Using a Mortgage Broker for your Investment Property Purchase
12 min read
When buying a real estate investment, it’s smart to use leverage and finance a portion of your purchase. Using finance allows investors to expand their real estate portfolio faster, benefit from appreciation, and build a portfolio with stronger cash flow.
Because of the importance of leverage and good loans, mortgage brokers are vital to the real estate investment process. In this article, we discuss everything you need to know about mortgage brokers and how to get the best loan terms for your investment property mortgage.
What is a mortgage broker?
When you start your investment property journey, it’s easy to get overwhelmed by the many options and requirements involved in securing an investment property mortgage. That’s where a mortgage broker comes in – a professional who can guide you through finding and securing a mortgage that fits your needs.
A mortgage broker is a licensed professional who acts as an intermediary between borrowers and lenders. They help you find a mortgage lender and secure a loan that fits your unique financial situation. Unlike loan officers at a bank or financial institution, mortgage brokers work with various lenders, including banks, credit unions, and other financial institutions. As a result, they can help you navigate the complex process of securing a mortgage. That means that they aren’t restricted by the product offerings of a single lender.
Benefits of using a mortgage broker.
Consider a mortgage broker a professional who acts as a middleman between property buyers and lenders. Their primary role is to help investors find the right loan product by assessing their financial situation and matching them with suitable lenders. Mortgage brokers are licensed professionals who work with multiple lenders to offer homebuyers various options for their mortgage needs.
Real estate acquisitions aren’t always simple. If fact, often, they are complicated and involve moving parts or adjustments. A mortgage broker is an incredible asset when buying an investment property because they will help you secure better financing options and navigate challenging financing situations. Experienced real estate investors consider their mortgage broker a part of their real estate team, just like their investment real estate agent. Here are some of the benefits of working with a broker when getting an investment property mortgage.
Access to Multiple Lenders
One of the primary benefits of using a mortgage broker is that they have access to a network of lenders. Unlike loan officers, they aren’t restricted by the products offered by a single financial institution. Instead, mortgage brokers work with a variety of lenders, including banks, credit unions, and private lenders, which means they can offer homebuyers a range of mortgage products with different terms and rates. This access to multiple lenders can save homebuyers time and effort, as they don’t need to go to each lender individually to compare their options. Furthermore, mortgage brokers can often find financing solutions for challenging deals.
For example, suppose an investment property is being purchased with the intention of a large renovation. In that case, the borrower will likely need a mortgage to cover the purchase price and a construction loan. A mortgage broker can access the loan products for this unique structure to make this deal work.
Expertise and Knowledge
Mortgage brokers are experts in their field and have in-depth knowledge of the mortgage industry. They can help homebuyers understand the mortgage process, the various types of mortgages available, and the criteria lenders use to evaluate applicants. This expertise can be particularly helpful for first-time investors unfamiliar with the mortgage process and needing guidance on the best mortgage product for their needs. Furthermore, they can help guide investors through the requirements of an investment property mortgage.
Personalized Service
Mortgage brokers provide personalized service to their clients, taking the time to understand their financial situation and mortgage needs. As a result, they can offer advice on the best mortgage product for their clients, considering their financial goals, budget, and future plans. This personalized service can help investors make informed decisions about their financing and ensure they get a mortgage that meets their unique needs.
Negotiating Power
Mortgage brokers have negotiating power with lenders, so they can often secure better mortgage terms and rates for their clients. Brokers can leverage their relationships with lenders to negotiate better terms, such as lower interest rates or waived fees. This can result in significant savings for homebuyers over the life of their mortgage.
Convenience
Using a mortgage broker can be a convenient option for real estate investors, as brokers handle much of the paperwork and communication with lenders on their behalf. Brokers can also coordinate with other professionals involved in the purchase process, such as real estate agents and lawyers, to ensure a smooth and efficient process. When investing in real estate, time is money, and using an experienced broker will help you save time to focus on other aspects of your business.
Tips for finding a good mortgage rate.
Mortgage rates have a monumental impact on the profitability of a real estate investment. Getting the best mortgage rate today can impact the profitability of your investment for the entire life of the loan, so it’s critical that investors prepare their finances and work with experienced professionals to set their investment up for success.
Tip #1: Have good credit.
Nearly every loan product will require the investor’s credit report to be reviewed. For example, a common investment loan product known as a Debt Service Coverage Ratio (DSCR) loan (which doesn’t use the investor’s income to qualify but instead uses the property’s rental income) requires borrowers to have a minimum credit score of 640. Investors with a higher credit score will be rewarded with a lower interest rate.
