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Get the credit you need to buy real estate. Qualifying for a real estate purchase requires different credit than automobile financing or retail credit.

If you plan to finance real estate, either as a home buyer or as an investor, these credit tips will help you with your credit score and save you money on loan costs.

1. Using expensive or undesirable types of credit costs too much and is negatively scored.

2. Accumulating too many lines of credit or too many credit cards causes credit report remarks like “too much consumer credit.”

3. Only paying the minimum due keeps balances too high.

4. Being maxed out on any credit card or line of credit causes deep drops in scores.

5. Taking cash advances costs higher interest and extra fees.

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6. Exceeding limit and having to pay over-limit fees is a negative with creditors and causes “high proportional amounts owed” remarks on credit reports and subtracts credit score points.

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7. Paying a day or more late causes unnecessary late fees and often increases interest rates.

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8. Charging more than you can afford causes a snowball effect of amassing debt with no easy way to pay it off.

9. Letting someone else use your credit, such as co-signing a loan, raises your debt-to-income ratio and possibly adds “too many consumer accounts” on your credit report, which lowers your score.

10. Ignoring credit problems causes unnecessary negative impact. Talk to creditors before being late and make arrangements. This action heads off negative reporting to credit bureaus.

11. Failure to report address changes to creditors causes misplaced bills and late payments.

12. Using partial name, different names, initials instead of whole name, or forgetting Sr. or Jr. causes mix-ups. Use your full legal name to protect you from confusion with similarly named borrowers.

13. Failure to report name changes to creditors also causes confusion.

14. Not checking credit report frequently is one of the most common mistakes consumers make.

You can buy real estate with poor credit, but you will save thousands in loan costs if you maintain good credit. A bad credit report leaves home buyers with sub-prime loans which have higher point charges, prepayment penalties, and higher interest charges, which therefore cost more money.

For instance, a mortgage loan of $150,000, 30-year, fixed-rate mortgage, interest rate of about 5.72 percent costs around $870 a month poor credit scores raise the interest rate over 9 percent and the payments over $1,200.

As you see from these payment differences, good credit means that you can finance a more expensive house with the same income, or save $330 each month.

Credit Requirements for Mortgages

Credit needed to buy real estate is not the same as good credit. Besides your credit score, mortgage lenders consider your debt-to-income ratio and other credit matters, unlike other credit grantors. Your debt-to-income ratio is the comparison of mortgage payment, including taxes, interest, and insurance to your total gross monthly income. Real estate lenders also consider your employment qualifications and your overall debt ratios.

Understanding the difference between good credit and the credit needed to obtain real estate financing helps you buy houses!

(c) Copyright 2004, Jeanette J. Fisher. All rights reserved.

About the Author

Professor Jeanette Fisher, is the author of Credit Help! Get the Credit You Need to Buy Real Estate, and other books. Jeanette and her husband Brian (former special ed teacher) chose real estate investing to be able to care for their daughter with special needs. While buying and selling millions of dollars worth of real estate, the Fishers were forced into becoming credit experts. Real Estate Credit Help, visit http://www.recredithelp.com

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Chicago Real Estate Insider information and resources: Chicago Real Estate Report.

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Permission is granted to electronically reprint the following article in its entirety and without modification in your Opt-In Subscriber publication or your web site ONLY, as long as no changes are made to the resource box included with the article. Courtesy copy requested. Thank you.

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Business Financing - Where to get it and why you would want a SBA Loan and Seller Financing

Business financing can come in the form of conventional loans, SBA (Small Business Administration) loans, and seller financing. A combination of the three forms may be used, but SBA loans are by far the most popular. In fact, SBA loans are the primary source of capital injected into the small business community nationwide. Last year the SBA assisted small businesses with over $10 Billion Dollars of loan guaranties.

The Small Business Administration more commonly known as the SBA is a Federal Agency established in 1953 to protect and assist America’s greatest resource… small businesses. SBA’s mission is to stimulate and foster economic development through small businesses, because helping small businesses get started and become successful is great for the nation’s economy. Briefly, the SBA loan guarantee program works in the following manner. The SBA will guarantee a portion of a business loan made by a lender enrolled in the program. By issuing a partial Federal Guarantee to the Bank, your loan, which might not be approved on conventional terms, can now be approved via a SBA guaranteed loan.

