The Four Pillars of Real Estate Lending

Real Estate Lending is based on 4 pillars:

• Income

• Reserves

• Credit

• Collateral 

Income is by far the most important factor, followed by Reserves (savings), while Collateral is not as significant. Credit sits in the middle.

Clients with a high credit score believe they should be able to get a loan at a low rate. They are surprised to know that this is not necessarily the case since they may not even qualify!

Also, I have clients who have excellent collateral, meaning their property is worth a lot, they owe next to nothing, and therefore from their perspective the bank should run to give them a loan. They are flabbergasted and upset when the bank doesn't even want to talk to them! 

Credit is important but its function is in pricing the loan (determining how much the interest rate would be) ONCE you have demonstrated to the lender that your Income and Reserves (savings) are adequate. 

Whereas Income and Reserves are not that easy to change, Credit on the other hand is relatively easy—although it may take a few months. 

However, most people don't think about it until they are in the middle of the transaction, at which point it may be too late! 

Further muddling this issue is that there are about 10 FICO formulas to calculate credit scores in addition to many others, such as for example "VantageScore v3.0." 

Websites such as Credit Karma and others use VantageScore version 3.0 to give you an indication of your score. However mortgage companies use FICO versions 2, 3 or 4. The difference between these systems can be about 50 points!

This can come as a surprise when you think your score is, for example 680, when for mortgage purposes it would be 630—barely enough to qualify!

There are a lot of misconceptions regarding credit scores. If you have the time, listen to this interview where I explain what's behind these scores.

The interview is called:

Entrepreneurship and Credit Scores

Preparation is key, and on average it takes 3 months.  Some cases have required 6 months, while others took 1 month of preparation.

What we do is run your credit report as a "soft pull"; this means it does not affect your scores and does not register as an inquiry. The report cannot be used for loan application purposes, but it gives us all the information we need to prepare, and using the tools provided by the credit vendor we can quickly formulate a plan to raise your scores in preparation for a loan application. 

If you are in this situation and would like to find out about your options, don't hesitate to reach out to me.