As an investor looking to finance a real estate deal, it’s important to identify and understand your financing options. At Money Lender Loans, our work is to help you access a suitable financing solution for the project you’re undertaking whether you have the capital or not. We serve individuals and companies across Orange County, CA looking for different financing avenues. In the following sections we will help you understand real estate loans in detail.
An Overview of Real Estate Loans
California currently boasts as one of the largest real estate markets in the country. Since the state is known for breathtaking natural surroundings, a thriving economy and sunny weather, there’s a high level of real estate developments. Metropolitan areas with the highest demands include Los Angeles, San Francisco, and San Diego.
Investing in real estate in California is never a bad idea provided that you have a good cash flow. Not every investor has this kind of cash flow. Real estate loans are an ideal solution for you if you're looking to have a stake in the real estate market. Your efforts can only be fruitful if you seek the loan from the right lender under the correct terms and conditions and use it wisely.
Understanding Real Estate Loan
Real estate loans are among many financing solutions you can use as an investor to secure funds for your upcoming or ongoing real estate project. They come in the form of capital obtained from us to renovate or buy property. Unlike other traditional loans, our real estate loans come with specific terms and conditions, which you need to understand before taking out a loan.
How Can You Obtain Real Estate Loans?
One misconception people have regarding real estate investing is that large sums of money are needed to help you get started. The truth is that there are different loans you can explore to fund your real estate project. Since the means of obtaining a loan affect your project's outcomes, it's important to understand the financial aspect of your project.
Always remember that each real estate loan has its advantages and disadvantages. The approach taken using this lending solution will depend on your situation and property. If you're new to the property development field, you should note that not all lending solutions are created equal. While some may work and others fail to work, the secret is to understand the type of real estate loan that will compliment your overall business strategy.
What to Do While Obtaining a Real Estate Loan
Take time researching the different types of real estate loans available out there. Such a strategy can help broaden your outlook on lending options and equip you with the knowledge on how to use them in your advantage. Note that borrowers like you have experienced some financing hurdles at one point in the course of their real estate projects. Whenever you feel like doubting your borrowing strategy, tap into your investor network and seek expert advice.
How Are Real Estate Loans Funded?
After finding a suitable property to invest in, the next step may include finding a reliable lender for a real estate loan. Keep in mind that there's no limit when it comes to funding your project provided that it's realistic and it looks great on paper. Some of the lenders you can borrow from for real estate loans include private money lenders and hard money lenders as explained below:
Private Money Lenders
Since private money lenders have the intent and means to invest money into your business, they may be essential to your project's growth. They are usually interested in providing you with cash to buy real estate properties as a way of working with you. However, you'll have to incur an appropriate fee (interest) when repaying the loan on a payback period that ranges from six months to one year.
You can obtain low-interest rates from a private money lender than a traditional lender since private money lending relies on establishing stable relationships. The private money lender may demand 8 to 10 percent interest if you're an experienced investor and 10 to 14 percent interest if you're a new investor. Advantages of this type of lending include high and consistent returns, the investment being secured by real estate and the lender not having any equity.
The process of transacting with a private money lender begins when you issue the documents securing your loan. You can also consider such a lender as an investor looking to profit from loans secured by a real estate property. Unlike banks, private money lenders offer the same combination of transparency and speed when deciding to give you a loan. It’s important to have a well-defined exit strategy if you want to use this type of financing solution.
Hard Money Lenders
Hard money lenders, whose finances come from private businesses and individuals, can offer you a high-interest rate loan for a short term to finance your real estate project. Hard money lending doesn’t adhere to the basic standards of creditworthiness as used by banking institutions. You can use this financing option if you’re looking to renovate an existing property since most renovation projects need the efficiency that this option brings.
The hard money lender will first determine the value of your property before giving you the loan. Expect this lender to provide you with money on terms such as having equity in your property. Hard money lending is gaining popularity for its speed, the volume of transactions and quality. You can count on this option if you want to close a real estate deal quickly but don't have the credit score to match your efforts.
What are the Best Real Estate Loans You Can Get?
Real estate loans come in various forms to suit your financing strategy for a real estate investment. Some of them leverage personal equity and may be offered by traditional lenders or the government. Here are the common types you should know:
Home Equity Loans
If you're capable of building up equity in the form of your residence, you may acquire a loan against that particular equity. Such a loan is known as a home equity loan since it allows you to use your home equity as collateral for taking out a loan. Home equity loans have low-interest rates and give you the flexibility to adjust your repayment structure or use the loan how you'd like. You may acquire one to resolve any debt or carry out home repairs.
One factor that makes 203K loans special is that they come designed for people who want to rehabilitate damaged or older properties. Since they are backed by the FHA (Federal Housing Administration), they have a low-down payment requirement of about 3.5 percent. They also are inclusive of a property’s purchase price and the estimated costs for making renovations. You (the borrower) can even include mortgage payments for six months in the loan.
A 203K loan may be suited for you if you’re looking to make a mortgage payment at a time the property is being rehabilitated and you can’t live in it. To get this loan, you’ll need to hire a licensed construction consultant and contractor. 203K loans don’t fund DIY (do-it-yourself) projects. Furthermore, you won’t be eligible for this type of loan if you’re investing in a fix and flip property.
The Federal Housing Administration gave potential homeowners a chance to broaden their access to homes by establishing the FHA loan. FHA loans are ideal for consumers with low credit scores and those who lack financial means to grow their savings. As you’re looking for real estate loan options, you may consider choosing those that are supported by the FHA since they have a down payment requirement of about 3.5 percent. The downside is that FHA loans only allow you to purchase single-unit and owner-occupied properties.
