Real Estate Finance
7 Different Types Of Financing For Real Estate:
1. Conventional Loan / Fixed Rate Mortgage
Conventional loans are not guaranteed or insured by the government. These are typically fixed in terms (10, 15, 20, 30 & 40 year) and rate. There are two types of conventional loans; conforming and non-conforming loans. Conforming loans fall within the maximum limits of set by the government i.e. less than about $700,000. Anything above the limit may be considered a “Jumbo Loan” and thus, non-conforming with government limits. These typically have higher rates and require more hoops to jump through for qualification.
Conventional loans are ideal for people with a good credit history, stable income, and at least 3% of the down payment. You will likely pay mortgage insurance if your down payment is less than 20%.
2. Government Insured Loans
Three government agencies help buyers with mortgages: The Federal Housing Administration (FHA Loans), the U.S. Department of Agriculture (USDA Loans) and the U.S. Department of Veterans Affairs (VA Loans).
FHA Loans can be as little as 3.5% down depending on credit. FHA Loans require two mortgage premiums, one paid upfront and the other paid annually with under 10% down payment. Private mortgage insurance (PMI) is required until you have at least 20% equity in your home.
VA Loans are provided to U.S. Military (active duty and veterans) and their families. They don’t require a down payment or PMI but a funding fee is charged as a percent of the loan.
USDA Loans help those living in rural, USDA-eligible areas secure a mortgage. Depending on income level, some USDA loans don’t require a down payment. Upfront mortgage insurance is 1% with a 0.35% annual fee paid in monthly installments.
3. Adjustable Rate Mortgages (ARMs)
An adjustable rate mortgage has a fluctuating interest rate that is depending on market conditions and lender terms. Many ARM products have a fixed rate for the first few years then reset to variable rates, sometimes with a cap. If you don’t plan to stay in your home for more than a few years, this could save you on interest rate payments.
4. Interest Only Mortgage
In some cases, a lender can give you an interest only mortgage in which you only pay for the interest for the first 5 or 10 years. After that period, it reverts to a conventional mortgage with fixed rates. This will take longer to pay off but can be useful if you are having trouble with the monthly payments.
5. Seller Carryback Financing
In a buyer’s market, sellers can often entice buyers with special concessions to get a deal done. One of which is seller carryback financing. In this case, the seller acts as the bank or lender and obtains a second mortgage on the property in addition to the buyer’s initial mortgage. Each month, the buyer pays off both mortgages. This may also be referred to as owner financing or seller financing.
6. Owner-Occupied Loan
If the property in question is a duplex or multifamily home, the buyer can obtain an owner-occupied loan. In this case, buyers can use the rental income from the property to underwrite the loan with higher loan limits. The property must have signed rental lease agreements so that payments can be verified. These are considered investment properties so private lenders may require higher down payments, typically between 25-30 percent down. The VA and FHA will also work with buyers on owner-occupied loans.
7. Agricultural Loans
Ag loans are available for properties with 10 or more acres and have no restrictions for owner vs. non-owner occupied. These include properties with orchards, farms, vineyards and more. Red Hawk Realty issues agricultural loans for eligible properties with flexible financing options. Contact our team to learn more.
Looking at a fixer-upper for a fix and flip? Here are valuable tips for fix and flips from an expert in the area Brock VandenBerg and find out how a hard money lender like TaliMar Financial can help you!
Commonly Used Finance Terms In Real Estate
Abstract of Title: A written summary of the title history of a particular piece of real estate.
Acceleration Clause: A provision of a mortgage or note which provides that the entire outstanding balance will become due and payable in the event of default.
Adjustable Rate Mortgage (ARM): Mortgage for which the interest rate adjusts periodically up or down through a set index. The initial interest rate usually is lower than that for fixed-rate mortgages, but monthly payments can go up or down when the rate is adjusted. Also called a floating rate mortgage.
Adjusted Gross Income: Gross income of a building if fully rented, less an allowance for estimated vacancies.
Adjustment Interval: The period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are six months and one year.
Amortization: The process of paying the principal and interest on a loan through regularly scheduled installments.
