly mortgage repayments when they go into a financial stalemate.
- Collateral- once the lender has assessed that your capacity and credit score meets expectations, collateral is the other most significant thing on the list. This is done by valuation of property by an independent appraiser in order to determine its current market value. The appraised value is used to determine the LTV.
- Lawsuits- lenders are sensitive to risk, so they have to check out every possibility on your end that can make giving you a loan a bad idea. A lender will want to know whether you are the plaintiff or defendant in any lawsuit because if judgment goes against the borrower, then it will impact their financial position negatively.
- Divorce- the number of divorces in the United States is on the rise. Lenders want to know the financial details in a borrower’s divorce because a borrower may be responsible for their ex-spouse’s debt. If a borrower includes alimony or child support as a source of income in their loan application, the lender will also want proof of such income.
- Ethnicity- the Department of Housing and Urban Development (HUD) requires lenders to inquire about the borrower’s race for purposes of statistics. To avoid discrimination of an applicant, no further ethnic inquiries can be made. HUD also checks lender records routinely in order to ensure that they are not turning down applications from minorities or exploiting them by charging them unusually high fees.
This concludes the three part Q&A on procuring financing for investment properties. If you have other questions, send them our way and we’ll do our best to get answers to you shortly!