Chapter 9

Securing the Best Mortgage Terms

In This Chapter

arrow Understanding the best ways to shop for mortgages

arrow Solving common borrowing problems

In Chapter 8, we discuss how to choose among the many loan options available to select the one that best suits your personal and financial situation. In the process of delving into the different types of real estate investment financing, you may have already begun the process of speaking with different lenders and surfing websites.

In this chapter, we provide our top tips and advice for shopping for and ultimately securing the best financing that you can for your real estate investment purchases and refinances. We also cover common loan problems that may derail your plans.

Shopping for Mortgages

Financing costs of your real estate investment purchases are generally the single biggest expense by far, so it pays to shop around and know how to unearth the best deals. You may find that many lenders would love to have your business, especially if you have a strong credit rating. Although having numerous lenders competing for your business can save you money, it can also make mortgage shopping and selection difficult. This section should help you simplify matters.

Relying on referrals

Many sources of real estate advice simply tell you to get referrals in your quest to find the best mortgage lenders. Sounds simple and straightforward — but it’s not. For instance, loans for commercial investment properties and residential rental properties with five or more units have different lender underwriting requirements and terms compared with residential one- to four-unit loans (see Chapter 2 for explanations of these types of investments).

Good referrals can be a useful tool for locating the best lenders. Here are a few sources we recommend:

Don’t take anyone’s referrals as gospel. Always be wary of business people who refer you to folks who have referred business to them over the years. You want to make sure that the referral is not just a payback or reciprocal arrangement with no justification, but actually someone that warrants consideration. Whenever you get a recommendation, ask the person doing the referring why they’re making the referral and what they like and don’t like about the service provider.

Mulling over mortgage brokers

You don’t need to use a mortgage broker unless you’re trying to get a loan for a property that has some challenges or you as the buyer have less than stellar credit or want to put the minimum down. Mortgage brokers also may not be justified when the market conditions are favorable and many lenders are aggressively seeking to make loans. Thus, in these instances, we recommend going directly to lenders for simple deals (a relatively small price tag, a property that’s in good condition and enjoys a good location, and so on) and using mortgage brokers for bigger, more complicated, or more difficult deals and especially if the capital markets are tight and lenders aren’t motivated to make deals.

But many property buyers get a headache trying to shop among the enormous universe of mortgages and lenders. Check out the following sections when deciding on whether you want to use a broker.

Counting a broker’s contributions

A good mortgage broker can make the following contributions to your real estate investing team:

  • Advice: If you’re like most people, you may have a difficult time deciding which type of mortgage is best for your situation. A good mortgage broker can take the time to listen to your financial and personal situation and goals and offer suggestions for specific loans that match your situation. Brokers do work on commission, which unfortunately can temper the objectivity of their advice, so tread carefully. Don’t blindly accept a mortgage broker’s advice, which may be nothing more than a commission-driven sales pitch masquerading as counsel.
  • Shopping: Even after you figure out the specific type of mortgage that you want, dozens (if not hundreds) of lenders may offer that type of loan. (You’ll find fewer lender options for five-plus-unit residential properties and commercial properties.)

    Thoroughly shopping among the options to find the best mortgage takes time and knowledge you may well lack. A good mortgage broker can probably save you time and money by shopping for your best deal. Brokers can be especially helpful if you have a less than pristine credit report or you want to buy property with a low down payment — like 10 percent of the value of a property. Purchasing a multifamily residential property with five or more units or a commercial, industrial, or retail property is difficult with less than a 20- to 30-percent down payment.)

    Be careful when selecting a broker, because the worst among them get in the habit of repeatedly using the same lenders — perhaps because of the lofty commissions those lenders pay out. (More on understanding mortgage broker’s commissions in the “Keeping up with commissions and other contingencies” section.)

