The market for real estate mortgages can be complicated. It’s easy to make mistakes and set yourself up for problems and even failure. If you’re new to real estate investing, limit the complexity by learning how the process should go. Also, work with a relationship bank that knows Minnesota real estate. That’s how you can get a rental property mortgage that fits your goals.
7 steps to getting a rental property mortgage that fits:
1. The Lender: Find a partner who works to limit complexity.
You don’t want to be alone in a sea of mortgage possibilities. Especially if you’re getting rental property financing for the first time, partners are a vital resource. They can guide you to a safe harbor.
So, don’t just look at rates and terms. Find a lender who:
- Knows real estate: Not all lenders have expertise in rental financing. A bank with little knowledge of real estate will offer little guidance and might even lead you in the wrong direction. Flagship is a local bank that specializes in real estate loans for rental property in Minnesota.
- Builds relationships: A lender whose goal is to get to know clients is invested in your success. A relationship bank will take the time to understand your real needs. Then, your lender will stick with you and be there when you need them.
- Creates solutions for you: Real estate expertise combined with a knowledge of clients as individuals help a lender customize loans. Rental financing that fits you may have to be created. Find a lender who can do this.
The right lender can limit the complexity of financing a rental property. This can make the process efficient, dependable, and customized.
2. The Conversation: Tell the lender your story.
If you’ve found a relationship bank, you can expect a conversation. Your lender will be eager to hear your story and get to know you. He or she will want to learn about the kinds of property you want to invest in, your financial goals, your management plans and more. Your experiences, values, and even your personality can all help your lender get a complete picture of you and your financing needs.
It’s a friendly conversation with a partner.
3. The Application: Summarize and document your story.
Your application orients the conversation. More importantly, it guides the bank in its research when it underwrites your mortgage. It summarizes the key parts of your story. This allows the bank to find the solution that fits you.
Your application includes two main parts:
- Project Overview: This summary describes the property, your plans for it, and the ownership structure. It should also include copies of any leases, if applicable.
- Financial Statements: You’ll include your personal financial statements with your project overview. Thorough, up-to-date financials and tax returns are vital to an efficient and successful approval process.
4. The Research: Setting you up for success.
Your lender will then research you and the property to make sure everything’s set up for success. You should understand the process and be prepared for ongoing communication (see step 7).
Your lender studies the property and your financial situation. This way, they see you can cover your monthly loan payments.
- NOI: Your net operating income (NOI) is the cash you’ll have each month to service your mortgage. It’s your rental income minus your operating expenses (before interest, income taxes, depreciation, and amortization).
- DSCR: The debt service coverage ratio (DSCR) shows your capacity to repay your loan. It’s equal to your NOI divided by your monthly mortgage payments. Banks usually look for a DSCR of 1.20X or greater.
- Capitalization Rate: This helps you evaluate your property investment. It indicates the income you can expect from it. Your cap rate is the NOI divided by the purchase price of the property.
- LTV: The loan-to-value ratio helps determine your down payment. The LTV is the loan amount divided by the appraised value. Usually, your down payment will be the lesser of 80% of the property’s value or the purchase price.
Lenders, of course, always need to evaluate the ability of clients to repay their loans. But this isn’t just in the bank’s self-interest. The underwriting process also benefits you. It ensures you have a strong foundation, so your investment can prosper.
5. The Appraisal: Getting insight into your investment.
Your bank will need an appraisal of the property to complete its research. This allows your lender to make accurate calculations regarding your investment. This, of course, helps you as well either by confirming your own analysis or unearthing concerns you might have missed.
6. The Conversation (cont.): Customize your solution by continuing the conversation.
The key to the application and research process is an ongoing conversation. That’s how a relationship bank serves you. After your initial discussions, your lender will continue to communicate with you throughout the process. You stay in the loop.
This way, your bank can work with you to address any complications that may arise. An ongoing conversation enables your bank to customize your solution as it completes the process.
7. The News: Get the go-ahead for your property purchase.
If your lender’s kept you in the loop, there shouldn’t be any surprises at the point. Hopefully, you’ll be all set to complete your property purchase.
If for some reason your loan is not approved, it doesn’t mean it’s the end of the story. Your lender can help you understand any problems in your application and help you strategize how to address them.
Get Your Mortgage Tailor-made
This is how the process should go. It often doesn’t, though. A relationship bank that knows real estate weaves a conversational thread throughout the process. Real estate expertise combined with robust communication can create a mortgage solution that fits you exceptionally well.