It's never too late to start a business and investing in real estate can be a great decision. Before diving in and building a business in real estate it’s good to know certain aspects of real estate investments, aspects that can be essential for its success such as how to get real estate financing. Investing in real estate is much easier than stock market investments. Research can be done easily, out on the street or even online. Technology comes in handy when investing in real estate because you can easily check out properties in another state or on the other side of the planet. There aren’t special requirements to become a real estate market player. The most important step is to begin somehow, because most of the times things roll over in time and a small investment can bring another one, and this one can link to another bigger investment and so on. This is how real estate businesses grow but the essential step you should make is to find real estate investment for your very first property and use leverage. A lack of leverage or real estate financing continues to hinder the majority of new investors in today's market simply because they are not aware of the different real estate financing avenues.
What is an investment property? When someone purchases real estate property and intends to earn a return of the investments through future resale, rental income or both options. Investment properties can be short-term investments, like flipping for example (a property is bought at a certain price, renovated and then sold for profit) or they can be long-term investments.
The key factor regarding real estate investments is the initial funding and since a small percentage of the first real estate property is provided by purchaser, through savings, the rest should be covered though other sources of fund. We’ll further present you the most common ways of real estate financing.
Sources of Real Estate Financing
Primary sources for real estate financing are savings and loan associations, life insurance companies (through mortgage bankers and brokers), commercial banks (as lenders for a wide range of loans) and mutual savings banks (owned by their own depositors, who, based on their deposits receive interest).
Financial middlemen like mortgage bankers and brokers play an important role in the real estate financing process even if they are not primary suppliers of capital. If choosing to fund your investment through financial middlemen, you should be prepared to pay a fee that represents mortgage broker’s commission for finding a capital supplier.
In real estate financing, mortgage bankers work a little bit different when compared with mortgage brokers, because bankers actually make different types of mortgage loans and package them in order to sell them further to primary lenders or secondary investors.
Pension funds, foreign funds, credit unions, individual investors, finance companies, and Real Estate Investment Trusts (REITS) can also be used for real estate financing.
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Government Sponsored Real Estate Financing Programs
For those real estate first time investors who have been unable to get real estate financing from above mentioned sources, the state has created various real estate financing programs that provide investors with funds at preferred interest rate levels.
- Federal National Mortgage Association, commonly know as Fannie Mae. It is the United States government-sponsored enterprise and are a leading source of financing for mortgage lenders and their financing makes sustainable home ownership and workforce rental housing a reality for millions of Americans.
- Federal Home Loan Mortgage Corporation, commonly know as Freddie Mac. It is a public government-sponsored enterprise and its aim is to promote stability and affordability in the housing market by purchasing mortgages from banks and other loan makers. It operates in the secondary mortgage market in the United States.
- Government National Mortgage Association, commonly know as Ginnie Mae. It is a U.S. government corporation within the U.S. Department of Housing and Urban Development (HUD) that was established in 1968 to promote home ownership.
Real Estate Financing by Banks
Real estate financing offered by banks is a good option as they offer the lowest mortgage rates on loans and they easily offer long-term loans. In the same time, many investors are running away because of the credit score requirements, verification of the income and inflexible down payment. Bank loan approval processes are usually lengthy and they can take as long as three months to be secured. Believe it or not, banks also charge separate pre-closure charges that may be applicable depending on when you choose to pay off the loan. It is therefore necessary to read carefully loan sanctioned terms. Whether prepayment of loan is allowed or not and if pre-closure charges are applicable is generally mentioned in letter of sanction addressed to the borrower and guarantor.
Real Estate Financing by Private Lenders
Private money lenders are not to be usually found in the business of lending, but they can offer more flexibility, lower interest rates and fees and long-lasting lending relationships. There investors, because are not actually in the lending business, are hard to reach (you can find them in the online environment, in the real estate specialty forums or marketplaces, at real estate business events and meetups).
Federal Housing Administration (FHA) Loans
The Federal Housing Administration, generally known as “FHA“, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA (Federal Housing Administration) Loans can be found at mortgage brokers and large mortgage lenders, credit unions of banks and the most important pro is that it’s quite easy to qualify for such a loan and FHA also offers attractive terms. In the same time, FHA’s fees are higher than other programs’ fees, the closing process is not that fast and you are limited to one deal at a time.
VA (Veterans Administration) Loans
A VA loan is a mortgage loan in the United States guaranteed by the United States Department of Veterans Affairs. VA (Veterans Administration) loans have special conditions for U.S. military veterans and they usually include a 0% down payment. It is much easier to qualify for a VA loan than for a FHA loan but the process is not that fast, and the limit is directly connected to your maximum entitlement; also, fixer properties will not qualify for such types of loans. You can get more details about VA loans at banks, mortgage brokers, large mortgage lenders or credit unions.
In the United States, a conforming loan is a mortgage loan that conforms to GSE (Fannie Mae and Freddie Mac) guidelines. Conforming Loans are that specific type of loans that conform to the guidelines and rules of giant FNMA and FHLMC, also known as Fannie Mae and Freddie Mac. 20% is the standard for the non-owner occupied loans, bot programs exist also for 5-10% down too. They have very attractive terms, with low interest rates (over 15 up to 30 years) and they have a somewhat faster qualification process than Federal Housing Administration (FHA) and Veterans Administration (VA) loans. An essential con for conforming loans is that you are limited to 4-10 loans and another minus would be that down payment is larger than FHA and VA loans.
Loan To Value Ratio in Real Estate Financing
It’s essential to do your research before choosing a real estate financing source. In the same time, there is another aspect to keep in mind – LTV (loan to value) ratio. This number describes the size of a loan in comparison to the value of the property the loan is securing. Money lenders use the loan to value ration to evaluate how much risk a loan presents and it is well known that a higher LTV ratio indicates higher levels of risk. Experienced real estate investors never recommend investing all your savings into a single real estate property, because risk levels are too high (you can, for example, use your savings as down payment for other five properties and this way your income and profit rise).
Think twice before investing your whole amount of savings in a single asset, because this means less money to invest in others and less chances to multiply your income. In the world of real estate investors there is a hot debate about cash/savings vs. loans as capital sources, but most of the voices state that if contracted under favorable terms, loan can be much more efficient and have proven to be less risky.
Good luck in choosing the best capital source for your real estate investment!
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