SBA Loan benefits include longer terms and larger loan amounts than you might be able to obtain through a conventional loan. They also include competitive interest rates and no balloon payments or annual reviews. Furthermore, SBA loans are fully amortized and loan terms typically range from 7 to 25 years depending on the purpose. To understand the benefits of full amortization, consider a loan that is used to purchase commercial real estate.

The conventional bank loan is normally amortized over 15 to 20 years and renewed every 3 or 5 years. So, when a small business owner faces the 3 year review of that conventional loan:

The bank may decide that its risk appetite no longer favors loans for those types of businesses and therefore requires full payment.
The bank may review and reamortize the loan over another 15 to 20 year period, which would mean more interest over the term of the loan.
If the small business is doing well, the bank may renew the loan as is, but often the borrower has to pay thousands of dollars in costs associated with the renewed loan application.
All of that uncertainty and additional expense for refinancing or restructuring of the loan is eliminated with SBA financing.

SBA loans are also easier to secure because they are offered by private lenders, and are not restricted by regulatory constraints that make bankers hesitate to lend to small businesses. The typical private lender offers from $100,000 to $2,000,000 financing (more or less depending on the lender).

As a buyer, seller financing should not be overlooked. How much money is the seller looking for as a down payment? Will the seller finance some of the purchase price? Is there another lender involved (like a bank or a former owner)? Is there an assumable loan? What is the current balance of each loan the business has now? This is an essential area of inquiry if you are trying to save time. Most sellers are unrealistic in the early stages of selling their business, even if it is listed with a broker. Sellers usually hope for an all-cash buyer. Most buyer prospects are also unrealistic - buyers are often looking for 100% seller financing! In reality, the “average” deal is closer to 30-50% down in cash from the buyer with 50-70% financing from the seller, SBA, and banks.

Most first-time business buyers need seller financing. Sellers are much more likely to finance buyers they like, regardless of experience. But it can take time for sellers to warm-up to this idea and to a particular buyer prospect. Seller financing is great because it shows that the seller believes in the business, but most importantly he or she believes that you can run it profitably!

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2002-03. GlobalBX . http://www.globalbx.com. All rights reserved. Buy a Business or Sell a Business on GlobalBX. GlobalBX is a free business for sale listing exchange that provides a confidential forum to facilitate the buying and selling of businesses with thousands of businesses and franchises for sale as well as comprehensive business information for business buyers and business sellers. Lists businesses for sale, business brokers, and franchise opportunites.

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About the Author

Jim Brown is Marketing Director at GlobalBX (http://www.globalbx.com), a free business for sale listing exchange that provides a confidential forum to facilitate the buying and selling of businesses with thousands of businesses and franchises for sale as well as comprehensive business information for business buyers and business sellers. Lists businesses for sale, business brokers, and franchise opportunites.

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The return on the bank’s equity (ROE) is the net income divided by its average equity. The return on the bank’s assets (ROA) is its net income divided by its average assets. The (tier 1 or total) capital divided by the bank’s risk weighted assets a measure of the bank’s capital adequacy. Most banks follow the provisions of the Basel Accord as set by the Basel Committee of Bank Supervision (also known as the G10). This could be misleading because the Accord is ill equipped to deal with risks associated with emerging markets, where default rates of 33% and more are the norm. Finally, there is the common stock to total assets ratio. But ratios are not cure-alls. Inasmuch as the quantities that comprise them can be toyed with they can be subject to manipulation and distortion. It is true that it is better to have high ratios than low ones. High ratios are indicative of a bank’s underlying strength, reserves, and provisions and, therefore, of its ability to expand its business. A strong bank can also participate in various programs, offerings and auctions of the Central Bank or of the Ministry of Finance. The larger the share of the bank’s earnings that is retained in the bank and not distributed as profits to its shareholders the better these ratios and the bank’s resilience to credit risks.

Still, these ratios should be taken with more than a grain of salt. Not even the bank’s profit margin (the ratio of net income to total income) or its asset utilization coefficient (the ratio of income to average assets) should be relied upon. They could be the result of hidden subsidies by the government and management misjudgement or understatement of credit risks.

