Many people are attracted to investing in real estate. It is a fairly safe investment option that can help diversify your investment portfolio and leverage your capital. More first-time buyers are entering the market and move-up buyers also are seeking bigger loans as their equity grows.
Whether you are buying your first home, your fourth rental property or your 100th flip, you likely will need financial assistance to close the deal. There are plenty of real estate financing options and each includes benefits and risks. Even when you think making a deal is impossible, real estate professionals may be able to guide you through the process and help make it happen.
With home prices on the rise across the country, buyers should investigate their options. Getting the right kind of loan can help increase buying power and ultimately boost cash flow and increase potential return on an investment. But with literally thousands of lenders to choose from and various real estate financing options to research and evaluate, borrowers can easily become overwhelmed.
So what are some common options when it comes to real estate financing and which option is best for you? Here are a few ways to structure real estate deals and examples of when to use them:
If you are moving in to a home that doesn’t need repairs and you have fair-to-good credit, then a conventional loan is right for you.
Conventional mortgage loans take into account the following information about a borrower:
- credit score
Buyers typically need to make a 5-25 percent down payment of the purchase price. Conventional loans must meet strict guidelines (as set forth by investment giants Fannie Mae and Freddie Mac) before they are issued. However, since there is less risk associated with conventional loans, borrowers usually benefit from lower interest rates.
People who have a hard time meeting the strict requirements that go hand in hand with a conventional loan may turn to portfolio lenders. Anyone who doesn’t have an acceptable credit rating or is buying a property that doesn’t fit into categorical norms may consider this option.
Portfolio loans are mortgage loans that are held in a bank’s portfolio. They are not sold on the secondary market and do not have to comply with underwriting guidelines that are set by secondary market investors. Portfolio lenders may be more flexible on the terms of a portfolio loans but often charge higher interest rates. Portfolio loans are ideal for borrowers with situations that fall outside standard mortgage underwriting guidelines.
Hard Money Loan
Hard money loans are often used to buy properties that are in poor condition and in need of repairs. Unlike conventional mortgage loans, hard money loans are backed by private money from individuals or funds from wealthy investors.
Since requirements are less regulated, hard money loans can be secured quickly. Many real estate investors seek out hard money loans because of their quick turnaround. Lenders will agree to the deal based on the value of the property rather than a buyer’s credit, debt, income and assets.
While these types of loans are ideal for property flippers and other investors, they can be expensive. Interest rates on hard money loans are very high compared to conventional loans. It’s important to have a strategy on how to exit out of a hard money loan and make plans to secure a longer-term loan with lower interest rates after a period or a few months.
Sometimes called “ piggyback” or combination (combo) loans, this type of real estate financing can be used when borrowers don’t have the full 20% down required to avoid paying private mortgage insurance (PMI). It also can be used by high net worth clients to keep first mortgages under the Fannie Mae and Freddie Mac limits to avoid jumbo rates. It requires buyers to pay 15% of the purchasing price and then split the remaining into a first mortgage for 80% of the price and a second mortgage for 5% of the price.
Other variations to these loans include splitting mortgages 80/10/10 or 75/15/5. The second number represents the second mortgage and the third number represents the down payment.
Blanket loans are used to fund more than one property, larger tracts, or land that eventually will be subdivided and sold. Builders and real estate developers often seek these loans as an alternative to individual loans for separate parcels of land or multiple properties. Blanket loans allow the borrower to sell portions of the property without having to retire the entire mortgage.