Ralph R. Roberts - Flipping Houses For Dummies

5 Thou shalt not omit debts or liabilities from your loan application.

6 Thou shalt not buy furniture, an entertainment center, a boat, or a big-screen TV.

7 Thou shalt not originate any inquiries into your credit (for example, by applying for a new credit card).

8 Thou shalt not make large deposits without first checking with your loan officer.

9 Thou shalt not change bank accounts.

10 Thou shalt not cosign a loan for anyone.

To simplify the loan process, supply your lender with copies of your last three bank statements and last three federal tax returns.

If your financial situation changes between the application and the time of closing, you’re legally obligated to inform the loan officer and lender of the change.

When considering any type of loan, carefully examine interest rates and other factors to determine what’s best overall and which loan is most suitable for your situation. An interest-only loan may offer lower monthly payments, but it may not be the best choice. A fixed-rate loan at a slightly higher interest rate may be better.

The best way to compare loans is to determine the total cost of the loan over the life of the loan:

1 Start with the amount the bank charges you upfront in loan origination fees, discount points (interest you pay upfront — typically, a percentage of the loan, to lower the interest rate), and other fees.

2 Multiply the monthly payment times the number of months you plan to pay on the loan.

3 Add the two amounts to determine your total payment.

4 Total the amount of each payment that goes toward paying the principal of the loan. (Your lender can tell you how much of each payment goes toward principal.)

5 Subtract the total you determined in Step 4 from the total in Step 3.

Suppose you’re considering two loans, each for $100,000. You plan on using the loan to buy and renovate a home over two years and then sell it and pay off the remaining principal on the loan. You have a choice between a 30-year, traditional fixed-rate mortgage at 6 percent and a 30-year, interest-only loan at 5 percent. Look at the 6 percent, fixed-rate mortgage first:

Here are the numbers for the 30-year, interest-only loan at 5 percent:

If you’ve ruled out interest-only loans because you think you’ll save money by paying down the principal, the numbers compel you to reconsider. With the traditional mortgage, you’re not only paying more than $180 more every month, but by the time you sell the house, you’ve paid $1,800 more for the privilege of borrowing the money!

As a general rule for quick flips, opt for loans with low (or no) closing costs, low (or no) discount points, and low interest rates. Avoid any loans that have prepayment penalties.

To secure investment capital for flipping properties, you need to know where to look. Obvious sources, such as banks, may be a little reluctant to loan money to a novice for investing in real estate, so you may need to poke around to find willing lenders and investors. The following sections show you where to start looking. Your agent can also help steer you toward lenders.

Don’t request quotes from more than a couple of lending institutions. When several lending institutions query your credit report in a short period, it shows up on your credit report and can lower your credit score and jeopardize your ability to qualify for a loan. Shop around first and then apply for a loan with only one or two lenders who offer the best rates and services.

Small, local banks and credit unions often run loan specials trying to lure you into doing all your banking with them. They may offer low-rate loans regardless of whether you open a checking or savings account with them. Check your local newspaper for ads, call around to four or five banks in the area to check out their loan offerings, or check with your current bank or credit union, which may offer an even better deal because you already have an account there.

If you have the choice, obtain your loan from a lender that doesn’t sell its loans. Some smaller banks and mortgage brokers sell to larger, out-of-state banks, which can foul up the handling of your escrow account (the account from which the lender pays your taxes and insurance), resulting in unpaid property taxes and insurance.

You’ve probably seen those commercials in which a couple goes online to submit a request for quotes from various lenders. The lenders descend on the house like a flock of fawning suitors and grovel to win the couple’s favor. Funny, yes, but realistic? Not quite. You still need to perform your due diligence by checking the numbers, as I explain earlier in this chapter.

I recommend that you stay close to home when borrowing money to finance your flip, especially when you’re first starting out. Local lenders are typically more motivated and capable of servicing your loan, and they can work with you more effectively if something goes wrong.

Fannie Mae and the Federal Housing Authority (FHA) offer home renovation mortgage programs that enable qualified buyers to borrow an amount equal to what the property is expected to be worth after repairs and renovations. For example, if you can purchase a property for $90,000 and sell it for $120,000, you can borrow up to $120,000 to purchase the property and pay for the repairs and renovations.

To take advantage of a home renovation mortgage, you find a property to flip and then do a walk-through with your contractor (see Chapter 10) and come up with a list of repairs and renovations and their total estimated cost. You present the lender with the details, they order an appraisal, and if the appraised value of the property is greater than or equal to your total (purchase price plus cost of renovations) you get the loan, assuming you’re deemed creditworthy.