THE BORROWER’S TEN COMMANDMENTSon July 24, 2018 7:22 pm under Real Estate Investment Tips
Thinking about breaking one of the Borrower’s Ten Commandments? It’s not a good idea. You’ll find that lenders will not easily absolve you of the borrowing sins listed below. You may even find yourself in credit purgatory for several years if you have repeated transgressions. Avoid falling from your lender’s grace by devoutly following these Ten Commandments for Borrowers:
1. Thou shalt not change jobs, become self-employed, or quit your job.
Lenders want to see financial stability and reliability from their borrowers. There is no better way to demonstrate that you can make payments on a loan then by having a steady job that you’ve had for several years. While it can be tempting to leave your job as a sign of full devotion to your new passion, that is a huge mistake that will significantly decrease your financial stability and make lenders more skeptical of giving you money.
Smart borrowers keep their day jobs for the first few flips. This not only helps them get loans but also helps them put more money in their bank account so that they can finally make the conversion to full-time flipper without losing their creditworthiness.
2. Thou shalt not take out a new loan for funds to close on your RFG loan.
Closing fees and the first interest payment make up the cash that will be due at the signing table. You must be able to make these payments in cash, not with credit or a secondary loan. You can imagine that borrowing money to be able to borrow money is a terrible financial situation to be in, and we don’t want any of our borrowers to struggle with that. If you don’t have the liquid funds to cover these costs, it’s better to wait until you get your finances in a better position before moving forward with a project.
3. Thou shalt not use credit cards excessively or let current accounts fall behind.
Ideally, credit is a financial tool that helps you spread out major costs over several months of payments. Beware though, it’s easy to think of your credit line as extra cash and end up in debt. Carrying significant debt on credit cards not only hurts your credit score, it will also be a competing drain on your resources that a lender doesn’t want to see.
4. Thou shalt not spend money you have set aside for closing.
When you apply for a loan, the underwriter will review your full financial situation to make a determination if you qualify for a loan and if so, how large of one. An important factor for both closing costs and liquidity of a house flipping project is how much cash you have available. If you get approved with $15K in the bank and buy a car for $12K between the time you are approved and when the loan closes, you wont even be able to close the loan.
5. Thou shalt not omit debts or liabilities from your loan application.
Are you withholding information from your lender in hopes of getting a loan? This never works for two reasons. First, the underwriter at your lender will have full access to your credit report and history, as well as your tax returns. If you think you are hiding debts or liabilities, be prepared to be exposed. Second, keep in mind that your lender only wants you to be successful so that you can pay back a loan. Misrepresenting your financial situation can take you even further down a path of financial hardship — thats in no one’s best interest.
6. Thou shalt not use the Seller’s title company — always choose your own title company.
Would you let your opponent’s lawyer defend you in in court? No! Remember that the title documents are legally binding agreements and slight changes in responsibilities and liabilities in the verbiage can cost you time, money, and massive frustrations. For more details about why you should always use your own title company, see our full blog here.
7. Thou shalt not have any new inquiries into your credit.
Stay focused. If you are trying to get approved for a loan, do only that. Credit inquiries (sometimes called “hard pulls”) will negatively impact your credit. Not only can this prevent you from getting approval, it can also affect the interest rate your lender is willing to give you. Stay away from anything that would require a credit check, such as buying a car, furniture, or renting a new apartment. If you’ve done any of those recently, it’s probably best to wait a few months. Also, it never hurts to be upfront with your lender about these things.
8. Thou shalt not make large deposits without checking with your lender.
How can more cash be bad?! While it seems like any lender would be glad to see cash flowing into your account, when it is unaccounted for, it’s worse than if it didn’t exist. Large cash deposits could be payday loans, cash from personal loans, or some other unknown source that will require repayment under terms the lender doesn’t know about.
If you are making large cash deposits during the loan approval process, keep a clear record of where the cash is coming from. Lenders love records! If you can prove you sold a car, liquidated some jewelry, or cashed out some bonds, your lender will be thrilled to take the new cash into account.
9. Thou shalt not change bank accounts.
Most lenders will look for six months of steady bank deposits with all large deposits and withdrawals accounted for. Switching banks is the financial equivalent of destroying evidence. A brand new bank account (even with significant cash deposits) just isn’t trustworthy. Can’t prove where your cash came from? Letting cash deposits “season” for six months in the bank is a good faith demonstration that it is truly your money to use.
10. Thou shalt not co-sign a loan for anyone.
Let’s call this making a deal with the Devil. Your lender will not want to do business with you if your financial situation is tied to the financial situation of some other, unknown, third-party. They want to do business with you and you alone.
This article is based on a submission from Kip Murphy, a Loan Originator in Columbia, South Carolina. Connect with him today at www.kipforloan.com