4 Questions to Ask Your Lender

There are a few reasons why some investors choose financing for their property investment over outright purchasing. The most obvious, of course, is because they don’t have the capital to purchase a property all-cash, so they need to get a mortgage for it. Another reason is to create a leveraging situation, where they can use the bank’s money instead of their own to create higher returns. Whatever your reason is for securing financing for your real estate investment, be sure to ask your lender these 4 questions.

1. What are the terms?
This one is pretty basic, but also pretty essential. Before signing on the dotted line, you need to find out what the terms of the loan are. This includes the interest rate, whether any points will be assessed, and what the loan to value (LTV) is. Most people already understand the concept of an interest rate and how it applies to a loan, but points and LTV still raise some questions for some folks. Here’s a quick explanation: points are basically lump sums of interest that are paid on the loan, with one point equaling one percent of the loan. For example, if your loan comes with 2 points, that’s equal to 2% of the total loan, which you’ll be expected to pay as a lump sum. LTV compares the loan amount to the property price and is expressed as a percentage. For most investors, the greater the LTV, the better the deal.

2. Are there any other fees?
Surprises fees are the worst, so make sure you don’t get slapped with the unexpected after you’re already deep in the loan process. At the very beginning, ask the lender what fees may be assessed. Documenting fees and underwriting fees are commonly added on top of interest and points, in addition to other similar costs. Individually, these may not seem like a big deal, but once you add them all up, they can have a negative impact on your return.

3. How long will the lending process take and how soon will the loan be funded?
The loan process can be long and arduous, which can be a real pain for an investor wanting a quick turnaround. Being prepared with all necessary documents and paperwork can speed up the process, but it’s still a good idea to get an estimate of the overall timeframe and funding schedule. The quicker you can secure the loan, the faster you’ll start making money.

4. Are there any special requirements or criteria that could affect your eligibility?
Some lenders have certain rules in place regarding the types of properties they’re willing to finance. For instance, some lenders may balk at the idea of supplying financing for a property that’s of a certain age, is located in a less-than-desirable area, or is in poor condition. Before starting the loan process, ask if there are any criteria that would render your property ineligible for financing.