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A bank can borrow cheap money from the Central Bank (or pay low interest to its depositors and savers) and invest it in secure government bonds, earning a much higher interest income from the bonds’ coupon payments. The end result: a rise in the bank’s income and profitability due to a non-productive, non-lasting arbitrage operation. Otherwise, the bank’s management can understate the amounts of bad loans carried on the bank’s books, thus decreasing the necessary set-asides and increasing profitability. The financial statements of banks largely reflect the management’s appraisal of the business. This has proven to be a poor guide.

In the main financial results page of a bank’s books, special attention should be paid to provisions for the devaluation of securities and to the unrealized difference in the currency position. This is especially true if the bank is holding a major part of the assets (in the form of financial investments or of loans) and the equity is invested in securities or in foreign exchange denominated instruments.

Separately, a bank can be trading for its own position (the Nostro), either as a market maker or as a trader. The profit (or loss) on securities trading has to be discounted because it is conjectural and incidental to the bank’s main activities: deposit taking and loan making.

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Most banks deposit some of their assets with other banks. This is normally considered to be a way of spreading the risk. But in highly volatile economies with sickly, underdeveloped financial sectors, all the institutions in the sector are likely to move in tandem (a highly correlated market). Cross deposits among banks only serve to increase the risk of the depositing bank (as the recent affair with Toko Bank in Russia and the banking crisis in South Korea have demonstrated).

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Further closer to the bottom line are the bank’s operating expenses: salaries, depreciation, fixed or capital assets (real estate and equipment) and administrative expenses. The rule of thumb is: the higher these expenses, the weaker the bank. The great historian Toynbee once said that great civilizations collapse immediately after they bequeath to us the most impressive buildings. This is doubly true with banks. If you see a bank fervently engaged in the construction of palatial branches stay away from it.

Banks are risk arbitrageurs. They live off the mismatch between assets and liabilities. To the best of their ability, they try to second guess the markets and reduce such a mismatch by assuming part of the risks and by engaging in portfolio management. For this they charge fees and commissions, interest and profits which constitute their sources of income.

If any expertise is imputed to the banking system, it is risk management. Banks are supposed to adequately assess, control and minimize credit risks. They are required to implement credit rating mechanisms (credit analysis and value at risk VAR - models), efficient and exclusive information-gathering systems, and to put in place the right lending policies and procedures.

Just in case they misread the market risks and these turned into credit risks (which happens only too often), banks are supposed to put aside amounts of money which could realistically offset loans gone sour or future non-performing assets. These are the loan loss reserves and provisions. Loans are supposed to be constantly monitored, reclassified and charges made against them as applicable. If you see a bank with zero reclassifications, charge offs and recoveries either the bank is lying through its teeth, or it is not taking the business of banking too seriously, or its management is no less than divine in its prescience. What is important to look at is the rate of provision for loan losses as a percentage of the loans outstanding. Then it should be compared to the percentage of non-performing loans out of the loans outstanding. If the two figures are out of kilter, either someone is pulling your leg or the management is incompetent or lying to you. The first thing new owners of a bank do is, usually, improve the placed asset quality (a polite way of saying that they get rid of bad, non-performing loans, whether declared as such or not). They do this by classifying the loans. Most central banks in the world have in place regulations for loan classification and if acted upon, these yield rather more reliable results than any management’s “appraisal”, no matter how well intentioned.

In some countries the Central Bank (or the Supervision of the Banks) forces banks to set aside provisions against loans at the highest risk categories, even if they are performing. This, by far, should be the preferable method.

Of the two sides of the balance sheet, the assets side is the more critical. Within it, the interest earning assets deserve the greatest attention. What percentage of the loans is commercial and what percentage given to individuals? How many borrowers are there (risk diversification is inversely proportional to exposure to single or large borrowers)? How many of the transactions are with “related parties”? How much is in local currency and how much in foreign currencies (and in which)? A large exposure to foreign currency lending is not necessarily healthy. A sharp, unexpected devaluation could move a lot of the borrowers into non-performance and default and, thus, adversely affect the quality of the asset base. In which financial vehicles and instruments is the bank invested? How risky are they? And so on.

