Why Borrowers Pay Different Rates

Lenders, like any business, have to make a profit.  The cost of acquiring the funds, the operating costs to service and the expected profit margin are easily identified.  The variable in pricing is the type of mortgage and the credit worthiness of the borrower.
A loan with a 3.5% down payment is riskier than a loan with 20% down payment.  If the lender has to take the property back to recover their expense, the margin is greater between what is owed and what the property is worth on an 80% mortgage.
Credit scoring is a risk-based pricing method that allows a lender to be competitive in the market for the best loans from different borrower groups.  Individual lenders set their own levels for what they consider “A” credit which is reserved for the best rates.  If good credit is approximately 710 to 740, scores below that are considered higher risk and will have higher rates.
Risk must be assessed for both the borrower and the property that collateralizes the loan.  The borrower’s credit history and income stability are strongly evaluated by the lender but if a default should occur, the property must secure the loan to avoid a loss to the lender.

The challenge for some buyers is they are unaware of what their credit score is and how it will affect the interest rate offered by the lender.  It is to the buyer’s advantage to be pre-approved by a reputable lender prior to starting the process of looking for a home.  In some cases, the lender can actually improve the borrower’s credit score to help them qualify for a lower interest rate.
Contact me for a recommendation of a trusted mortgage professional - Paige@RealEstatePaige.com

The Rules

The profit potential in single family homes for investment has been a consistently good long-term investment. They offer investors the opportunity of high loan-to-value mortgages at fixed interest rates for 30 years on appreciating assets, tax advantages and reasonable control that other investments don’t offer.
Last year, Warren Buffett said that if he had a way of buying a couple hundred thousand single-family homes, he would load up on them. Blackstone group L.P. (BX) has now purchased over 30,000 homes and American Homes 4 Rent (AMH) has more than 19,000 for rental purposes.
Individual investors actually have an advantage over the institutional investor but if they are not familiar with rental real estate, some basic rules could be very helpful.

1. Invest now to get more in the future.
   Whether it is time, effort or money, the prudent investor is willing to forego immediate gratification for something more at a later date.
2. Real estate is an IDEAL investment.
   IDEAL is an acronym that stands for income, depreciation, equity build-up, appreciation and leverage. 
3. Invest in single family homes in predominantly owner-occupied neighborhoods at or below average price range.
   This strategy should involve homes that will increase in value, rent well and appeal to an owner-occupant in the future who will pay a higher price than an investor.
4. Location, location, location.
   The same homes in different areas will not behave the same. You can improve the condition, modify the terms or adjust the price but the location can’t be changed.
5. Understand your strategy – buy and sell, buy and hold or buy, rent and hold.
   These three distinct strategies involve big differences in acquisition, management and taxation.
6. Know where your profit is coming from before you invest.
   The four contributors to profit are cash flow, appreciation, amortization and tax savings. They don’t contribute equally or the same in all investments.
7. Profit starts with purchase.
   Buying the property below market value builds profit into the investment initially.
8. Risk is directly proportionate to the reward involved.
   An investment that has a high degree of upside also will have considerable downside possible.
9. Avoid functional obsolescence unless you have a plan before you buy.
   The lack of usefulness or desirability of a home that exists when you buy it will still be there when you sell it. Unless it can be cured, it will affect future profit.
10. Good property + good tenant + good management = great investment.
    These are three solid components for a successful investment.
11. Problems left unresolved have a tendency to get worse.
    It is generally cheaper in time or money to fix a problem earlier rather than later.

If you’d like more information about the opportunities in our market, contact me.