Financing Your Home

Consider All of Your Options

Once you’ve found the property in which you want to invest, it’s time to examine the different real estate financing options.

Consider loans that are offered by the government, traditional lenders, as well as ways to leverage personal equity.

Traditional Loan

Traditional loans includes conventional and Federal Housing Administration (FHA) loans. Many investors choose traditional lender financing options because interest rates are at historic lows.

Traditional loans require a sufficient down payment (anywhere from 15 to 25 percent), an adequate credit score (a minimum of 680) and documentation of income. In addition, the money used must be what is called “sourced and seasoned” for at least 60 days and cannot be a gift.

Conforming Loan

Conforming loans conform to standardized rules set by Fannie Mae and Freddie Mac. Conforming loans must be less than the conforming-loan limit, set by the Federal Housing Finance Agency.

The conforming-loan limit isn’t universal across every market. In higher-priced areas, the limit is higher.

Federal Housing Administration Loan

The Federal Housing Administration (FHA) is one of several home loan options offered by the federal government to help broaden access to homeownership for consumers with less-than-perfect credit profiles, as well as those who do not have the financial means to save up for a large down payment. These loans offer a down payment requirement of as low as 3.5 percent, while still allowing for a low interest rate.

203(k) Loan

203(k) loans are a special type of loan backed by the FHA designed specifically for those who plan to rehabilitate older or damaged properties.

The loan includes the price of the purchase of the property, plus the estimated costs to make renovations. 203(k) rehab loans are offer a low down payment requirement of 3.5 percent, and allow for the funding of cosmetic or major repairs as needed.

203(k) borrowers are required to hire a licensed contractor and construction consultant, meaning that DIY projects are not allowed. In addition, fix and flip investment properties are not eligible.

Veterans Affairs Loan

The U.S. Department of Veterans Affairs (VA) helps service members, veterans, and eligible surviving spouses become homeowners. VA loans are provided by private lenders, banks and mortgage companies and offer lenders more favorable terms to buy, build, repair, retain, or adapt a home for personal occupancy.

Portfolio Loan

Portfolio loans are financed by the loan originator, but instead of being sold to a secondary market to big banks like Fannie Mae and Freddie Mac, the lender retains the loan for their own portfolio.

Lenders are free to set any terms they are comfortable with rather than being forced to follow the strict guidelines imposed by the secondary buyer. This can make portfolio loans easier to obtain than traditional mortgages for investors and self-employed borrowers.

Seller Financing

With seller financing, the buyer makes payments directly to the seller of the property rather than going through a bank, thus eliminating the need to obtain financing through a lending institution. The buyer signs a promissory note which includes what happens in case of a default, the applicable interest rate, and the repayment schedule of the loan.

Homeowners who have a difficult time selling their home are most likely to provide seller financing.

Private Money Loan

Private money loans (also called hard money) provide investors with cash to purchase real estate properties in exchange for a specific interest rate. The terms are generally established up front with a specified payback period – anywhere from six months to a year.

These loans are most common when investors believe they can raise the value of the property over a short period of time, typically through renovations.

Private money financing is generally determined by the value of the investment property itself, with lenders analyzing the “After Repair Value” (ARV) to determine the size of the loan.

Private money should only be used when there is a clearly defined exit strategy.

Home Equity Loan

A home equity loan, more formally known as a Home Equity Line of Credit (HELOC) allows homeowners to leverage their home equity as collateral in order to take out a loan. Common uses for a home equity loan include home repairs, education, or the resolving of debt.

A major benefit of a home equity loan is the low rates that are typically based on the prime rate. Borrowers enjoy the flexibility to use the loan how they would like, as well as manage their own repayment structure.

Lease Option

A lease option is where the buyer pays the seller money in order to have the right to purchase the property at a later date.

The parties can agree on a price at the time of the lease option agreement or agree that the buyer will pay the fair market value of the property when the buyer is prepared to purchase the property.

This option prevents the seller from selling the property to a third party. However, if the buyer does not purchase the property by the end of the specified time, then the seller is able to sell the property and the buyer has no obligation to purchase.

Short Sale

If a homeowner is experiencing financial difficulties or if the home is owned by a lending institution, then the bank that owns the home may allow it to be sold for less than what the actually worth. This would be done through a short sale.

The value of the home can be purchased at a discount of 20% or even more in some cases. After agreeing upon a price, the buyer must then obtain approval from the bank. It’s not possible to purchase a home through short sale without bank approval.

Foreclosure

A foreclosure action is when the borrower stops making payments on the mortgage. Once a certain number of payments are missed, the lender institutes a foreclosure proceeding, and the lender seizes the home. This proceeding is initiated by the bank, rather than by the buyer (in a short sale). Foreclosures take less time to complete than a short sale. Foreclosed properties are purchased through an auction.

Final Thoughts

Now that you are aware of some of the most popular financing strategies, it’s time to decide which type of real estate financing works best for you.
You’ll want to consider the amount you want to pay up front and also how long you plan to reside at the property before making a final decision.
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