- 1). Calculate the amount you wish to allocate to each borrower. By allocating that amount, you spread the risk over a number of borrowers. Do not allocate more than 10 percent to 20 percent of your total investment portfolio to one borrower.
- 2). Develop a set of income guidelines for your borrowers. Your borrowers should provide proof of employment for the past two years. Verifications can vary depending upon whether they are self-employed. If they are self employed, request a letter from their accountant verifying their income. Avoid lending to borrowers whose mortgage payment will represent more than 35 percent of their monthly gross income.
- 3). Review prospective borrowers' credit rating by obtaining a credit report from Experian and Equifax and Transunion. You need written authorization from your borrower before the credit reporting agencies will release a credit report.
- 4). Decide on a percent amount you wish to lend against the value of the real estate property. The term is called loan-to-value (LTV). Avoid lending more than 70 percent on the total value of the property. Thirty percent equity will provide a cushion in the event your borrower defaults and you must take possession of the property and resell it quickly.
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