Conforming loans are designed to adhere to the FHFA’s conforming loan limit. In 2019, the FHFA (Federal Housing Finance Agency) set this limit at $484,350, which is $32,250 more than the limit set back in 2018. Note that this amount isn’t standardized across every real estate market. Factors such as documentation requirements, credit score and history, debt-to-income ratio and loan-to-value ratio help characterize conforming loans.
Traditional Mortgage Loans
Traditional mortgage loans, which include FHA and conventional loans, have attractive interest rates. However, most of them, such as conventional mortgage loans, require you to make a down payment ranging from 15 to 25 percent and have proof of income. They may also need you to have a credit score of at least 680. Your dream of owning or investing in a property may come true once you meet these conditions.
What Do Lenders Consider Before Giving You a Real Estate Loan?
One of the most crucial factors lenders use to differentiate you from other borrowers is your credit score. Lenders consider this factor when looking at your financial profile to determine whether you can qualify for their loans. Your credit score and other factors discussed below also matter when you want to acquire a real estate loan.
A three-digit number calculated from your credit reports makes up your credit score, which helps predict your likelihood for repaying borrowed money. Other than your credit score, a lender may look at your credit history which gives information on your outstanding debts and credit applications. Your credit history also offers insights on your unpaid collection accounts, civil judgments or tax liens, previous bankruptcy filing and delinquent accounts if there are any.
Total Income and Expenses
You may be at a lesser risk of defaulting a loan if you have a higher income and low expenses. The lender will want to look at your fixed expenses, which include rent or other loan repayments. Other lenders may expect your debt-to-income ratio to be 43 percent or lower for you to qualify for a real estate loan.
A lender may review your employment history to determine whether your income can afford you a real estate loan. Income earned for the past two years may help the lender measure your income stability. The loan originator may consider you as a risk if there are signs of unemployment in this period. Instead of being denied for the loan, you may end up getting it but paying a higher interest rate.
Lenders usually impose higher interest rates for short-term loans since they assume that your ability to repay the loan will likely change in future. Long-term loans have lower interest rates but take time to resolve. Since most of them involve large sums of money, real estate loans may seem attractive if they're long-term.
Making a down payment for a real estate loan helps assure the lender that you’re serious about acquiring the loan. A lender may impose lower interest rates if you make a large down payment and vice versa. Consequently, a sizeable down payment can help a lender approved you for a loan if you have a low credit score. While you may want to make a large down payment, ensure to have adequate cash in your savings account to use for an emergency.
Having liquid assets may indicate to the lender that you are a low-risk borrower. The assets can be converted into cash quickly and used to repay your loan when you experience financial setbacks such as losing your job. Liquid assets may be in the form of government bonds, stocks, money market accounts or savings. With these assets, you may be awarded a real estate loan at a lower interest rate.
If you're applying for a home loan, expect the lender to assess the total value of the house since it will act as your loan collateral. Collateral can be any item, including a title deed, that a lender can use to recover the loan amount in the event you default making repayments or experience financial setbacks. Consider using property, which you can afford to lose, as collateral.
Other Options that Can Get You Preapproved for a Real Estate Loan
Lenders have varying documentation requirements for pre approving borrowers for real estate loans. The basic things they ask for are as follows:
- Driver’s license or any other government-issued photo ID
- Residential address history including names and contact details of your previous landlords
- Social security number
- Federal tax returns (W2s and 1099s) filed in the past two years
- Pay stubs dating 30 days back
- List of your financial accounts including 401k, brokerage, savings and checking accounts
- Printouts of bank statements for the accounts
- List of existing debt payments including personal and auto loans, child support or alimony, and credit card debt
- Information on legal judgments or liens against you including lawsuits, collections accounts, bankruptcy or IRS actions
- Down payment information, which includes the source of funds and down payment amount
How Do Real Estate Loans Compare to Other Financing Options?
Financing your existing or upcoming real estate project may spur feelings of anxiety if you’re not sure about which financing option to use. Besides real estate loans, cash financing, self-directed IRA accounts, and seller-financing may come handy to your situation. However, these options fail to match up to real estate loans as explained below:
With cash financing, you can save on interest, receive instant equity in your investment and increase your cash flow. You also get to save on the purchase amount of a particular property. However, you'll need an unlimited amount of capital to enjoy the benefits of this financing option. You'll also need to seek a real estate loan from a private money lender if you're low on cash.
Seller financing allows you to strike a mutually-beneficial financing deal with a seller of your choice. When using this financing option, you’ll be making direct payments to a property seller rather than involving a bank. Such a strategy may persuade the seller to sell you the property more quickly. You also get to avoid meeting requirements such as creditworthiness set by loan lenders.
Self-directed Individual Retirement Account (IRA)
A self-directed IRA gives you more freedom over your investment choices in realms such as real estate, precious metals, stocks, and partnerships. The IRS (Internal Revenue Service) can still allow you to transfer your retirement capital (stored in your IRA) to procure real estate assets such as commercial and residential properties. You may use a self-directed IRA to diversify your portfolio and tap into capital. Unlike a traditional retirement account, a self-directed IRA gives you more control when investing in allows you to direct where and how your money is invested.
Get a Real Estate Loan from a Trusted Lender Near Me
One key aspect to finding the best lender for a real estate loan is being able to know the different types of real estate loans and lenders. At Money Lender Loans, we're reputable for helping clients like you get the financing they need, provided that they observe our terms, conditions, repayment schedule and interest rates. We leverage our experience in the real estate lending industry to help our existing and potential clients across Orange County, California. Apply for a real estate loan from us today by calling 949-409-4372.