Date: Thursday, January 11, 2007 @ 10:44 AM EST
Topic: Credit and Finance
A very basic introduction to lending and what lenders look for when
deciding to give you a loan- for real estate or anything else.
I've been talking to a couple of new investors about financing, and I
thought it might be good to explain some of the basics of lending.
First, what exactly are lenders looking for? The answer, surprisingly,
is quite simple. Lenders are really only looking for two things:
ABILITY to pay and WILLINGNESS to pay.
Ability to pay is determined by answering this simple
question: After you meet all of your monthly obligations, is there
enough left over to pay this new debt you're asking for? This is a
matter of comparing your provable income with your actual expenses. Of
course, the bank doesn't usually know your actual expenses, so they
apply some formulas and educated guesswork. The income part they get
from your paystubs, W2's, and tax returns.
Willingness to pay is usually determined by looking at your
credit history and asking your creditors for a rating of your payment
habits.
If you have a history of paying your bills and credit
obligations on time, most lenders usually assume that you will continue
to do so. Different lenders, even different loan officers working for
the SAME lender, will assign varying degrees of importance to these two
areas.
For instance, one lender may hold the belief that, as long as you have
sufficient income (ability to pay) and there is enough equity in the
deal to guarantee the Lender's position should you default, the loan is
worth making.
Another lender may see that, even though you make a good income, your
history says you don't make your payments, so she won't make the
loanCredit scores and algorithms have made the process more complicated
than it used to be, but it still boils down to these basic factors.
If you understand this, and can view yourself dispassionately through
the eyes of the lender, you will know how best to improve your credit
standing and get the loans you need to grow your www.business.The simple truths of the credit world allow me to make three very general recommendations to beginning investors.
First, keep your job as long as you possibly can. The steady, provable
income it provides makes a very favorable impression on lenders.
Second, keep your total debt as low as possible. This will ensure that
when you need a new loan, the lender can see that there will be room
for it in your monthly budget. Third, pay your bills on time, every
time. This demonstrates to the lender that not only are you ABLE to pay
your bills, you are also consistently WILLING to do so. Now, go make
more offers.
Tom Dunn is a writer and successful real estate investor. He is the
author of the popular DealFiles Real Estate Investor Stories website.
Tom resides in upstate New York with his wife and three children.
