With mortgage interest rates so incredibly low, it seems a shame not to apply just on principle alone without asking yourself the hard questions like ‘What mortgage can I afford?’ Since the real estate market seems to have bottomed out price wise, the levels of inventory are ridiculously low and the mortgage rates (well, we’ve covered that) – it’s like the perfect storm.
The opportunity to get into the real estate market has never been better. But this is only for a limited time. Housing starts and new home sales have turned around, and property prices are next. So my suggestion is for investors and first home buyers alike is to ask yourself the all important question – what mortgage can I afford?
This is the most important part of your real estate purchasing. Finding the right property is secondary to finding the right financial framework around which the purchase occurs. I know that sounds a little strange to people who maybe haven’t bought an investment property and have been owner occupiers – but it’s true. Having a bad deal with lender for your mortgage can make all the difference between a good purchase and a horror story.
What mortgage can I afford?
Basically this will revolve around what sort of property you are looking at purchasing. If the property is income producing, then your lending options got a whole lot broader (now that private mortgage lenders will consider your application for finance). If on the other hand you want to purchase a good property at a good price for yourself to live in, then your more traditional lenders are probably the best place to help out with the finance.
When lenders look at your mortgage application they consider a few key things. First, they want to know the value of the property. How this value compares to the amount of credit you are seeking will determine a few important things – like whether you need to take out PMI for example. While not a huge immediate cost, over the life of a loan it can cost a bunch, so it’s best to avoid PMI if at all possible.
Basically what the lender looks at after the valuation of the property is the borrower’s income. Now this (while important) is something that you can be creative with. Depending on your real estate investment business plan (you do have one right?), you may be structuring your real estate investments in a certain way – like in a LLC or maybe a partnership or trust. Anyway, not matter how you structure your purchase, you should probably speak to your accounts person (it’s all about assembling that team).
Crunch some numbers with a mortgage calculator
Before you go speaking to lenders, use some of the free mortgage calculators that are available online. These will give you a fair idea of what your borrowing capabilities are. Remember that it’s not just a case of how much you can borrow – the repayment amount is all important. If you can’t afford to make those repayments you will find yourself in trouble.