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Aug 15, 2024 William Vision

Types of Loans Available to Finance a Property Acquisition

Funding a property acquisition is essential for any successful real estate investor. You can work hard to find an excellent property with a motivated seller willing to part with the asset at below-market value. However, without the loan or capital to finance the purchase, you may not be able to close and could see a lucrative deal slip through your fingers.

As such, most investors use loans to invest in real estate, even with all-cash deals. If you're considering investing in real estate, it's a good idea to familiarize yourself with available financing, like traditional loans, government programs and alternative funding strategies.

Traditional Financing

Traditional financing comes from banks and credit unions. These institutions can be a good source of loan funds, especially if you are already a customer in good standing of the institution. It also helps if the property's seller is also a customer of the same bank or credit union.

Smaller community-based banks and credit unions have a mandate to support real estate loans in their regional area. When advancing this strategy, it is a good idea to find a bank or credit union serving the community where the property is located.

The real estate lending market features all kinds of loans, such as residential mortgages for single-family homes, investment property loans for a modest number of rental units (townhouses, condominiums, duplexes, and small apartment buildings up to four units), and commercial loans for larger projects. 

Here are some forms of financing available:

  • Fixed Rate Mortgages: 15- or 30-year terms, with a certain rate for the duration of the loan.

  • Variable Rate Mortgages: Five- to 30-year terms, with an adjustable interest rate based on the interest rate changes on an index, like the FED funds rate. 

  • Jumbo Rate Loans: Loans with higher rates for properties with a value above the maximum for conforming loans. As of August 2024, the rate in most parts of the country was $766,550, with exceptions in higher-priced areas.

  • Interest-Only Loans (aka Balloon Payment Loans): Loans that allow payment of only interest for a time and then a larger balloon payment at the end, usually forcing a refinancing.

  • Bad Credit (aka Sub-Prime) Loans: Loans offered at higher interest rates for borrowers with bad credit histories. Such loans might require a higher down payment or co-signer.

If you plan to use traditional financing to buy real estate, it is a wise strategy to prequalify for the loan. With this process, you apply for the loan before you find the property. The pre-qualification typically involves due diligence, where the lender examines your income and credit history to ensure you meet loan qualifications.

The strongest form of prequalification is a lending commitment letter. This is a document with an expiration date from your lender, stating the maximum loan amount available and the required down payment. Assuming the lender is strong and solvent, an unexpired commitment letter is almost like cash. You can make an all-cash offer on the basis of such a letter if you have the required down payment. With a lending commitment lender, the lender must make the loan if it meets basic criteria.

The second-best form of prequalification is when the lender agrees to fund your acquisition, subject to certain terms. Under this process, the lender has final approval of your loan if certain conditions are met.

Private money loan


U.S. Government Programs

The federal government has direct loans of over $158 billion and more than $2.2 trillion of guaranteed loans. These government loan programs support education, housing, business, disaster relief, and more. 

Some federal programs also provide real estate loans, like the following:

  • FHA LoansAn FHA loan is insured by the Federal Housing Administration. The government guarantees these loans; however, they are underwritten and funded by lenders approved by the FHA.

  • VA Loans: A VA loan is backed by the Department of Veterans Affairs. It is available to veterans, active-duty military, and their spouses. There is no down payment or mortgage insurance required, making these loans very attractive to those who qualify. 

  • Fannie Mae and Freddie Mac Loans: These loans are available for low to moderate-income borrowers and require a small down payment and modest credit score.

Fannie Mae and Freddie Mac loans are the only government-backed loans that can be used for real estate investment purposes, as well as primary residences. Furthermore, these loans can't be used for construction purposes. 

Meanwhile, FHA and VA loans are solely for primary residences. The exception is if you acquire a multiunit property, like a duplex, and reside in one of the units while renting out the rest.

Alternative Funding

If you find that you can't obtain a loan from a traditional lender or a government-backed loan won't work for you, consider alternative financing methods like the following:

  • HELOC Loans: A home equity line of credit (HELOC) cashes in on the equity in the property you already own, providing funding to acquire another property. 

  • Private Money Loans: These loans come from business associates, friends, or family members who believe in you and your real estate project. 

  • Hard Money Loans: Hard money loans carry an average of 60% loan-to-value. In other words, you receive a loan that totals 60% of your project's value, while you kick in the other 40% from other sources. These loans are secured by the property in question. They're short-term loans, generally with high interest rates, and typically used for construction purposes. Such loans are taken out by refinancing as soon as possible. 

  • Crowdfunding: Crowdfunding, allows you to tap into a "crowd" of many people who pay you small amounts for a percentage of your deal. You can find likely investors through social media or word of mouth.

Final Thoughts

As you can see, there are numerous options available for funding your property acquisition, from traditional bank loans to government-backed programs and alternative financing methods. The key is to thoroughly research and understand each option, considering factors such as interest rates, loan terms, and qualification requirements.

Remember, the right financing strategy can make or break a real estate investment. By familiarizing yourself with these various funding sources and carefully selecting the one that best suits your situation and investment goals, you'll be well-positioned to seize opportunities in the real estate market. Whether you're a first-time investor or a seasoned pro, having a solid grasp of your financing options is crucial for success in the dynamic world of real estate investing.

PropertyReach's database provides you with the information you will need to find that ideal real estate investment. To learn more, log on to propertyreach.com

 

 

Published by William Vision August 15, 2024
William Vision