Tip # 2: A sizeable down payment.
Making a larger down payment on an investment property can significantly reduce the amount of money you need to borrow, resulting in lower interest rates and better loan terms. A larger down payment also signifies to lenders that you are serious about your investment and can manage your finances responsibly.
Tip #3: Keep your DTI low.
A lower debt-to-income (DTI) will help lower your investment property mortgage rate. The DTI ratio is the total amount of debt you have compared to your gross income, and having a low DTI can help you qualify for better loan terms. Lowering your DTI involves reducing the debt you owe or increasing your income.
Tip #4: A lower LTV.
A lower loan-to-value (LTV) ratio can also help you get a better mortgage rate. LTV is the ratio between the amount of money borrowed and the appraised value of the property, and lenders prefer to lend to those with lower LTV ratios because it reduces their risk.
Tip #5: Strategically choose your loan term.
One way to get a lower interest rate is to opt for a shorter-term loan. For example, a 15-year loan will almost always have a lower interest rate than a 30-year loan. However, if you’re confident that you can pay off your loan in 15 years, it could be worth it to get a 30-year loan with a higher interest rate so long as the early payoff fee isn’t too high. Paying down a 30-year loan faster can actually mean that you spend less on interest than on a shorter-term loan because the interest is only charged on the principal. Often, a lower
Tip #5: Shop around.
Shopping around for a mortgage is one of the most important things real estate investors can do to get the best rate. Don’t just take the first offer you receive; instead, compare rates from multiple lenders to find the best deal and save money in the long run. Instead of reaching out to several banks and credit unions on your own, engage a mortgage broker who will do the comparison for you and help you find the best deal.
Questions to ask when choosing a mortgage broker.
Not all mortgage brokers are the same. Like any professional, some specialize in specific areas while others are more qualified. Finding the right mortgage broker should be looked at as hiring the right team member. Therefore, it’s essential to ask targeted questions to ensure you’re working with someone capable of meeting your financial requirements and who has your best interests in mind. Even if you’re provided a broker based on the referral of a friend, colleague, or investment real estate agent, you still want to ask questions to ensure they are the right fit for your deal.
Here are some questions to ask when choosing a mortgage broker. Have this list close at hand when you make a call to a mortgage broker.
Question #1: What is your experience as a mortgage broker?
One of the first things you should ask a potential mortgage broker is how long they’ve been in the industry and what their experience level is. You want to work with someone with a solid track record of success and who knows the ins and outs of the mortgage process. While many years of experience doesn’t guarantee that they are great at their job, it’s a strong indicator of their abilities. Furthermore, experienced mortgage brokers have navigated financing in several different economic environments, which is particularly important when financial conditions are changing rapidly.
Experienced mortgage brokers can give you insight into what happened during previous high interest rate environments. As a result, they are more capable of offering guidance on how to structure your finances to get the best interest rate.
Question #2: Do you have any other real estate experience outside of finance?
Many mortgage brokers have different experiences outside of mortgage lending, such as real estate investing or sales, which you can leverage in your search for the best investment purchase and investment property mortgage.
Question #3: How many lenders do you work with?
A single mortgage broker doesn’t necessarily work with all lenders that service your area. The more lenders a mortgage broker works with, the more options you’ll have when finding the best loan for your needs. Ask the broker how many lenders they work with and what types of loans each lender offers.
Question # 4: How do you get paid?
Mortgage brokers make money by charging a commission on the loans they facilitate. Most mortgage brokers are typically paid on a commission basis, meaning they earn a percentage of the total mortgage amount they help secure. The commission rate can vary from broker to broker, but it usually falls between 1% and 2% of the total mortgage amount. For example, if a mortgage broker helps a homebuyer secure a $300,000 mortgage with a commission rate of 1.5%, the broker would earn a $4,500 commission. This commission is paid by the lender and is usually included in the overall cost of the mortgage.
In addition to commission-based payment, some mortgage brokers may charge upfront fees for their services. These fees can vary widely and may include an application fee, processing fee, or other administrative costs. Homebuyers should be wary of brokers who charge high upfront fees, as this can be a sign of an unscrupulous broker. However, many reputable mortgage brokers do charge upfront fees, but they will often be much lower than the overall commission they earn. This is because the upfront fees are meant to cover the broker’s administrative costs, such as credit reports and processing fees, and not to generate profit.
Question #5: Do you have any preferred lenders you work with?