Annual Percentage Rate (APR): The effective interest rate a loan would have if one accounted for costs associated with securing the loan, such as closing costs and points. It represents the annual cost of a loan and is thus a more reliable indicator for comparing different mortgage options.
Appraisal: An estimate of the value of a property made by a qualified professional called an appraiser.
Assessed Valuation: The value that a taxing authority places on real or personal property for the purpose of taxation.
Assumable Loan: A loan that can be transferred to a new owner when a property is sold.
Balloon (Payment) Mortgage: Usually a short-term fixed-rate loan that involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract.
Bridge Loan: A short-term loan secured by the equity in an as-yet-unsold house, with the funds to be used for a down payment and/or closing costs on a new house. There is no payment of principal until the house is sold or the end of the loan term, whichever comes first. Interest payments may or may not be deferred until the house is sold.
Buydown: The process of paying additional points on a loan to reduce the interest rate. Buydowns can be temporary or permanent.
Cap: The maximum amount that the interest rate or payment may increase for an adjustable-rate loan, regardless of index changes. An interest rate cap limits the amount the interest rate can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
Cash Out: A loan transaction in which the borrower receives funds as the time of closing.
Cash Reserves: Cash reserves are the same cash assets as those used for the down payment and closing costs but, since reserves are not paid to anyone, the asset does not have to be liquidated. The monetary value assigned to any asset used for reserves is equal to the amount of cash the borrowers would receive if they liquidated the asset.
Capital Expenditures: Line items on a profit and loss statement that would not be expensed on an annual basis. This category would include replacement of major building systems, such as roofs, driveways, etc.
Cash Reserves: These are liquid and semi-liquid assets a borrower has available that exceed the funds needed for the down payment and closing costs. For some transactions, lenders require that borrowers have between 2 and 6 months of cash reserves to qualify for a loan.
Cash to Close: Liquid assets that are readily available to be used to pay the closing costs for a mortgage transaction.
Certificate of Title: A written statement usually furnished by a title company or attorney that presents the status of the title to a piece of property.
Closing Costs: The cost and fees associated with the official change in ownership of the property and with obtaining the mortgage usually assessed at the closing or settlement.
Combined Loan-to-Value Ratio (CLTV): The ratio between the loan amounts of all loans on a property and the value of the property. The ratio is commonly expressed as the percentage of value a lender is willing to finance. It differs from the loan-to-value (LTV) ratio only when the property has more than one lien.
Commitment: A binding pledge made by the lender to the borrower to make a loan, usually at a stated interest rate within a given period of time for a given purpose, subject to the compliance of the borrower to stated conditions.
Comparables: An abbreviation for comparable properties used for comparative purposes in the appraisal process. Comparables are properties that have sold recently and have reasonably the same size and location with similar amenities to the property under consideration, thereby indicating the approximate fair market value of the subject property.
Comparative Market Analysis: An estimate of the value of a property based on an analysis of sales of properties with similar characteristics.
Credit Report: A report containing detailed information on a person's credit history, including identifying information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower's permission, to determine his or her creditworthiness.
Debt-to-Income Ratio: The ratio, expressed as a percentage, that results when a borrower’s monthly payment on all debts (mortgage, car payments, credit cards, etc.) is divided by his or her monthly income.
Default: The failure to perform an obligation as agreed in a contract.
Discount Point: Amount payable to the lending institution by the borrower or seller to decrease or "buy down" the mortgage note interest rate. One point is equal to one percent of the loan amount (1 point, or 1%, of an $80,000 loan would be $800).
Down Payment: An amount paid in cash to the seller when a home is purchased. The down payment is the difference between the purchase price and the mortgage amount.
Earnest Money: A portion of the down payment delivered to the seller or an escrow agency by the purchaser of real estate with a purchase offer as evidence of good faith.
Escrow: 1. A special account set up by the lender in which money is held to pay for taxes and insurance. 2. A third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.
Fair Market Value: An appraisal term for the price that a property would bring in a competitive market, given a willing seller and willing buyer, each having reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy and sell.
Foreclosure: The process by which a lender takes back a property on which the mortgagee had defaulted. A servicer may take over a property from a borrower on behalf of a lender. A property usually goes in to the process of foreclosure if payments are no more than 90 days past due.
