Are you thinking of investing in real estate in New Jersey? Getting your finances in order is the first step. Even if you see an amazing property you want to snatch up right away, it's essential to take these steps to ensure you're fully prepared. Otherwise, you could be dealing with some major headaches in the future.
1. Figure Out How You Want to Finance Your Investment
Unless you're going to purchase New Jersey real estate with cash, you need to figure out a financing plan.
Traditional financing might be the best choice for your first real estate investment! That said, you will still need a good credit score, strong income, consistent employment records (lenders usually like to see that you've worked at the same place for two years), and a sizable down payment.
Determine how much you can afford to finance based on current expenses and cash you have on hand for any necessary upgrades or renovations. Pretend like this isn't an investment and make sure you could afford the property even if you don't have a tenant paying the rent.
Even if you choose to finance the traditional way, you'll still need a lot of cash on hand for the down payment, closing costs, and any other renovations needed. The more cash you have, the stronger the chance you have to make a good deal.
2. Know Your Credit Score & Keep It Healthy
Obtain a free copy of your credit report through one of the credit bureaus. You can do this easily online using a tool such as NerdWallet.
Also, most banks offer a free credit score report and a FICO report (which is the score that more closely resembles what lenders use) — see if this is included with your banking services.
Once you have your credit report, scan it for any negative marks, late payments, and errors. Dispute any errors you see and work to get anything negative removed or fixed.
Also, if you're in the process of financing a home or expecting to within the next three to six months, here are a few tips to keep your credit in good shape:
Don't open any new lines of credit, including credit cards and auto loans. Even if you know you have enough income to pay for it, a hard credit inquiry will temporarily lower your credit score and affect the mortgage rate you qualify for.
Cancel credit accounts or close credit cards. When a lender looks at your credit, they're examining all of your current available credit. If you close an old credit card with a $10,000 limit, that automatically affects your total available credit and overall credit utilization (how much credit you're using versus what's available), which could temporarily drop your credit score.
Rack up credit card debt. Sure, you might be excited to furnish your new investment property. However, wait until after you've closed on a home to rack up a huge bill on a store credit card. Even if you're going to pay it off quickly, it's important to only continue spending what you normally do with credit cards.
Lower credit limits. You might think that lowering your credit limits can help qualify you for a larger mortgage, but that's not the case. Lowering your credit limits can actually work against you, as it decreases your total available credit and can affect your credit utilization.
3. Get Pre-Approved for a Mortgage
Getting pre-approved for a mortgage is one of the most important things you can do before purchasing real estate, even if it's an investment property. Not to mention, it's an easy way to reduce stress when buying a home because you'll know exactly what you qualify for so you aren't shopping out of your range.
A mortgage pre-approval tells you the purchase price you're approved for, the current interest rate, an estimated cost for your monthly mortgage payment, and an estimate of how much cash you'll need to pay for the down payment and closing costs.
To get pre-approved, you'll need quite a few documents:
Proof of income - this includes paystubs, W2s, or 1099s depending on your employment situation
Personal identification - two forms of ID, such as a driver's license and passport, as well as your social security number
Bank statements - you typically need a few months of bank statements
A total of your debt payments - make a list of all of your monthly debt payments including car loans, student loans, credit card payments, and other property loans
While a pre-approval analyzes your current financial picture, you will not have a hard credit inquiry unless you actually follow through with the loan application.
While the pre-approval process can be lengthy, it's a crucial step of financing any property. The good thing is that you'll know exactly what you qualify for, and your lender can usually even lock in the interest rate you received during the pre-approval process!
4. Don't Forget to Shop Around
Shop around for lenders and get a few different pre-approvals to try and get the best offer. Oftentimes, if you take one pre-approval to another lender, they'll try to give you a better rate to win your business.
Even if another lender is offering an interest rate that's just 0.5% lower, it can end up saving you tens of thousands of dollars over the life of the loan.
Check with banks you don't currently do business with, as they might be more competitive with their offers in an effort to win a new customer.
5. Have a Reserve of Liquid Funds
Investment properties require a lot of cash. Even if you're going to finance the property, liquid funds are crucial for a few things:
Down payment and closing costs
Repairs and renovations
Furniture if you're going to make the home a vacation rental
To cover cash flow if the property doesn't have a tenant
Looking for Investment Property in New Jersey?
Whether you're interested in purchasing an investment home or commercial real estate, our experienced team of real estate agents is here to help! We've worked with local clients for over 25 years and know how to find a property that will be a profitable business venture.
Contact us today for a FREE consultation!
