As counterpoint to my last entry, which focused more on high-level aspects of real estate investing, here are some immediate actions you can take to start learning by doing:
Know the difference between your credit report and credit score.
A credit report typically comes from one of the three large reporting agencies and lists out the various accounts you have now or have had in the past. The report also records how well you’ve kept up on your commitments to paying your debt.
On the other hand, a credit score is a proprietary score calculated by FairIsaac. Also known as a FICO score, this score is a number that is calculated for each or your credit reports and it represents your risk of non-payment. A subtle distinction that I’ll make here is that it does not represent your ability to repay a loan. The banks use your credit score, income, and existing debt service(the amount of money you are committed to paying each month) to determine the size of the loan they are willing to give you.
Banks use your FICO scores to determine your risk of non-payment, which allows them to determine your interest rate. The higher your FICO score, the lower your risk, and therefore, the lower the return the bank is willing to take on your loan. So, a higher FICO score translates into a lower interest rate for a given type of loan.
If your credit score is not yet above 700, take steps to get it there.
Find a lender
Like most people, I don’t have rich friends and relatives looking to deploy their cash into personal loans, so I try to always use a direct lender or correspondent lender. These lenders typically have the best rates and the lowest closing costs. Check quoted mortgage rates against a site like BankRate to see if you are getting a good deal.
Call some friends that own real estate and have them give you the name and number of the lender they used(assuming they had a good experience). Call a major bank in the area and speak with them about getting a mortgage. If you can, find a specific person at a local firm who you can always call directly. Ask whomever you call at smaller firms if they are a direct or correspondent lender. You’ll get some weird answers but search for the “yes, we are a correspondent lender with BankX” or “yes, we are a direct lender”.
Your lender representative is a key team member, so make sure you have someone you like and who is honest and direct. Keep in mind that you won’t really know if you like them until after your closing. A good lender representative pays attention to their clients through closing, and makes sure the deal happens. Be open and honest with your lender, you don’t want surprises three days before closing. Triple check everything your lender sends you.
Begin developing a relationship with a Realtor
Real estate is a local business, and Realtor’s are the eyes and ears of investors who aren’t investing full-time, so it is important to establish a strong relationship with a Realtor in an area where you believe you will be investing. Specifically, you want to develop a relationship with a Buyer’s Agent. Most regions have buyer’s agency these days, and although some may not, if a Realtor tells you that their state doesn’t have buyer’s agency, check on that by calling other agencies and asking them. Buyer’s agency is a wonderfully positive trend that has taken root over the past 10 years, so some agents may not be familiar with it. You usually don’t want to work with anyone unless they are working for you, so you want a Buyer’s Agent.
I don’t recommend signing any type of buyer’s agency contract, and in my opinion a good buyer’s agent won’t ask you to.
Your agent is a very important member of your investment team, so make sure they are both competent and that you like them. Check out their firm’s website, read about their background, and chat with them on the phone. Select a few Realtors to meet in person next week sometime, and chat with them about what you are looking for.
Find a Lawyer
You’ll need to have a good real estate lawyer selected to handle the closing. Referrals are a good way to go here. Again, you won’t really know if they are good until you’ve done a closing with them, but definitely visit their office before you select them.
Now get going!
Phew! We’re just hitting the tip of the iceberg here, but you’ve got plenty to do. Here are two things that you can do now that will take you less than an hour:
- Order your credit report (howto)
- Call three lenders and ask them about their rates.
- Let one lender prequalify you and tell you your credit score.
