Mortgage brokers or lenders are one of the most important members of your real estate investing dream team when buying your first investment property.
They play a crucial role in helping you secure financing for your deal.
What Do They Do?
A mortgage broker or lender’s main job is to connect you with financing that suits your investment strategy and financial situation.
Mortgage brokers work as intermediaries between you and a variety of potential lenders, helping you shop around for the best loan terms, including interest rates, down payments, and loan types.
Lenders, on the other hand, are institutions (like banks or credit unions) that provide the actual loan themselves.
Here’s what a mortgage broker or lender typically handles:
- Evaluating Your Financial Situation – They will review your credit score, income, debt-to-income ratio, and other factors to determine your eligibility for a loan.
- Presenting Loan Options – Brokers present multiple loan options from various lenders, while lenders present the loan options they offer directly.
- Securing Pre-Approval – They can help you get pre-approved for a mortgage, which strengthens your offers when you make offers on properties.
- Coordinating with the Appraiser – Once you’re under contract, the lender selects and coordinates with the appraiser to determine the property’s value.
- Finalizing Loan Terms – They help lock in your interest rate and loan terms, so you know what to expect at closing.
- Overseeing the Loan Process – Brokers and lenders guide you through the loan process from pre-approval to closing, ensuring all paperwork is in order and you meet deadlines.
In addition, your mortgage broker can provide information about buying down your mortgage interest rate, which is an important tool for real estate investors to improve cash flow.
By paying points upfront, you can lower your monthly payments, which might improve your cash flow. A good broker can help you run the numbers, comparing different options to see whether buying down your rate will save you money in the long run and if it aligns with your investment strategy.
See the bonus chapter on how to improve cash flow on your rental property at the end of this book for more information.
When Do You Involve Them?
You’ll want to bring your mortgage broker or lender into the picture as soon as you start seriously considering buying your first investment property.
Ideally, this happens before you start making offers. Early involvement helps you understand your budget, the loan options available to you, and allows you to secure pre-approval. Having pre-approval is especially important in competitive markets where sellers favor buyers who already have their financing lined up.
You will work closely with your broker or lender throughout the transaction, from pre-approval to closing.
They will keep you updated on your loan’s status, and help you gather and submit required documents, like bank statements, tax returns, and pay stubs.
Why Are They Important?
The terms of your loan—especially the interest rate, down payment, and fees—directly impact your cash flow, the overall profitability of the investment, and your long-term ability to scale your portfolio.
A good mortgage broker or lender will help you get the best possible terms for your financial situation and investment goals, saving you money in both the short and long term. And, they’ll help ensure your financing plan aligns with your real estate investing goals and plan to be financially independent.
Here’s why they are so critical:
- Access to Loan Products – A mortgage broker can offer a wider range of loan products than a single lender, which is helpful if you’re looking for something specific for a particular strategy or situation.
- Knowledge of Investor-Specific Loans – They can also guide you through investor-specific loan products, like loans for multi-family properties, BRRRR, flipping, house hacking, Nomad™ or loans tailored to those looking to scale quickly.
- Pre-Approval Advantage – A pre-approval letter makes you more competitive in the eyes of sellers, which is especially important in hot real estate markets.
Mortgage brokers don’t just help you buy properties—they can also help you optimize financing after you own your rental portfolio.
If you decide to refinance to pull cash out for additional investments, or if interest rates drop and it makes sense to reduce your monthly payments, your mortgage broker can guide you through a cash-out refinance or a rate-and-term refinance.
They can help you compare options and decide which route will best serve your goals as a real estate investor.
Other Items of Note
- Appraisers – As mentioned, your lender will select an appraiser to assess the property’s value. You’ll typically pay for the appraisal either upfront or as a line item on the closing statement.
- Loan Fees – Be aware of the various fees associated with your loan, including origination fees, appraisal fees, and closing costs. Your mortgage broker or lender should provide a loan estimate early in the process, which will break down all these costs. We cover comparing mortgages and lenders in detail in Financing Real Estate Investments: The Best Real Estate Investment Book Volume 4.
- Working with Investors – Not all mortgage brokers and lenders are familiar with the needs of real estate investors. Make sure you’re working with someone who understands investor-specific concerns, such as ensuring cash flow on rental properties and knowing the different lending guidelines for investment properties compared to primary residences.
Mortgage Brokers Can Help You Find These Loans
When you’re investing in real estate, the right mortgage broker can be an invaluable resource. They have access to a variety of loan products and can help match you with the best financing options based on your situation. Some of the most common ways to finance rental properties are:
- Conventional Financing – Conventional loans follow Fannie Mae and Freddie Mac guidelines and are widely used by investors. You typically need a 20% down payment for investment properties, and these loans offer competitive rates, though they have stricter qualifications.
- FHA Loans – FHA loans are government-backed and designed for owner-occupants, but you can use them for small multi-family properties if you live in one of the units. They require as little as 3.5% down, but mortgage insurance applies if your down payment is under 10%.
- VA Loans – Available to veterans and active-duty military, VA loans offer 100% financing, which means no down payment. You can use these for multi-family properties, as long as you live in one of the units, and there’s no private mortgage insurance (PMI).
- USDA Loans – USDA loans are a zero-down payment option for homes in eligible rural areas. Although typically for owner-occupants, Nomad™ investors who start by living in the property can also use them. Income limits apply, and the home must be in a rural area.
- Portfolio Loans – Portfolio loans come from smaller banks or credit unions and stay on the lender’s books, which allows for more flexible terms. These loans are great if you’ve maxed out conventional loans or need custom terms for unique properties.
- Private Money Loans – Private money loans are from individuals, often friends or family. They offer flexibility in terms and rates but depend heavily on personal relationships.
- Hard Money Loans – Hard money loans are short-term, high-interest loans used for fix-and-flip projects. Lenders focus on the property’s value, not your credit, and these loans can close quickly, making them ideal for short-term projects.
- Lines of Credit – A line of credit, like a Home Equity Line of Credit (HELOC), lets you borrow against your property’s equity. It’s a revolving credit line that can be used for property improvements or even as a down payment on your next property.
- Commercial Financing – Commercial loans are used for larger properties, usually five or more units. These loans focus on the property’s income potential rather than your personal financials, with larger down payments and different standards than residential loans.
- Creative Financing – Creative financing includes options like owner financing, subject-to deals, or lease options. These methods allow for flexibility, often with little or no money down, but can be complex and require careful negotiation.
Each of these options offers distinct advantages depending on your strategy, and a mortgage broker can help you navigate the complexities of each one.