This is the second post in my series on How to Get a Portfolio Loan for Real Estate Investing.
Before we get into the specifics (which I cover in my upcoming course). Let’s look at an overview of what you should banks are looking for.
ALL lenders that underwrite utilize the 5 C’s of Credit.
The five Cs of credit are:
Lenders want to know what kind of reputation your business has in the industry as well as with other financial institutions. The lender might pull Dun & Bradstreet reports on your company, talk to peers, and/or talk to other lending institutions.
For a personal guarantee, the lender might pull an individual guarantor’s credit report.
Lenders will generally check your credit history through various reporting bureaus such as TransUnion, Equifax and Experian.
• Your credit report is a detailed summary of your credit accounts (credit cards, auto loans, mortgages, home equity loans, etc.), balances
and credit limits and payment history.
• Your credit score (usually between 300 and 850) provides an indication of the level of risk associated with your ability to repay. Generally, the
higher the score, the lower the risk and the easier it may be for you to qualify for additional credit.
Lenders need to evaluate whether you can comfortably manage your credit card payments, lines of credit, or loans. Your past income and employment history are good indicators of your ability to repay outstanding debt. The following may be considered:
• Income Amount: Is your incomeadequate to cover the limit on yournew credit card, line of credit or loan amount? Does your income show a
pattern of decreasing or declining?
• Stability: Have your employment and income been consistent? Have you been in the same or a related field over time?
• Income Type: Does your income consist of wages, commissions or other? How frequently are you paid? Is your income seasonal? If it’s from
a source other than traditional employment, how long will it continue? Also, the ratio of your current and any new debt as compared to your before-tax income may be evaluated.
The lender will want to see how well-capitalized is your company? What is the company’s book-value, liquidity profile, and working capital conditions. Lenders will also want to see how much capital you have invested into the company and taken out of the company.
The loans, lines of credit, or credit cards you apply for may be secured or unsecured. With any secured credit product (secured credit cards, auto
loans, home equity lines/loans, home mortgages, etc.), you pledge something you own as collateral.
•Secured credit card: this would be the amount of money you deposit into a collateral savings account.
•Secured lines of credit and loans: the collateral needs to be evaluated to appraise its current value. For example, if you are interested in a
home equity product, the fair market value of your home will be evaluated and the total amount owed (the balance on your original mortgage plus any other outstanding debt secured by your home) subtracted from your home’s current value. What’s left is the equity in your home. A percentage of your home’s equity, which is referred to as combined loan-to-value (CLTV), is then determined. Lenders will lend you a portion of your home’s CLTV, depending on where you live and other factors.
Lenders may want to know how you plan to use the money and will consider the loan’s purpose. Will it be used for an auto purchase, home
improvements, education expenses, debt consolidation or a property purchase? Lenders may also look at environmental and economic conditions.
In summary, these are the 5 C’s of Credit that lenders will be evaluating when underwriting a portfolio loan, lines of credit or any type of loan. While all lending institutions have different underwriting standards. The foundation of the underwriting standards are built on the 5 C’s of Credit.
For your personal credit you can take the following steps to build your personal credit profile as a guarantor:
1. Order a free copy of your credit report
By law, you’re entitled to one free credit report every year. Once you receive the report, review it to make sure all the information is correct. Go to www.annualcreditreport.com or call toll-free 1-877-322-8228 to order your report and then monitor it regularly.
2. Challenge any incorrect or outdated information on your credit report
Contact the reporting credit bureau (Equifax, Experian or TransUnion) and advise them of an error. The bureau then must contact the creditor that reported the incorrect information. If the creditor doesn’t respond within 30 days, the bureau must remove the item and send you a corrected report. Learn more from the Federal Trade Commission (FTC) fact sheet, “Credit Repair: How to Help Yourself,” at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm
3. Take steps to avoid identity theft
When someone else uses credit in your name, your credit health can be seriously damaged. Learn more at www.ftc.gov/bcp/edu/microsites/idtheft
4. Manage your credit profile
• Develop a realistic budget and pay your bills promptly
• Contact your creditors right away if you’re having trouble making payments on time
• If you miss a payment, develop a repayment plan and do what you can to stay current
• Consider automatic payment from your bank account to ensure timely payments
• Pay more than the minimum payment on your bills.
• Take advantage of online resources to learn about how to improve your credit. Visit the Wells FargoSmarter CreditTM online resources center at www.wellsfargo.com/smarter_credit
5. Develop a strong relationship with your bank
Make sure your banker knows you and understands your personal situation.
6. Seek guidance from reputable sources
If you seek help to repair your credit, make sure it comes from a legitimate source and is free or manageable. Beware of credit repair or high-fee loan advance scams. Learn how to choose a credit counselor at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm