Types of Real Estate Loans, How to Use Them, and Tips to Remember

Are you looking forward to buying a piece of real estate? While buying is a major achievement, you need to be ready with adequate finances to acquire your dream property.

You may, therefore, need to obtain a loan to make the purchase and pay off the amount over a given period. So, what are the available options when looking for a loan?

Bridge Loans

Bridge loans are temporary loans which come in to close the gap between the new home's sale price and the buyer's new mortgage when the buyer hasn't sold the house yet.

The loans security is the buyer's existing home. The home buyer uses the borrowed money as a deposit for the new home and can repay the loan and interests for the new home within a specified period.

The interest rates can vary among lenders. However, the interest accumulates and is due when repaying the loan after the sale of the house.

Bridge loans are beneficial in that a buyer can put the home on the market and buy with limited restrictions. The loans may not require monthly payments for the first few months.

However, bridge loans cost more than home equity loans, and the buyer may become stressed paying two mortgage payments at the same time.

Hard Money Loans

A hard money loan is when a borrower acquires some money from lenders to buy a home. Hard money loans can be used for other purposes than the purchase of a home as well and a borrower doesn't need to have an existing home to qualify.

The success of acquiring a hard money loan depends entirely on the lender. Most times, the creditors are private and don't have to meet specific standards as commercial creditors.

With the default risks attached to hard money loans, the interests are higher than those of other loans. The collateral, in this case, a home returns to the lender if the borrower fails to pay the loan.

Real Estate Purchase Loans

These loans are similar to adjustable-rate and fixed-rate commercial mortgages. To qualify for a real estate purchase loan, you must have an outstanding credit history.

Additional savings in business investments and personal bank accounts can help you acquire the loan. The creditor needs the property as collateral, and the interest rate is determined by the ratio of credit value to equity value.

This type of loan protects the lender from defaults and has clear terms of an agreement between both parties.

Participating Mortgage

This type of loan allows the lender to share part of the revenue from the commercial property. Usually, the lender receives the monthly mortgage, the interest and a portion of the sales proceeds or rental income.

Such loans are common where tenants have stable incomes and have long-term property agreements.

Joint Venture Loans

Joint venture loans come in handy when you and other parties share the profits and losses of the property in equal portions.

Such a loan can be helpful where individual applicants cannot acquire adequate finances to acquire the property.

When obtaining the loan, two people apply on behalf of the others. Additionally, the partnership or relationship between applicants doesn't have to be official to qualify for the credit.

Important Tips to Remember When Acquiring Real Estate Loans

  • Check your credit as a great score is required to obtain a loan, especially if you need a large amount. Also, the ability to finance your mortgage every month does not imply your credit is great. Your score goes up with a lower utilization rate.
  • Evaluate your assets and liabilities to determine your money spending pattern. As a buyer, you should understand how lenders will view the income. Familiarize yourself with the basics of acquiring loans.
  • Keep tabs on the necessary documents including income and tax papers. Since buying property can take a long time, it’s important to know what you need, prepare the documents and save time tracking your records.
  • Get to understand the process of acquiring the home. If you are buying a house for the first time, you need to know how much you can afford by calculating the debt-to-income ratio. It will help you evaluate how much you will pay upfront and monthly.

Closing

With the right resources and the requirements, you can get a real estate loan, purchase the property and start living your dream.

As an important factor, learn about the hurdles you may face, the legal requirements and the financing plan. Also, understand the different rates applicable when purchasing and prepare for the same.

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Topics: Real Estate Investing, Home Buying, Real Estate Tips