You’ve found your dream property, and you’re ready to pull the trigger on adding a new multifamily residence to your real estate portfolio. It may seem like the hard work is behind you, but if you aren’t careful, you could sabotage your own chance of being approved for a loan with just a few simple mistakes.
Here are five common mistakes to avoid when applying for a multifamily loan.
1. Lack of research
In any type of investment, research is paramount. You’ve done the research to find the perfect property, but now you need to do the research to find the perfect loan. A lack of research into these three key areas can get you stuck with a loan that may have harsher terms and higher interest rates than you could have secured by completing your due diligence.
Who is lending?
Find out what organizations are offering multifamily homes. The more options you find, the more likely you are to secure the best loan possible for your needs.
What loans are out there?
Not all loans are created equally. They all have different terms that dictate the length of the loan, your monthly payments, down payment amount, and interest rate. Search for the best deal you’re able to find.
What do I need to qualify?
A loan may have the greatest rates in town, but if you don’t qualify, it doesn’t matter. That’s why it’s important to find out the specific lending criteria for each loan option before making a decision.
2. Not knowing how much money you need
Before walking into any lending institution, you need to do a detailed calculation of how much money you actually need to secure the property. Find the sweet spot where you’ll have enough money to purchase and make any desired improvements to the property, without risking monthly payments that are too high and could lead to you defaulting on your loan.
It’s important to really get specific and realistic about this amount before requesting a loan – it could be the thing that makes or breaks your new investment.
3. Failing to prepare financial documents
No financial institution is going to issue a loan without sound proof of the loan-seeker’s finances, and financial history. When you are ready to start shopping around for a loan, first make sure your financial documents are up to date, in order, and all in one place.
This includes your credit score, tax returns, and bank statements, as well as your calculated debt-service-coverage-ratio. Without this information, your loan application may be delayed, or worse, denied.
4. Weak Business Plan
Your business plan is one of the most important parts of your loan application. Lenders need to feel confident that you not only have the financial history to support a loan, but they also need to see your vision for the property you’re looking to purchase, and if and how it will be profitable enough to cover future loan payments.
A good business plan should be comprehensive and specific. It must include all of the details and facts about the property for which you’re seeking a loan. It also must include the income forecasts you have calculated – or the amount of money you anticipate your property generating on a monthly basis. Finally, you should include information about your long-term vision for the property. Lenders want to know that you aren’t impulse buying without a plan for the future. A building owner with a plan instills confidence that the property will continue to be profitable not just for the time being, but in the future, as well.
5. Not Meeting Requirements
You can do all the research in the world, and find the best possible loan, but none of it matters if you don’t meet the requirements to secure it. Before applying for a loan, check the minimum credit score requirement and make sure you have it. Find out whether the lender requires the buyer to have previous experience managing multifamily properties – this can be a barrier to entry for first-time investors. It’s also important to calculate your debt-to-income ratio and ensure that it meets the lender’s requirements.
If you apply for a loan without first making sure you qualify, you will likely be denied, meaning all of your hard work was for nothing, and you must start over with a new lender or a new loan.
Start Off on the Right Track
Applying for a multifamily loan, especially if it’s your first time going through the process, can seem daunting. But in reality, if you put in the work to do your research, calculate how much capital you need, have all of your documents in order, and present a strong business plan to a lender and loan for which you qualify, the process can be painless, and even exciting.