Your Lender

It goes without saying that the person with the ability to grant or deny access to massive amounts of cash is a critical player on your team. Here again is where your relationships can pay off.

If you have never bought anything more substantial than a winter coat, it is time to hit the pavement. To be a star flipper, you need a friendly lender in your back pocket. Local banks are your best bet, as sellers frequently frown on offers from an out-of-town institution. That is not to say that you’ll never close a deal if you choose your sister-in-law in Hawaii as your financier. However, if yours is one of multiple offers, you want to do everything you can to make it as attractive as possible.
A quick word about money: A lender will take several factors into account (primarily your income, credit score, and the price and value of the property in question) to determine how much money you are eligible to borrow.

Nowhere is it stated that you have to borrow it all. Since lenders are in the business of making money, the more you borrow, the more they make. Remember, borrowed money is not free money. You will be paying mortgage payments and costly interest on it (depending on the length of time you wind up borrowing it). Only you can determine your borrowing comfort zone.
Start at the bank where you do most or all of your personal banking and set up an appointment with a loan officer. (If you insist on keeping all your cash in a sock in the freezer, ask friends for referrals.) Explain your intentions—that you’re buying to flip and that if all goes well, you hope to do it again. You will not appreciate the true value of having a solid relationship with a personal banker until you need last-minute funds wired into your account to go toward your down payment and it’s the Friday before a holiday. A loyal banker will find a way to make it happen.
Following is a list of questions to ask potential lenders, along with the answers you’re looking for:

1. Is there any benefit to having an existing checking or savings account here, or to opening one before I apply for a loan? There should be some sort of incentive for banking with a lender that gets your loan business, such as a lower interest rate (up to a half of a point, which ain’t chump change), faster fund transfers, or no fees for Internet access. Ask and you very well may receive.

2. How quickly can I get a preapproval letter? Please note the distinction between a prequalification letter and a preapproval letter. With the former, you have met with your lender and he has, based on information you provided verbally, said in essence, “This institution is probably going to be lending this person money.” The information you have given, however, has not been reviewed or approved by an underwriter (the actual money source), so it’s a preliminary step. Better than nothing, certainly, as it shows you have not been flat-out rejected. Much stronger is the preapproval letter, which says “We have gone through this borrower’s financial underwear drawer and will be granting him $X, subject to an appraisal of the property in question.” The minute you’re actively searching for properties, you want that preapproval letter available to you at a moment’s notice.

3. Where should my credit score be to take advantage of your best programs?
Although this will vary from lender to lender, it always pays to know where you stand going in. Your potential lender may scan over your credit report and see that you’re on the brink of significant savings by just paying off one card or selling that car you’re paying through the nose for (and may not even be in love with). The answer you want here is, “Let’s take a look at your report and see what we can do.” A flat numerical answer tells you he’s not all that interested in helping your cause.

4. What sort of junk fees can you waive? There are lots of things you may be charged for that are either inflated or flat-out fluff—hence the categorical tag. Things like “document prep,” “underwriting,” and “processing” or “service” fees are all costs a lender may be willing to waive. Simply by asking the question, you’re showing that you are aware of such goings-on.

5. If I set up an automatic withdrawal of my mortgage payment from my bank account can I save some money in points or fees?<B> If there is a bank affiliated with your lender, this should be an option you can take advantage of. I’ve saved |1/4| of a percent in interest, which can add up nicely. It really depends on how cheap money is at any given moment, and how much of it they’re lending out, but it certainly can’t hurt to ask.

6. How much do you charge for an appraisal? Prices for appraisals can vary greatly, but if a lender quotes you a figure greater than $1,000, ask if there are any alternative options.

7. How soon after closing can I establish an equity line of credit? If you’re putting less than 20 percent of the purchase price down, you may have to do some visible improvements and get the property reappraised before your lender will be willing to dish out any more money.
Nevertheless, you need to be sure that cash will be forthcoming if and when you need it. If you’re putting 20 percent or more down, you should be able to get an equity line shortly after you close.

8. Do you communicate via e-mail? Wasted time means wasted money, so you want to get all your documents as quickly as humanly (or electronically) possible. Nothing tests your patience like a procrastinating or inaccessible lender holding up your closing on a flip when you’re prepped and ready to start work.

9. What is the best way to reach you on weekends? Many times, I have stumbled on the perfect flip at an open house on a Sunday and needed a preapproval letter to make that super strong offer that very day. Don’t stop pestering until you have a BlackBerry address, a contact at the gym who can track him down on the treadmill, and the cell phone number of the dog walker for his kids’ nanny’s poodle.

Market conditions change, and loans vary from lender to lender, but here are a few types that may be available:

Monthly Option Adjustable Rate Mortgages (ARMs). These loans will have payments based on an initial interest rate from 1.0 percent to 5.0 percent.
The interest rate will adjust monthly. This is calculated by adding a margin to a particular index. The most widely used index today is the Month Treasury Average Index (MTA; 12-month average of the one-year T-bill).
These loans are great for investors who want the lowest payment while they are fixing up a property and then selling it. However, the way these loans are now being priced by lenders, they are at or higher than a 5/1 interest only loan when they adjust. The reason for this is that the secondary market does not want to purchase most of these loans because they are candidates to be refinanced or sold.

Fixed Loans for 5/1, 7/1, or 10/1 years. These loans are fixed for an initial period of time and interest only payment then will adjust once a year with a margin between 2.25 to 2.75 over the LIBOR (London Interbank Offered Rate or one-year T-bill). In today’s market, I would probably recommend a 5/1 ARM for investors who are flipping as it gives them the time they need and the rate will be lower than the monthly option ARM. If they are holding an investment property, the 10/1 ARM provides a rate at
.375 to .50 percent less than the 30-year fixed.

30-Year Fixed Mortgage. A bank offers these fully amortized with a fixed payment that allows you to pay off the loan within the specified time periodand with interest only If the investors want to keep the property, are not considering selling it, and feel rates will be increasing, then this is the product for them. Also, lenders have come out with a 40-year amortization on a fixed rate that could revolutionize the way we buy real estate and increase our borrowing potential.

Lenders now have the ability to lend to limited liability companies (LLCs) at the same pricing on the loans as on a title held by an individual.
Lenders may also offer a stated asset stated income 75 percent first loan to $650,000 with a combined loan to value up to 75 percent and can lend up to $1,000,000 first loan at 70 percent loan to value with a 25 percent combined loan to value. Also, on Verification Assets a lender may be able to go to $2,000,000 with a $1,000,000 line of credit behind it to a 75 percent loan to value.

There are lots of online sites where you can research financing options before you go to the bank: www.loanpage.com is one example.