No less important is the maturity structure of the assets. It is an integral part of the liquidity (risk) management of the bank. The crucial question is: what are the cash flows projected from the maturity dates of the different assets and liabilities and how likely are they to materialize. A rough matching has to exist between the various maturities of the assets and the liabilities. The cash flows generated by the assets of the bank must be used to finance the cash flows resulting from the banks’ liabilities. A distinction has to be made between stable and hot funds (the latter in constant pursuit of higher yields). Liquidity indicators and alerts have to be set in place and calculated a few times daily.

Gaps (especially in the short term category) between the bank’s assets and its liabilities are a very worrisome sign. But the bank’s macroeconomic environment is as important to the determination of its financial health and of its creditworthiness as any ratio or micro-analysis. The state of the financial markets sometimes has a larger bearing on the bank’s soundness than other factors. A fine example is the effect that interest rates or a devaluation have on a bank’s profitability and capitalization. The implied (not to mention the explicit) support of the authorities, of other banks and of investors (domestic as well as international) sets the psychological background to any future developments. This is only too logical. In an unstable financial environment, knock-on effects are more likely. Banks deposit money with other banks on a security basis. Still, the value of securities and collaterals is as good as their liquidity and as the market itself. The very ability to do business (for instance, in the syndicated loan market) is influenced by the larger picture. Falling equity markets herald trading losses and loss of income from trading operations and so on.

Perhaps the single most important factor is the general level of interest rates in the economy. It determines the present value of foreign exchange and local currency denominated government debt. It influences the balance between realized and unrealized losses on longer-term (commercial or other) paper. One of the most important liquidity generation instruments is the repurchase agreement (repo). Banks sell their portfolios of government debt with an obligation to buy it back at a later date. If interest rates shoot up the losses on these repos can trigger margin calls (demands to immediately pay the losses or else materialize them by buying the securities back).

Margin calls are a drain on liquidity. Thus, in an environment of rising interest rates, repos could absorb liquidity from the banks, deflate rather than inflate. The same principle applies to leverage investment vehicles used by the bank to improve the returns of its securities trading operations. High interest rates here can have an even more painful outcome. As liquidity is crunched, the banks are forced to materialize their trading losses. This is bound to put added pressure on the prices of financial assets, trigger more margin calls and squeeze liquidity further. It is a vicious circle of a monstrous momentum once commenced.

But high interest rates, as we mentioned, also strain the asset side of the balance sheet by applying pressure to borrowers. The same goes for a devaluation. Liabilities connected to foreign exchange grow with a devaluation with no (immediate) corresponding increase in local prices to compensate the borrower. Market risk is thus rapidly transformed to credit risk. Borrowers default on their obligations. Loan loss provisions need to be increased, eating into the bank’s liquidity (and profitability) even further. Banks are then tempted to play with their reserve coverage levels in order to increase their reported profits and this, in turn, raises a real concern regarding the adequacy of the levels of loan loss reserves. Only an increase in the equity base can then assuage the (justified) fears of the market but such an increase can come only through foreign investment, in most cases. And foreign investment is usually a last resort, pariah, solution (see Southeast Asia and the Czech Republic for fresh examples in an endless supply of them. Japan and China are, probably, next).

In the past, the thinking was that some of the risk could be ameliorated by hedging in forward markets (=by selling it to willing risk buyers). But a hedge is only as good as the counterparty that provides it and in a market besieged by knock-on insolvencies, the comfort is dubious. In most emerging markets, for instance, there are no natural sellers of foreign exchange (companies prefer to hoard the stuff). So forwards are considered to be a variety of gambling with a default in case of substantial losses a very plausible way out.

Banks depend on lending for their survival. The lending base, in turn, depends on the quality of lending opportunities. In high-risk markets, this depends on the possibility of connected lending and on the quality of the collaterals offered by the borrowers. Whether the borrowers have qualitative collaterals to offer is a direct outcome of the liquidity of the market and on how they use the proceeds of the lending. These two elements are intimately linked with the banking system. Hence the penultimate vicious circle: where no functioning and professional banking system exists no good borrowers will emerge.

About the Author

Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, United Press International (UPI) and eBookWeb and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Web site:

http://samvak.tripod.com/

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