Listen up. This is important and it is the most common situation I see beginning real estate investors get themselves in. You go out and get pre-approved by your mortgage broker. They give you the thumbs up and tell you to go out and purchase your first investment property. You are excited that you have begun your wealth creation journey. And you should be, real estate is a proven vehicle to build wealth. You then go and find a Real Estate Agent that actually knows something about investing in real estate (a huge challenge in itself), you spend weeks finding the perfect property and you finally make the purchase. Then it happens... Closing day approaches and your mortgage broker rings you up with something like this: "Hey, I've got some updates. Apparently I can't actually get that mortgage program that we spoke of a few weeks ago. Don't worry, you will still be able to purchase the investment property but you'll need to put down 15% instead of 10% and the interest rate on the mortgage is going to be 7.8% instead of 5.9%." Now you've got problems. You need to magically come up with more cash, your Return on Investment will change drastically and your monthly cash flow on the property will go from a positive to a negative. Let the scrambling begin! You call your agent, who will likely not have many options for you, you call another broker, who doesn't have enough time before closing to save you and you then call your mom asking to borrow money to save this deal from falling apart. Not fun, not funny. Here's what you should know... 1. First off, always ask your friendly neighborhood mortgage broker how many investment properties they have actually closed on. You are looking for experience. Let some else work in a beginner. Not you, it is not worth your time or your money. 2. Second, ask the mortgage broker to send you the fine print. Ask for the details of the mortgage program. Check that the interest rate on the mortgage program doesn't have any clauses about increasing the interest rate based on your down payment amount. I've seen brokers offer mortgage programs without fully understanding the program. You should know that these mortgage programs are sold to the brokers just like anything else...with salespeople and marketing flyers. Some of the marketing material may highlight a certain interest rate. But the fine print may state that your credit score must be above 650 AND the down payment must be 15% to qualify, not 10% as you anticipated. Now let me be clear, I don not think there is any malicious intent in these situations. There is fine print in every deal, whether it be a car purchase or a commercial lease. However, if your banker or mortgage broker hasn't been through any investment mortgages they may be totally unaware of these critical points. So take it upon yourself and ask them to email or fax you the details of the mortgage program. 3. Lastly, know your credit score. You can pull your credit score from Transunion or Equifax and it will not affect your score. When you pull your credit score yourself it's called a soft pull. Your credit score plays an integral part in getting any mortgage and it is amazing how many people don't know their own score. You may think you have perfect credit, but, and I've seen this, you forgot to pay a $20 VISA card bill 6 months ago and your score drops from 660 to 610 and you now no longer qualify. Real Estate Investing is a real business. Treat it as such. Know you broker's background, know the mortgage program, know your credit score. It will save last minute panic attacks two days before closing. You can focus on making money instead of spending more of your own. Now go forth and take some action!!
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