Obtaining Traditional Financing for your Investment Property

The Five Stages of a Mortgage Life Cycle 

Buying your first home or investment property is exciting, but it’s common to get confused about the mortgage process. Real estate investors looking for a mortgage will have to go through several steps, jump through a few hoops, and become familiar with some new terms.

This article will guide you through the five stages of the mortgage life cycle. It will discuss the application process, the closing process, how to take advantage of equity in the property, and what the lender does with your loan after closing. By the end of the article, you'll be ready to dive into the Chicago housing market. 

Stage One: The Mortgage Application 

Once you’ve found your ideal real estate investment property, the first step in the mortgage life cycle is applying for the mortgage. Most homeowners and real estate investors opt for financing through banks, but there are other options, including:

  • Credit unions 
  • Private lenders
  • Mortgage finance companies
  • Monoline lenders

You can also work with a mortgage broker who negotiates with many possible lenders to get you the best deal. Brokers can be beneficial because they're familiar with the requirements and restrictions of various lenders. That means they can match you with potential lenders that will give you the highest chances for approval.

The broker will tell you what interest rates, mortgage types, and amortization periods that certain lenders are willing to offer. This is an important step because it will impact your future financial situation. Paying off a loan faster will mean higher regular payments, but in the end, you'll pay a lot less interest and be debt-free sooner.

There's a lot of paperwork involved with a mortgage application, and you'll have to provide a lot of documentation for a potential lender to assess. Here’s a list of the most important documentation you'll need:

  • Identification, including your social security number
  • Proof of employment and income
  • Bank, investment, and tax records
  • A full list of debts and a credit report
  • A gift letter if anybody gave you money for a down payment 

Stage Two: Underwriting and Approval 

When your application is complete, it will go to an underwriter for processing. The underwriter will evaluate your income, credit, down payment, the size of the mortgage, and the value of the property. At this time, you may have to pay for an appraisal on the property.

If the underwriter finds that you're a low enough risk, then the mortgage will be approved. After the approval, the interest rate for the term will be fixed. 

Stage Three: Closing

After the mortgage is approved and signed, there are still a few steps and a lot of paperwork before the title passes to you and the keys are handed over. There are also fees associated with this stage of the process, including fees to cover:

  • Attorney
  • Taxes
  • Home inspection 
  • Title insurance if required
  • Mortgage insurance if required
  • Notary

Once the closing process is complete, the title will go into your name, but the lender will put a lien on the property as collateral until the mortgage is paid in full. You'll also receive a deed of trust that proves the seller transferred the rights to the property to you.

Stage Four: Taking Advantage of the Equity You Build in Your Property

As you repay the mortgage over the next 15 to 30 years, you'll build up equity. When you have enough equity, you can access it through products like home equity loans and home equity lines of credit (HELOC). Many investors rely on products like HELOCs when budgeting for new real estate investment projects, performing repairs on existing properties, or funding capital improvements. 

For example, say you've invested in the Chicago rentals market and want to add a second story to the single-family home you bought. In that case, you could use the money from a HELOC or home equity loan to pay quality builders to add a second rental suite to the house.

However, you can also use the funds for debt repayment or to make large purchases that aren't related to your real estate investments. 

Stage Five: The Loan Is Sold in the Secondary Market

At any point in the life cycle of your mortgage, the original lender may sell part or all of the loan to other investors. This process is called selling the loan in the secondary market. If a lender is going to sell the loan to the secondary market, they’ll usually do it shortly after closing.

The main reason a lender would do this is to recoup some of the capital they lost financing the mortgage. Banks, for example, have to keep a certain amount of money on hand at all times so they can finance withdrawals and loans, and selling the mortgage frees up some of those funds.

Once the mortgage loan originator sells the mortgage, the loan may be broken down and sold off to subsequent investors, which can include:

  • Pension funds 
  • Other banks
  • Hedge funds
  • Governments 
  • Insurance companies

The Bottom Line

Investing in Chicago real estate is typically a safe bet because there’s usually a healthy demand for rental properties. More than that, property values typically increase over time, so when you invest wisely, you'll secure a decent return on investment. When you want to dip your toes into the market, understanding the life cycle of a mortgage will prepare you for the process. 

The first step is applying for the mortgage, and that includes choosing a lender and a mortgage product. When the application is complete, an underwriter will assess you as a risk and approve or deny the mortgage. 

Once the steps in the closing process are complete, you'll get the title and the keys to the property. After a few years of building equity in the property, you can use that equity to make more investments or perform improvements. 

At any time, the lender can sell the mortgage to the secondary market. But don’t worry: even if that happens, all you have to worry about is making your payments on time. 

Once you’ve secured a mortgage and an investment property, reach out to Quality Builders if your property needs renovation. Quality Builders is a Chicago General Contractor for real estate investors with expertise in single-family homes, small multi-family (2-4 units), and medium multifamily (5-30 units). We have a mission to bring technology and transparency to the real estate & construction industry.