The Biggest Piece of the Lender Pie
One of the biggest hurdles that many investors face is learning the lending side of real estate. Today we are going to go over the lender pie and how it affects you as an investor. For over 23 years I have been working with investors. Many of them are just starting out and learning how to build both income and wealth. Wealth in real estate investing is achieved by using other people’s money for leverage. It is important that you understand the leverage side, what it looks like, and how you can make it work for you. All lenders base their lending decision on three factors, which are your credit score, LTV, and your income. The biggest piece of the lender pie is credit score!
1. Credit score
Lenders will evaluate your credit score and how you have paid people in the past before considering loan approval. Lending is primarily based on algorithms, and your credit score is a big determining factor.
LTV stands for the loan to value. It is determined by evaluating how much money you have in a property, how much equity you have, and what is your piece of this property. LTV is one of the biggest factors that lenders look at when
determining if they are going to lend to you, how much they will lend, and what it is going to cost.
3. Income and Reserves
Income and reserves can either come from you or from the property. If you’re looking at a DSCR or fix and flip, and you are going to sell it, then it is the income that the lenders will evaluate. Reserves include the amount of money you have put away in case something comes up. In regards to rental properties, it is how many months of reserves you have in case the property goes unrented for 3 to 6 months. If you’re a flipper, the reserves can help you make payments over the next 6 to 9 months until your property is sold.
Which factor is the most important to lenders?
The answer is that It’s always a mix between the three. However, your credit score has the largest impact on the other two pieces in the lending pie. Here is an example that illustrates how your credit score can affect both your LTV and the flexibility on income requirements.
Example: Credit score
Your credit score is the most important factor in being approved or denied for a loan. If you have a good property, but a bad credit score in the 500’s, it won’t matter for most lenders. To clarify, a good property could be one that is 50% or 60% LTV. However, most lenders won’t even look at you. This is due to the fact that all lenders have guidelines and have to take into consideration certain things. If you have a 600 or even 620 credit score, then you are going to be limited. Your credit score is vital to your success. The higher credit score will get you more money, a higher LTV, and it will provide more flexibility on income requirements. It is imperative for new investors to get their credit score as high as possible because it will lower the interest rates, the lower the mortgage payment, and decrease the amount of income you will need.
The lending pie provides the perfect visual of how important leverage is for investors. Again, leverage is how you create wealth and income. While the pieces of the pie are not always equal, it is imperative that you understand how your credit score, income, and LTV work together. Remember, a lender is going to look at every piece and make sure that your pie is where it needs to be for approval. While LTV and income are more difficult to change, your credit score is a place where you can make the biggest impact. Be on the lookout for future videos that focus on credit and easy ways to raise your scores.
Our goal is to make sure that you are as successful as possible. Contact us to find out more about the lending pie and how you can raise your credit scores.
Watch our most recent video about The Lender Pie: 3 Key Loan Qualifications in Real Estate to find out more.