Unless you already have significant wealth, it is almost certain that you will need to take out a loan/mortgage in order to buy an investment property. Most people agree that being in too much debt is not a good thing, however if you are borrowing to purchase an appreciating asset (such as a house) then the borrowing can help propel you to increased wealth.
Borrowing to buy an investment property means you can start off with a little of your own money and a lot of someone else’s money and secure a growth asset for your future. The downside to using the bank’s money is that they will charge you interest and they retain the power to sell off (foreclose) the property if you are not meeting the repayments.
It’s like the equivalent of taking a baseball bat to your kneecaps So it’s a good idea to know what obligations you have to the lender.
What Do I Need to Qualify for a Mortgage?
The number one most important thing you need to get a mortgage is a regular income. This could be from a job or business or other investments. The lending institution will assign a risk factor to you depending on the reliability of the income source you provide. In general, full time and permanent employment is seen as lower risk where as self-employed and business owners may be treated as a higher risk.
So get all your income and bank statements together for the last 6 months in preparation for your application. Be ready to prove to the bank that you are easily capable of making the monthly repayments.
Equally as important as the income to service the loan is the property that the loan will be secured against. When we start talking about loans in the hundreds of thousands of dollars, it will always be a requirement to have a security or collateral to back up the loan.
You could think of this like handing over your gold wristwatch to the local pawn broker in order to get a short term cash loan. The pawn broker is going to sell off your watch if they don’t get their money back in the agreed time period.
So an important thing to consider when making an offer on a property is not to pay over market value. If the amount you agree to buy the property for is higher than what the bank values it at, you will have to make up the shortfall yourself with more cash or else the bank won’t lend the money to you.
Some other things to think about are should I “use a fixed or variable rate” and should I “use principal and interst or interest only” on my loan.
Should I Use a Mortgage Broker?
A mortgage broker is an independent entity that does not work for any bank but who knows the bank’s loan products very well. A good mortgage broker should be able to recommend the best loan for your circumstance and also get you the best interest rate.
It is a good idea to use a mortgage broker to find a suitable loan product, but try to get a recommendation for a good one because if you get a lazy broker, it can make the whole application process worse than dealing with the bank directly.
Overall, going through the mortgage approval process can be a daunting task, but if you try to understand what the bank looks for in their applicants, it will make the process go a lot smoother.
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