Getting a conventional loan is not a complicated process, but there are a lot of moving parts. Allow me to give you a quick summary of the entire process, so you’ll best know what to expect when getting your loan.
7 Simple Steps to Get Approved for a Conventional Loan
Step #1: Shop
When shopping for a conventional loan, I recommend beginning your loan search before you get your property under contract. After all, the bank needs to approve both you and the deal before lending, so you might as well get the first half of that equation out of the way to make sure you aren’t wasting anyone’s time. It would be best to know before shopping for a deal whether or not your credit score is high enough to secure that deal!
Start with the bank that you already have your primary checking account with. Schedule an appointment with the loan officer, and actually sit down with them. Ask them what kind of loan programs they have for rental property loans. Ask them the rental property loan amounts they typically lend on, the current interest rates, the term, and any other information. Have the same conversation with three or four other lenders in your area, and be sure to mix it up between banks, credit unions, and mortgage companies. Once you have the basics from each company, pick one and get pre-qualified.
Step #2: Pre-Approval
Getting pre-qualified means getting a conditional “yes” from the bank before you even find a deal by bringing in all your financial paperwork. In other words, the bank approves you before they even see whatever property you hope to buy. Now, of course, the deal will need to make sense to them, but getting yourself and your financials approved is the most difficult part.
Of course, it’s possible to skip the pre-approval and just bring a deal and your paperwork in, but when you’re hunting for a killer real estate deal, this pre-approval can help a lot.
Step #3: Submit the Property Information
Once you find your deal, it’s time to get the second half of your approval equation started: the approval of the property. The lender will require you to submit (or have your real estate agent submit) information about the property, most likely the P&S agreement. The lender may also want to see additional documents from you if it’s been awhile since you got pre-approved (such as updated pay stubs and bank account information).
Step #4: Loan Goes to Underwriting
When all the information has been gathered, it is sent to the lender’s underwriter, who will give the final “yes” or “no” on the loan. It’s likely that during this time, the underwriter will make you jump through numerous hoops before giving you the loan.
Step #5: Lender Issues an Appraisal
The lender will likely hire a residential real estate appraiser to give them a valuation of the property. The lender’s goal, of course, is to be secure in their investment, so they want to make sure they are not loaning more on the property than they should (and also that the property is in good enough condition for them to loan on). A typical single-family house appraisal will cost approximately $400, while a small multifamily appraisal might cost up to $1,000. If you are buying a commercial property, expect to be in for at least $4,000. This appraisal cost is not generally fronted by the lender, but you will be required to pay this before the appraiser will go out.
This, of course, is to protect the lender from spending money on an appraiser and then having the loan not go through.
Step #6: Loan Goes Back to Underwriting
After the appraisal is complete, the underwriter once again reviews all the documents for the property, including the information just obtained in the appraisal, and decides whether or not they want to take the risk of lending to you. They may, once again, ask for you to jump through certain hoops. For example, I once had an appraiser require that the gutter down-spouts on a property have “splash blocks” installed before they would issue a “yes” on the loan. They also, again, may want to see more pay stubs or other financials from you. Just get them what they need, and do it as quickly as possible. The biggest delay in the underwriting process is usually the borrower needing to get paperwork to the lender, so don’t be a clog in your own pipe! Ultimately, underwriting will either approve or deny the loan.
Step #7: Loan Closes
If the loan is approved, the bank will let you or your real estate agent know. The title company or attorney will also be informed, and closing will take place soon after. At the closing table (typically at your title company or attorney’s office), you will bring a check for the down payment, and your lender will wire over the funds for the purchase. The title company or attorney will take care of the paperwork, and you’ll be the owner of a new property.
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