With the drastic expansion of new real estate markets comes the mirroring expansion of financial backing. No more are the days of traditional loans or nothing at all, but instead the days of multiple avenues of lending and borrowing. It’s important to know all of your lending options before you buy, so you can get the best deal and outcome for you. Here is a look at the new, and not so new lending options available in today’s real estate market.
These loans can come from banks, non-banks, mortgage brokers, or credit unions. These are usually longer termed loans with low interest rates, but have very strict guidelines including examination of income, credit, and employment history. Borrowers sometimes have trouble with these lenders when they already have a mortgage loan, are self- employed, or have less than perfect credit. Non-banks are not government backed, so are able to cater to buyers and investors who have low to moderate income, minorities, and other typically under-qualified homebuyers.
Real Estate Investment Trusts are groups of investors that have funds readily available. There are two ways to use REITs; you can invest in the properties that they have accrued, or you can acquire loans from the group for your own investment. These loans usually use property value and projected loan lifespan to negotiate the amount and terms. Since REITs are usually made up of private lenders, the qualifications can vary greatly, but are generally more lax than conventional loans.
Hard Money Lenders
There are now small groups of investors that are willing to lend money to flippers and rental owners. These types of loans are known as “hard money”, and work very differently than conventional mortgage loans. First, these loans are based on the property value, and usually carry a much shorter term of 3-36 months with costly loan fees. The interest rates are also higher, usually hovering between 8-15 percent. However, these loans require no income verification or credit references, and they are not reported to credit bureaus.
This is an exciting new option in which experienced buyers can borrow the funds through a group of private investors. These funds are usually very short term, and very quick to pay out, usually only taking 3-5 days. Another option for crowd funding is to invest in a property that is already producing income, and owned by the investors. With this route, the investor holds an equity stake in the property, along with others.
Now and then, the owner of the home may be willing to personally finance the loan. This means the terms can vary greatly. Some will be more strict and carry the same terms as a traditional loan, while other owners may have more lenient terms with higher interest rates. Unfortunately, this is completely up to the lending owner.
This lending structure provided most home loans in the 1980’s, and is making a powerful comeback. These lenders surfaced mainly as a result of steep regulation, and generally cater to buyers who have low to moderate income, minorities, and other typically under-qualified homebuyers. Typically, these lenders are not insured by the FDIC, but must disclose their net worth, liquidity, and financial capabilities to guarantee underwritten loans.