BiggerPockets - How to Fail At Financing a Rental Property | 7 Steps to Avoid

Short Summary

Main recommendation: Avoid seven common mistakes that cause mortgage financing for a rental property to fail, and do not treat real estate as a way to fix existing financial problems. The video frames each mistake as something to avoid if you want your loan to close, covering behavior during the application and escrow period as well as preparation before applying.

Key Points

• The promised list of 7 steps to avoid, as named in the video:
  1. Taking on new debt during the loan application without telling your loan officer, which can push your debt-to-income ratio past the maximum.
  2. Lying on the loan application or leaving out money owed or properties owned, since underwriters trace these back.
  3. Cutting corners on the application by guessing or "spitballing" figures instead of looking them up.
  4. Shopping for other lenders while already under contract, which can jeopardize the deal and cause closing-cost surprises.
  5. Having no money saved, since skipping down-payment savings and stable income usually fails on conventional loans.
  6. Making large unexplained deposits into your bank account during processing, because lenders must source and trace those funds.
  7. Negotiating seller credits larger than your actual closing costs, which lenders do not allow beyond that amount.
• Underwriters calculate your debt-to-income ratio at its maximum, so any new car loan, furniture financing, or credit line can break an otherwise approved deal.

Details Worth Noting

• Concrete instructions:
  • During the application, do not open new credit such as car loans, furniture financing, or store credit lines, and tell your loan officer about any debt you do take on.
  • Fill in every field on the loan application with accurate figures. Look up anything you do not know rather than estimating.
  • Declare all money you owe people and all properties you own.
  • Pick your lender before going under contract. Do not switch lenders mid-escrow to chase a slightly lower rate.
  • Compare total closing costs, not just the interest rate, when evaluating a lower-rate offer.
  • Save money for a down payment and keep a stable job before pursuing conventional financing.
  • If someone gives you money for the purchase, expect to document where it came from, why it was given, and how it should be declared for taxes.
  • Keep seller credits no higher than your actual closing costs.
• The speaker says creative no-money-down strategies, such as buying subject to, rarely work with conventional loans, which offer the best rates and down payment options.
• The speaker notes that lenders often trace the source of deposits under regulations that grew out of the Patriot Act to prevent money laundering.
• The speaker says some clients find ways to raise the seller credit amount legitimately, but the credit still cannot exceed actual closing costs.

Bottom Line

Mortgage approval depends on honest, stable finances and a disciplined process from application through closing, so avoiding these seven mistakes matters more than any single financing trick.