  • Paperwork and presentation: An organized and detail-oriented mortgage broker can assist you with completing the morass of forms most lenders demand. The paperwork can be truly overwhelming and tedious if you haven’t been through the process before and your records aren’t in order. Mortgage brokers and escrow officers can assist you with preparing your loan package so that you put your best foot forward with lenders. The mortgage broker only gets paid if the loan is funded so she can also be an advocate and lobby the lender on doing some more difficult deals that take some trust and creativity to complete.

    Have your personal financial statement prepared in advance so that it can be easily updated. Each time you seek a loan for an investment property, you have to provide a current financial statement to the broker (and, actually, all potential loan sources).

  • Closing the deal: After you sign a purchase agreement to buy a real estate investment property, you still have a lot to do before you’re the proud new property owner (see Chapter 14 for all the details). A competent mortgage broker makes sure that you meet the important deadlines for closing the deal.

Keeping up with commissions and other contingencies

A mortgage broker typically gets paid a percentage, usually between 0.5 and 1 percent, of the loan amount. This commission is completely negotiable, especially on larger loans that are more lucrative. (In case you’re interested, the commission on larger deals — say, on a loan of $25 million or more — is 0.25 to 0.5 percent.) Don’t confuse the mortgage broker commission with the lender-required points. When lenders have a lot of money to place, you may find that using a mortgage broker doesn’t cost you the full amount of their quoted commission because lenders will reduce their points by enough to cover a portion or even all of the mortgage broker fees.

The mortgage broker may also be receiving compensation (or other financial incentives based on the volume of placed loans) from certain lenders that further complicates your analysis. It also means that you need to explore fully the fee structure with each proposed loan. Be sure to ask what the commission is on every alternative loan that a broker pitches. Some brokers may be indignant that you ask — that’s their problem. You have every right to ask; after all, it’s your money.

Even if you plan to shop on your own, talking to a mortgage broker may be worthwhile. At the very least, you can compare what you find with what brokers say they can get for you. Again, be careful. Some brokers tell you what you want to hear — that is, that they can beat your best find — and then aren’t able to deliver when the time comes. Some mortgage brokers promise fantastic terms to get you in the door; then, when you’re just about ready to close on your loan, they come up with a last minute problem with your credit report, appraisal or some other issue that prevents them from delivering on the loan as quoted. This bait-and-switch tactic often works because most borrowers have some blemish or negative on their loan application or credit report. So make sure you find a mortgage broker who doesn’t overpromise and underdeliver.

If your loan broker quotes you a really good deal, ask who the lender is. Most brokers refuse to reveal this information until you pay the necessary fee to cover the appraisal, credit report, and required environmental reports. But after taking care of those fees, you can check with the lender to verify the interest rate, the points, the amortization term, and the prepayment penalties (if any) that the broker quotes you, and make sure that you’re eligible for the loan.

Web surfing for mortgages

You can shop for just about anything and everything online, so why should mortgages be any different? Mortgage websites often claim that they save you lots of time and money.

In our experience, the Internet is better used for mortgage research than for securing a specific mortgage. That’s not to say that some sites can’t provide competitive loans in a timely fashion. However, we’ve seen some property purchases fall apart because the buyers relied upon a website that failed to deliver a loan in time.

Here’s a short list of some of our favorite mortgage related websites that you may find helpful:

Solving Potential Loan Predicaments

The best defense against loan rejection is avoiding it in the first place. To head off potential rejection, disclose anything that may cause a problem before you apply for the loan. For example, if you already know that your credit report indicates some late payments from when you were out of the country for an extended period or your family was in turmoil over a medical problem, write a letter to your lender that explains this situation. Or perhaps you’re self-employed and your income from two years ago on your tax return was artificially much lower due to a special tax write-off. If that’s the case, explain that in writing to the lender.

With the non-cash deduction of depreciation taken by most real estate investors, working with a lender that routinely makes real estate investment property loans is particularly important because she’ll understand your tax return and how to calculate your actual net cash flow. These lenders will add back in the non-cash deduction whereas an inexperienced lender’s underwriters will use only the taxable income line on your IRS Form 1040.

