What NOT TO DO When Applying for Financing - Avoid This Mistake
Getting financing to fund your income property investment might be one of the biggest challenges you’ll face on your way to becoming a landlord. However, securing a good financing plan doesn’t have to be such a nightmare, as long as you’re not making rookie mistakes that can set you back and prevent you from getting those first property keys. Here’s a story of one of my experiences that led to a great lesson, which I will share below!
Here’s How it Went Down
We started to close on a potential airbnb project, a very nice property out of the suburbs. We were pretty far in the process - the APS was conditional and the next step for us was to get the home inspection. During the home inspection, the inspector found a few minor issues and moved on to do a septic inspection. This is where things started to get nasty. Most simply put, the septic was a disaster and it needed to be replaced.
Although there were a few other issues with the property, those were kind of insignificant compared to the huge problem of the septic inspection not passing. Naturally, this meant that we had to replace the septic and I knew that’s going to cost a lot of money. What we did then is we counter offered on the agreement of purchases and sale stating that we wanted a reduction of the price to cover the costs of the septic being replaced, which we put on the APS. As simple as that.
We countered and, when we went to apply for financing, I did not tell my mortgage broker the full story. That’s where I had messed up. My mortgage broker had asked why we wanted a reduction of price because he noticed a significant drop of $30 000. I just kind of fluffed it up not to make a big deal out of it as I was worried that we’d risk losing financing. What I told him was that there were just a few little repairs such as the carpet and some painting, and that I wanted to negotiate and get the price down. He said that made sense so he didn’t worry much about the $30 000 reduction.
Then, things went from bad to worse. We went to submit the application and, mind you, we were firm on this agreement of purchase and sale. Only two days before the closing, we got a phone call from the mortgage broker stating that the lender had reviewed the APS and the counter offers and saw that the septic was bad and that it had to be replaced. So, they decided to hold back the financing and to send someone to do an appraisal again. This meant we would have to submit an application for financing again, which would set us back the whole week but we only had two days.
As you can imagine, we were on pins and needles that whole week and we had to go to the seller and ask for an extension on closing and then go back to the lender. They said they were going to give us the mortgage with the reduced price of the septic. They also said we have to build an entirely new septic, after which we would get those $30 000 back.
What’s the Lesson?
It’s simple - you should never hide anything from your mortgage broker. Always be clear about everything because they have your best interests in mind. How are they able to fight for you and submit the best application without knowing everything there is to know about the property and your plans with it? With that said, never feel like you have to hide things from your mortgage broker because they’re on your team and on your side.