I work a lot with people buying investment properties. These are savvy people that have excellent credit and usually have options when it comes to money for closing.
I am often surprised by the way these same people are generally not however prepared when they need to get a mortgage and make it more difficult on themselves when it comes to going through the approval process. Hopefully this post helps with some tips that will make the approval process much easier when you get ready to purchase.
Not all of these may apply to every person but hopefully some good info for you if you are looking to start purchasing rental properties with mortgages and being able to scale.
Let's start with the money you will be using for closing, us lenders typically call this your "cash to close". Put this money into an account and leave it there. Ideally in a savings account where you have as little deposits and withdrawals as possible. Generally lenders need 60 days worth of bank statements to be able to use for approval. After 60 days if the money has been in the account the funds are considered "seasoned". With most conforming lenders once funds are seasoned underwriting will not have further questions. It can be tedious for the borrower, the lender and underwriting to have to verify random deposits or withdrawals. Underwriters can be prickly sometimes but don't give them the oppurtunity to complicate your life! Do yourself a favor and leave the money where it is once it is ready. Handle your everyday transactions from another account.
If you are utilizing a retirement account for funds to close make sure you get the process started to obtain this money sooner than later. I always warn my clients about this because sometimes the process to get a check from your 401k provider can take weeks and if you need it for funds to close this can delay closing.
I often work with people that are business owners or own an LLC for their rental properties. It may make sense to avoid paying taxes by showing losses on these businesses but when qualifying for a mortgage if you need that income to count for your debt to income ratio to work you better be aware of what you are doing especially if you are looking to scale. Most lenders need 2 year demonstrated history on tax returns to be able to use it to qualify so don't slow yourself down if you are looking to scale faster. The 2 year history applies to almost all types of income (bonuses, commissions, royalties, dividends etc.).
If you are looking to purchase a property and already own some properties most lenders will require you have 6 months reserves for each property that you own. This means real estate taxes, insurance and mortgage payment if applicable for each. If you start to own more than a couple properties it must be something you need to keep in mind to qualify for more. You should have reserves for repairs and maintenance regardless but if you need 6 months for each property you own it can add up. You can usually utilize retirement accounts for reserves as well as long as you can prove you can take that money out if you needed to.
If you are looking to purchase a multi family property it is not uncommon for these properties to have some issues. Broken windows, loose wires, water in the basement are some that I commonly run into. A good agent should know from walking it if the house will be able to get conventional financing. If the appraiser goes to the property and points out issues that are either general functionality problems or dangerous you may need to have some repairs completed in order to close. If the appraiser points out issues to be corrected 9 times out of town they will need a final inspection to go back to the house and make sure they have been fixed. Final inspections are an extra fee usually about $100-$200 dollars and can take up another week or so to be completed AFTER repairs are finished. Something to keep in mind if you need to make a certain closing date and when calculating your out of pocket for closing.
Hopefully these observations have been at least a little helpful.
If anyone has any tips to add to this thread or any questions let's talk!!
Graham Nadler
