Since most of us don’t have hundreds of thousands of dollars lying around to purchase real estate, we need a loan. The good news is that there are plenty of types of loans to choose from. Whether you’re interested in residential, commercial, industrial, or agricultural property, individuals and institutions are ready to fund your investment—as long as you’re willing to put up the real estate as collateral and pay them back with interest.
Conventional – These are the loans most people think of when they think of a real estate loan; they’re typically used to purchase residential properties. They require a 20-percent down payment and come with a competitive, fixed interest rate and either a 15-year or 30-year term. Borrowers must prove they have stable, verifiable income and a reasonable credit score, and once the bank or mortgage broker loans them the money, the loans are often sold to a government-sponsored enterprise like Fannie Mae or Freddie Mac.
Conventional High Loan-to-Value – These are similar to conventional loans, but they require a higher credit score, more income, as well as private mortgage insurance. These additional requirements allow lenders to accept a lower down payment.
Hard Money – This is a transaction between two private parties, but it is not based on any personal relationship between them. It’s what’s called an “arm’s length” transaction. Typically, these loans have a short term, five years or less, and are arranged by a broker with higher points, higher interest rates, and a lower loan-to-value ratio than conventional loans. The advantages are that they are easier to qualify for: your credit score doesn’t really matter and the property doesn’t have to be in good condition. In fact, it can be raw land.
Commercial – As the name suggests, these loans are used to purchase commercial property, industrial property, or multi-family residential property (5+ units) for investment purposes. The loans have higher interest rates as compared to conventional loans, and the terms typically range from 10 to 15 years with an adjustment to the interest rate every five years. Your lender will likely service the loan through payoff, rather than selling the loan to another institution.
Small Business Administration (SBA) Loans – These are only for commercial property. They offer competitive, fixed interest rates and often require a companion loan from a conventional lender. They usually have a higher loan-to-value ratio, but they can be difficult to secure because of the obnoxiously onerous documentation and the strict timeframes for completion, which can make the up-front costs significant.
Reverse Mortgages – These are available to senior citizens who can secure them with their owner-occupied residence. The money from the loan can be used for whatever the borrowers choose, as they are basically reversing out the equity in their home. The rates are slightly higher than conventional loans, but the terms are great. In fact, you can set things up so you receive a lump sum payment or monthly payments to the borrower. The borrower must continue to live in the home for the term of the loan. If the borrower moves to another home, a care facility or dies, the loan becomes due in full.
Federal Housing Administration (FHA) – These are often used by first-time homebuyers. They require low down payments and offer competitive, fixed interest rates. They are not difficult to qualify for, but they do require mortgage insurance which increases the cost of the loan.
FHA Rehabilitation – These allow homebuyers to purchase fixer-uppers—homes that require rehabilitation. They require low down payments and as renovations are completed, more funds are advanced to cover the cost of additional work on the property. These loans are a little more expensive than conventional, fixed-rate, 30-year loans and they require a few extra steps to qualify, like getting bids for the work to refurbish the property.
I’ll share information on several more types of loans in the weeks ahead.
If you have questions about real estate or property management, please contact me at firstname.lastname@example.org or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.