Gross Income: Total income, before deducting taxes and expenses. The scheduled (total) income, either actual or estimated, derived from a business or property.
Growing Equity Mortgage: Mortgage that has a fixed interest rate and increasing monthly payments. The advantage of this type of loan is that the loan can be paid off in a shorter duration than a traditional fixed rate loan.
Hard Money: Usually short-term loans designed for properties that do not cash flow, situations requiring quick closings, or borrowers or transactions that cannot qualify for conventional financing.
Home Equity Line-of-Credit (HELOC): A loan through which the lender extends a specified amount of credit for a specified time period secured by the borrower's home.
Homeowner's Insurance: An insurance policy that covers the dwelling and its contents in case of fire or wind damage, theft, liability for property damage and personal liability.
Interest: The sum paid for borrowing money, which pays the lender's costs of doing business.
Interest Rate: The sum charged for borrowing money, expressed as a percentage.
Interest Rate Cap: A provision of an adjustable rate mortgage limiting how much the interest rate may increase in a single adjustment period.
Lender Buy-Down Mortgage: A convertible mortgage offering a discounted interest rate at the beginning of the loan that gradually increases to an agreed-upon fixed-rate over the first few years of the loan. It provides lower initial payments and a stable final monthly rate, but the final rate may be somewhat higher than on a standard fixed-rate mortgage.
Lien: A legal claim or attachment against property as security for payment of an obligation.
Lifetime Cap: A provision of an ARM that limits the total increase in interest rate over the life of the loan.
Line of Credit: An arrangement in which a bank or vendor extends a specified amount of unsecured credit to a specified borrower for a specified time period.
Loan Origination Fee: The fee charged by a lender to prepare all the documents associated with your loan.
Loan-to-Value Ratio (LTV): The ratio between the loan amount and the value of the property. The ratio is commonly expressed to a potential borrower as the percentage of value a lender is willing to finance.
Lock-In: A commitment by a lender guaranteeing a specified interest rate for a specified period of time. Also called rate lock. This process may require a fee or premium.
Lock-Out Period: A period of time after loan closing during which a borrower cannot prepay the loan.
Mortgage Insurance: An insurance policy the borrower buys to protect the lender from nonpayment of the loan.
Negative Amortization: Occurs when interest accrued during a payment period is greater that the scheduled payment, and the excess amount is added to the outstanding loan balance. For example, if the interest rate on an ARM exceeds the interest rate cap, then the borrower's payment will be insufficient to cover the interest accrued during the billing period. The unpaid interest is added to the outstanding loan balance.
Non-Conforming Loan: A mortgage loan that does not conform to regulatory limits such as loan amount, loan-to-value ratio, and other characteristics.
Owner Financing: A purchase in which the seller provides all or part of the financing.
PITI: Principal, interest, taxes and insurance, the four components of a mortgage payment.
Pre-qualification: A preliminary assessment of a buyer's ability to secure a loan, based on a specific set of lending guidelines and buyer representations made. It usually results in a determination of the amount of money a prospective home buyer is qualified to borrow. This is not a guarantee or commitment by a lender to extend credit.
Prime Rate: The interest rate that commercial banks charge their most creditworthy borrowers, such as large corporations.
Principal: The amount of debt, not including interest, left on a loan. 2. The face amount of a loan.
Processing: The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.
Recording Fee: The charges made by the register of deeds to record the legal documents.
Refinance: The renewal of an existing loan by the same borrower.
Sale/Lease Back: When a lenders buys a property and leases it back to the seller for an extended period of time. This arrangement allows the seller to make full use of the asset while not having capital tied up in the asset. Leasebacks sometimes provide tax benefits.
Subprime Loan: A rating term describing a riskier loan typically associated with weaker credit.
Survey: The measurement and description of land by a registered surveyor.
Title: The actual legal document conferring ownership of a piece of real estate.
Title Insurance: An insurance policy that insures you against errors in the title search, essentially guaranteeing the borrower's and lender's financial interest in the property.
Title Search: An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate.
Underwriting: The process of deciding whether to make a loan based on credit, employment, assets other factors.