Mortgage brokers build relationships with lenders over time, which can be valuable for both parties. Lenders often rely on mortgage brokers to bring them business, and they may offer brokers special incentives to encourage them to recommend their products to homebuyers. These incentives can include higher commission rates or exclusive mortgage products that are unavailable to the general public. If the mortgage broker states that they have preferred lenders, ask them why they prefer these lenders and if they receive any additional incentives from a lender.
However, keep in mind that mortgage brokers have a fiduciary duty to act in their client’s best interests and should never recommend a lender or product based solely on the incentives they receive. So if you feel that a mortgage broker is pushing a particular lender that isn’t giving you the best loan terms, this could be a red flag.
Question #6: Can you provide references?
A reputable mortgage broker can provide you with references from satisfied clients. Ask for a few references and follow up with them to get a sense of the broker’s communication style, responsiveness, and overall level of service.
Question #6: How do you stay up to date with industry changes?
The mortgage industry is constantly evolving. There are regular regulation changes, interest rate shifts, and finance restrictions. It’s crucial to work with a broker who stays updated with the latest trends and changes so they can be your guiding force throughout the application process. Ask the broker how they stay informed and if they attend industry conferences or participate in professional organizations. You don’t just want a broker when getting an investment property mortgage; you want a finance professional who can be your industry expert.
Question #7: What is your communication style?
In a world where we communicate via text, call, email, or even social media, it’s crucial to understand how a mortgage broker will get in touch with you and make sure that it matches your preferred communication style. Clear and consistent communication is essential throughout the mortgage process. Ask the broker how they choose to communicate (e.g., phone, email, text), how often they’ll update you on your loan’s progress, and what you can expect regarding response times.
Question #8: What sets you apart from other brokers?
Finally, ask the broker what sets them apart from other brokers in the industry. A good mortgage broker should be able to articulate their unique value proposition and explain why they’re the best choice for your needs.
The importance of shopping around for the best mortgage terms.
As a real estate investor, choosing the right mortgage for your investment property is crucial, and one of the best ways of ensuring you get the best deal is by shopping around for the best mortgage terms.
Get lower mortgage rates.
A lower interest rate means more savings today and for years to come. For example, the interest rate on your mortgage will determine how much you pay over the loan’s lifetime. So, you can save thousands of dollars over time by shopping around and finding a lower rate.
Loan terms vary by lender.
Different lenders offer different loan terms, usually involving fees such as early or late payout fees. Make sure you’re getting the best terms for your investment property purchase by comparing terms from various lenders. Often, you can negotiate better terms. If you have several options, you can use them as leverage to negotiate a better deal. This could include lower interest rates, reduced closing costs, or better loan terms.
Understand the market.
Shopping around gives you a better understanding of the market. You’ll learn about the different loan products available, current interest rates, and what lenders are looking for in borrowers. With this knowledge, you can make more informed investment property and mortgage decisions.
Avoid predatory lenders.
These lenders use unethical practices to exploit borrowers, such as charging excessive fees or offering loans with hidden terms. By shopping around with a mortgage broker, you can choose a reputable lender.
How to find reputable mortgage brokers in your area.
When you start searching for a mortgage broker, you’ll find that the market is flooded with professionals who claim to be experts. So instead of just reaching out to the first business you find on Google, take a more strategic approach.
First, get referrals from your network or investment real estate agent. If you’re not working with an agent, start your search for a reputable mortgage broker by asking for referrals from your family, friends, and colleagues who have recently purchased investment properties. They can give you firsthand insight into their experience with a mortgage broker and can recommend someone they trust.
Next, check their credentials. Ensure they are licensed to operate in your state and registered with the National Mortgage Licensing System (NMLS). You can also check their record with the Better Business Bureau (BBB) and the Consumer Financial Protection Bureau (CFPB) to see if they have any complaints or disciplinary actions against them.
Lastly, talk to the mortgage broker to make sure they are the professional you want to work with for your investment property mortgage. The questions above provide an excellent outline for your initial conversation with a potential broker.
Using a mortgage broker can be an invaluable resource for real estate investors who want to get the best mortgage terms on their investment property purchases. Do your research and ask the right questions to find a reputable broker who can be a part of your investment team, help you build your real estate portfolio, and save money in the long run.
Are you just starting your investment property journey? Oak Avenue is a real estate investment agency that helps investors build their Florida property portfolios. We work with the region’s top-performing and experienced mortgage brokers who offer our investors the best financing options. Get in touch for more information on Oak Avenue or to get a list of mortgage broker referrals today.