Homeownership is often seen as one of the ultimate forms of financial independence. Instead of throwing money away each month, making someone else rich, you’re investing money in your future – in equity on your property. If you can invest in multiple properties, they earn even more money for you, thereby increasing your financial independence.
However, purchasing property is not always easy, and there are some things you should consider before you start investing in real estate.
Your Personal Finances
Be sure to resolve any credit issues before starting your property search, otherwise you could be in for a nasty surprise.
Most people purchase real estate by taking out some kind of loan. The type of loan you qualify for will depend on a variety of circumstances, including your income and credit history. For example, if you have a recent bankruptcy on your record, that could make it more difficult for you get a loan, or increase your interest rates.
Conversely, having no credit history at all could also negatively affect your eligibility. Also, even if you have good credit, if your overall debt (not including your housing expenses) is more than 36 percent of your income, you could be ineligible for some loans.
Before you start looking at properties, calculate your current income, and your percentage of debt to make sure the ratio is below 36 percent. You should also check your credit history for any negative entries, as well as your credit score – a score below 580 could prevent you from getting some loans.
Types of loans available
Conventional home loan are the most common, and also the most stringent when it comes to credit history and income requirements. These types of loans also require you to make a down payment of at least 20 percent of the price of the property. If you can’t make the down payment, you will be required to purchase mortgage insurance. You can use a conventional loan to purchase a primary residence or an investment property; however the interest rates could be higher for investment properties. You can find a conventional loan through any bank, mortgage company, or credit union that offers home loans.
VA loans are similar to conventional loans, but they can have less stringent requirements because the VA guarantees the loan. For example, the lender might allow a slightly lower credit score, or finance with no money down and no mortgage insurance. However, you might not be able to use a VA loan to finance an investment property, and you have to meet certain other eligibility requirements. Because the VA does not administer the loans, you can get one a lender specializing in this area, like Low VA Rates, beforehand.
FHA and HUD are government-funded loans, designed to help low-income individuals become home owners. These loans tend to have less stringent criteria in terms of credit scores and income, but some programs could require potential buyers to attend classes and training sessions to qualify. Because they are government-funded loans, they are only available through approved lenders, but the loans are available for both investment properties and primary residences.
If you are unable to get a mortgage through conventional means, you could consider owner financing. The best way to describe owner financing is that the owner sells the property to the buyer, and the buyer makes regular payments to the owner for the cost of property.
There are several different types of owner financing, including land contracts and lease purchase agreements – also known as rent-to-own agreements.
The big advantage to owner financing is that it gives individuals, who might not otherwise qualify, the opportunity to purchase property.
Stefanie @ The Broke and Beautiful Life says
I have great credit but seriously limited income. I wonder how that will affect my ability to secure a home loan.
Mathieu Lebrun says
Thank you for sharing. It’s very useful. Hope to hear more from you.