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mini-perm loans

How Important is a Good Credit Score For Real Estate Investors?

September 25, 2019 by Team RE Mentor 1 Comment

Your credit score can have a lasting impact on your ability to invest and get a mortgage.

Not only can it change a loan from being approved to being denied, but it can affect other aspects like interest and insurance rates, among others. You’ll want to make sure your credit score is good enough to allow you to take advantage of the real estate market. So, how important is your credit score when you’re looking to buy real estate?

A low credit score will impact the cost of your loan because it represents the level of risk to a mortgage lender.

A high score indicates that you pay your bills on time and will be able to repay your mortgage; a low score, on the other hand, means that you could be a potential risk to a lender. To compensate for the extra risk, lenders will increase your interest rates to protect themselves. Therefore, the higher your credit score, the lower your interest rates. But what should your ideal score be?

The short answer is that, ideally, your credit score should be above 740 and your total debt payments, including your future mortgage payments, should not exceed 43% of your gross income. The primary benefit of a higher credit score is that you’ll pay less interest. Forbes illustrates that the difference between a 3.5% and a 4.5% interest rate on a 30-year $250,000 mortgage is over $50,000 in interest.

The importance of a good credit score is illustrated by other benefits, like better credit card terms, higher credit limits, and lower insurance premiums.

Another important factor for home buyers is homeowners insurance. The insurance premiums you pay once you purchase a home will be greatly affected by your credit score. Unlike your regular credit score, your credit-based insurance score isn’t publicly available. To evaluate your risk factor, insurers use your credit report for many of the same things as traditional lenders. FICO estimates that 85% of home insurers throughout the United States use insurance scores to determine monthly premiums in states that allow it. The reason for this is that the Federal Trade Commission determined that these scores accurately predict risk, or the likelihood of filing a claim, to underwriters. What, then, can you do to improve your credit score?

Your credit score calculation is a bit complex. Some of the factors considered are your loan repayment history, the total balances on your accounts, how long those accounts have been operating, and the number of times you’ve applied for credit in the past 12 months. The best way to keep a high credit score high is to pay your bills on time, every time. Additionally, you’ll need to pay your existing debts, like credit card balances and other loans, and avoid opening new accounts, credit cards, or loans.

Content written for RE Mentor

By C. Mendoza

Filed Under: Article, credit scores, educational article, mini-perm loans, real estate investing Tagged With: Article, real estate

Rolling Into A Mini-Perm And We Don’t Mean a Haircut – This is A Must Know For Real Estate Investors!!!

August 7, 2019 by Team RE Mentor Leave a Comment

mini-perm loan

Mini-perm financing is short-term financing typically used to pay off income-producing construction. Or commercial or multi-family properties, usually payable in three to five years. In this case, "perm" is short for "permanent", alluding to permanent financing.

Commercial properties often cannot qualify for long-term, permanent financing until they've established operating histories.

Mini-perm loans, therefore, are used to pay off the construction loans. And bridge the gap until the property can qualify for permanent financing.

During the last year it seemed as though mini-perm financing has tended to be more prevalent in some parts of the United States.

Generally, mini-perm loan financing is used to pay off construction or commercial property loans. Either at the beginning of a particular project or investment. Once a project is producing income, the borrower can begin to look for a more long-term financing solution.

The loan carries a balloon payment at the end of the term. With the anticipation that the loan can then be easily refinanced due to the fact that the property now has an operating history on which to successfully obtain permanent financing.

Listen to Eric Stewart from Atlantic Capital Group describe bridge loans to mini-perms as featured on Real Insights Podcast

There are two types of mini-perm financing available, namely:

  • hard mini-perm; and
  • soft mini perm.

A hard mini perm is a project finance structure where legal maturity is set typically around 7 years. Forcing the borrower to refinance before maturity or face default.

A soft mini-perm is a structure without this default risk. Where the loan maturity remains long-term but whereby increasing incentives are in place to encourage the borrower to refinance.

Advantages of the hard mini-perm include the obligation on the borrower to refinance. Refinancing would be at prevailing market rates, and the fact that funders will be able to price on a short-term basis which also allows the repayment of their upfront fees over a shorter period.

Risks

The main disadvantage is of course the introduction of default risk potential for all parties (funders, borrower and Government).

Upon default, the funders may lose control to an administrator and have to allocate more capital to the project. In contrast, a soft mini perm sets out the contractual remedies available to funders and no additional capital is required. Unsurprisingly, the soft mini-perm is the structure more favored by the market generally.

Long-term funding is still available in the banking market.

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Filed Under: Article, mini-perm loans, multifamily investing, real estate, spotify Tagged With: Article, banking, loans, mini-perm loans, real estate, rementor, small business

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