Once you’ve identified a property to purchase, you need to start thinking about financing. If you are looking at single-family homes or properties with four units or less, a good local lender may be your best choice. Banks are generally good as well, but they often tend to offer shorter term loans and or higher interest rates on investment properties. If you have a fairly typical property in an area with banks nearby, make a simple phone call to see what they have to offer.
In my situation when I purchased my first investment property in Las Vegas, I used a mortgage broker which was extremely helpful. Mortgage brokers generally charge 1% of the loan amount to help locate a quality funding source for you. My new mortgage broker charged a $500 fee upfront and then worked on getting a point or two on the back-end with whichever lending house or bank he ended up working with.
Now most mortgage brokers are there to help you but I must warn you – from past experience – not all brokers are going to be honest. Mortgage brokers are your typical salesperson with specific incentives to make more money. They may charge you a small fee upfront but not necessarily find the best loan program for you.
For example, say there were two banks that your broker was deciding between for your loan program. The first bank offered a 6.5% 30 year fixed loan with a bonus of $5,000 for the broker. The second Bank offered a 6.25% 30 year fixed loan with no bonus. Which of the two do you think you’re mortgage broker will offer you?
The best solution is to find a broker that is recommended to you by a friend or family member. Somebody that you can trust and not have to question their loan programs. Regardless, if I were you I would still ask to see the details and specifics on each loan program available for you. These mortgage brokers are legally required to show you all commissions or monies going in or out of the deal. They of course are not going to offer this to you upfront but it’s there if you wish to ask for it.
Despite my bad experience with one broker doesn’t mean the majority of them are evil. It’s just that one or two that gives them a bad name. Overall I highly recommend using a trusted and well established mortgage broker versus trying to work with a bank or lending house directly. They basically do all the leg work for a small fee and have access to numerous sources of information as to which loan program would be the best for your situation.