Real estate financing is an indispensable tool in any investor’s arsenal. It requires thorough study and comprehension before beginning a deal.
Understanding real estate financing options will enable you to select the most advantageous strategy for your business venture. Furthermore, it will give you insight into how each alternative will influence the success of your real estate investment.
Hard Money
Hard money is a form of financing that investors can use for real estate projects. It’s ideal for property flippers who require fast results and don’t have the luxury of waiting weeks for traditional bank loan approval.
To secure financing for investments, it is essential to thoroughly vet potential hard money lenders. Look for businesses with a proven record of successful investment financing.
To locate hard money lenders, you can look online or ask real estate agents and investor clubs about potential sources for private lending. They may know of lenders who specialize in fix-and-flip loans or be able to refer you to one.
In addition to researching websites and reading reviews, it’s wise to interview potential hard money lenders. Ask them specific questions about their process and what makes them suitable for your investing business; you won’t regret asking these questions! Plus, developing a relationship with your hard money lender now could lead to better terms in the future.
Conventional Mortgages
Conventional mortgages are a popular choice among many homebuyers and are widely available. Furthermore, they typically feature lower interest rates than jumbo loans, FHA or VA loans.
Your eligibility for a conventional loan will depend on your credit score, down payment amount and debt-to-income ratio. They may come with fixed or adjustable rate options.
Borrowers who require a low down payment may be able to take advantage of special programs that require as little as 3% down. These schemes are also popular among those looking to buy an older home and renovate it later.
Although conventional mortgages tend to be harder to qualify for than government-backed ones, they can be more affordable in the short and long term. Notably, conventional loans usually do not include an upfront mortgage insurance fee like FHA and USDA loans typically do – this adds anywhere from 1%-4% annually to your total loan cost.
Gifted Funds
Gift money can be an excellent source of down payment cash for homebuyers who cannot afford to save for one themselves. However, it’s essential to know that lending institutions have strict regulations regarding who can give money for a down payment and how much is allowed.
Lenders consider both the amount and source of funds when determining whether or not you can use gift money for your down payment, as well as any existing relationships between you and whoever gave you the money. If you receive a large gift from family or friends, make sure you have documentation proving its original purpose is being served – that it has not been used elsewhere.
Many lenders require you to obtain a letter from the donor stating they are making a gift and do not expect repayment. This letter can be written using any template provided by your lender, but both you and the giver must sign it.
Flipping
Flipping houses can be an excellent way to make a large profit when you purchase distressed property at a low price, renovate it and resell it. But first you must determine how much it will cost to purchase and renovate, as well as its after-repaired value (ARV).
Budgeting carefully is the most essential step. Make sure you have enough money for a down payment, closing costs, lender fees, rehab expenses and carrying costs.
You may use a home equity line of credit or hard money loan to finance your project. These loans are ideal for investors with less-than-perfect credit and require fewer forms than traditional loans.
Portfolio lenders may provide financing for your deal. These smaller local banks take a more realistic look at your deal’s prospects and are more accommodating about financial standing than larger traditional lenders. Ask your real estate agent if they know of any portfolio lenders in your area!
