Investors commonly lock-in a private money loan for a real estate project with the end-goal of acquiring an optimally-priced asset, making needed renovations and then quickly cashing out for profit. This exit strategy approach sounds like a fairly simple process, but there are certain scenarios where it can be challenging to refinance the loan—which can make borrowers feel like they are trapped in a less-than-ideal situation. For investors planning to refinance a private loan, here is a quick overview of some proactive things you can do beforehand to mitigate risk and avoid any potential complications down the road.
Rehab the Property
Conventional financing institutions like banks and credit unions impose specific criteria pertaining to the general condition of the asset that must be met before they offer funding. If you bought a run-down property with the goal of re-selling it, you have to first rehab the property prior to submitting for a refinance. That means ensuring that the structure is secure and safe for occupants. You should also obtain a certificate of occupancy and avoid any building code violations to maximize your chances of successfully refinancing.
Cater to Tenants
For investors focused on commercial property assets, it is important to earmark your funds towards improvements that will attract the quality of tenants that you want long-term. For instance, for an investor looking to draw in corporate tenants into an office building, you could install walled office spaces, add a conference room and kitchen space, and upgrade the flooring. The vast majority of traditional mortgage providers will refuse to fund unoccupied commercial buildings, so you should try to rent the property out fully prior to applying for a conventional loan.
Bump Up Your Credit Score
Most banks require a minimum credit score of 620 in order to obtain financing. If you aren’t quite at this benchmark, work to improve your score so you can successfully qualify for a refinance loan. You can do this in a number of ways, to include:
- Obtaining a free credit report to analyze what areas you need to concentrate on
- Pay all of your outstanding debt installments on time
- Reduce all credit card balances under 30 percent—with the goal of getting that mark under 10%
- Request a credit limit increase to decrease your collective balance percentage
- Do not apply for new credit unless absolutely necessary as the inquiries from potential creditors can negatively impact your score
- Maintain old credit cards, even if you are not actively utilizing them
- Look into ways to consolidate debt
- Actively monitor your credit score on a regular basis to determine what practices are most effective in improving your status
Get Your Taxes In
Banks make their lending determinations based on the data from your previous tax returns, so you need to make sure that all of your tax documents are in order and updated. You may have to request any missing forms from the IRS or a previous employer in order to make sure that your record is complete so there are no delays in the refinance application process. If the expense of amending your taxes to rectify any oversights is not overwhelming, it may be worth pursuing in order to improve your debt-to-income ratio.
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F.E. Forbes has been assisting real estate investors maximize their profitability and build sustainable businesses for over 100 years. Our experienced team of professionals has a proven track record of success when it comes to delivering innovative and effective financing solutions for a broad range of investment projects. Contact us today to learn more about how we can assist you in achieving your investment goals!