Real Estate Financing

Real Estate Financing Basics

Many people choose to purchase real estate to have a place to live, while others purchase real estate as an investment. If you are considering either, you will want to learn as much as you can about real estate financing.

When financing real estate, you have several options:

• Borrow money from a friend, family member, or anyone else who is willing to give you money
• Contract an investor
• Take out a loan from a lending institution

The first two options have their benefits. If you borrow from someone other than a financial institution, chances are you will have little to no interest with the loan, which can save you a great deal of money. However, there are very few people who are willing or able to loan the large sums of money needed to purchase real estate. You can consider contracting with an investor, but this usually only works for commercial real estate, as the investor will want to see some type of return on the investment.

The third option, a loan from a lending institution, is the most common form of mortgage financing, and there are many different loan options that can be utilized.

Real Estate Loans

There are several different types of loans that can be used to finance your real estate venture. While some of these loans have specific requirements that must be met, others are available to anyone who has the means to repay them. Loans frequently used for real estate financing include:

• Commercial Mortgage Loans – These loans are available for commercial property only.
• FHA Mortgages – Funded by the government, these reduced interest loans are available to those who meet specific financial requirements.
• Interest Only Mortgage Loans – With these loans, you pay only the interest due each month for a specific amount of time (usually 5-7 years), before refinancing or paying the mortgage balance in full.
• New Home Mortgages – Sometimes called construction loans, these loans are meant to fund new constructions.
• Conventional Home Loans – These loans are basic mortgage loans funded by mortgage lenders.

Obtaining Real Estate Financing

The ability to obtain real estate financing through a mortgage loan lender will depend heavily upon the state of your credit score. Your credit score can range anywhere between 500 and 850. The higher your score, the better your credit is. Those who have good credit will find it much easier to qualify for different types of loans. Good credit also ensures a lower interest rate, which is very important, as the rate of interest you pay will inevitably determine how much money is spent over the life of the loan. Before applying for financing, you should pull a copy of your credit report to check for inaccuracies and credit blemishes. If any problems appear, try to get them cleared up as quickly as possible.

Your next step involves finding a lender. You can try contacting traditional lenders or you could shop online for a mortgage loan. Either way, the lending industry has become very competitive. If your credit is in fair shape, you should have no problem finding a lender who is willing to offer you a competitive interest rate.

Once you have narrowed your search down to three or four lenders, you can begin making comparisons. Pay special attention to interest rates, lending fees, and loan terms and conditions. When you finally settle on one lender who meets your real estate financing needs, you will be presented with a loan agreement. You should read the agreement over carefully before signing it. If there is anything on there that you do not understand, don’t hesitate to express concern or ask your lender questions.