Even if you’re the ideal mortgage borrower in the eyes of every lender, you may encounter financing problems with some properties. And of course, not all real estate buyers have a perfect credit history, lots of spare cash, and no debt. If you’re one of those borrowers who must jump through more hoops than others to get a loan, don’t give up hope. Few borrowers are perfect from a lender’s perspective, and many problems aren’t that difficult to fix.

Polishing your credit report

Late payments, missed payments, or debts that you never bothered to pay can tarnish your credit report and squelch a lender’s desire to offer you a mortgage loan. If you’ve been turned down for a loan because of your less-than-stellar credit history, request a free copy of your credit report from the lender that turned you down.

Getting a report before you even apply for a loan is advisable and no longer costs you any money. Once a year, you’re entitled to obtain a free copy of your credit report from each of the three credit bureaus. The contact information for the credit bureaus is

If problems are accurately documented on your credit report, try to explain them to your lender. Getting the bum’s rush? Call other lenders and tell them your credit problems up front and see whether you can find one willing to offer you a loan. Mortgage brokers may also be able to help you shop for lenders in these cases.

Sometimes you may feel that you’re not in control when you apply for a loan. In reality, you can fix a number of credit problems yourself. And you can often explain those that you can’t fix. Some lenders are more lenient and flexible than others. Just because one mortgage lender rejects your loan application doesn’t mean that all the others will.

As for erroneous information listed on your credit report, get on the phone to the credit bureaus. If specific creditors are the culprits, call them too. They’re required to submit any new information or correct any errors at once. Keep notes from your conversations and make sure that you put your case in writing and add your comments to your credit report. If the customer service representatives you talk with are no help, send a letter to the president of each company. Getting mistakes cleaned up on your credit report can take the tenacity of a bulldog — be persistent.

Another common credit problem is having too much consumer debt at the time you apply for a mortgage. The more credit card, auto loan, and other consumer debt you rack up, the less mortgage you qualify for. If you’re turned down for the mortgage, consider it a wake-up call to get rid of this high-cost debt. Hang on to the dream of buying real estate and work at paying off your debts before you make another foray into real estate. (See Chapter 8 for more information.)

Conquering insufficient income

If you’re self-employed or have changed jobs, your income may not resemble your past income, or more importantly, your income may not be what a mortgage lender needs to see relative to the amount that you want to borrow. A simple (although not always feasible) way around this problem is to make a larger down payment.

If you can’t make a large down payment, another option is to get a cosigner for the loan — your relatives may be willing. As long as they aren’t overextended themselves, they may be able to help you qualify for a larger loan than you can get on your own. As with partnerships, make sure that you put your agreement in writing so that no misunderstandings occur.

Dealing with low property appraisals

Even if you have sufficient income, a clean credit report, and an adequate down payment, the lender may turn down your loan if the appraisal of the property that you want to buy comes in too low. This is a relatively rare situation that happens more in rapidly appreciating markets; it’s unusual for a property not to appraise for what a buyer agrees to pay.

Many sellers have a distorted view and are unrealistic about the true value of their real estate and need a reality check. This is especially true during a period like the late 2000s when real estate values generally fell. Assuming that you still like the property, use the low appraisal to renegotiate a lower price from the seller. Or if you still really want the property, and because you won’t likely be able to get the full amount of the loan you planned as part of your acquisition deal structure, you may be able to get the seller to carry back part of the purchase price as seller financing at favorable terms. The seller gets the price that she wants, but you’ll need to get below-market financing to still make the deal work from your perspective.

You may be the owner of a property in need of refinancing because the loan is coming due or the terms are unfavorable and the appraisal is too low. In this case you obviously need to follow a different path. If you have the cash available, you can simply put more money down to get the loan balance to a level for which you qualify. If you don’t have the cash, you may need to forgo the refinance until you save more money or until the property value rises.