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Real Estate Sales Blog

Major types of Loans available for purchasing real estate

A loan is a means of financing an expenditure. A lender views a loan differently, they see the loan as an investment and just like any other investor, they are looking for a profitable return on their investment. For a lender, a loan must generate enough income to be attractive as an investment, this income is realized through finance charges and interest charged. Your goal as a borrower is to find a loan with the best terms, meaning low interest rates and minimal finance charges. The three major types of loans are conventional, FHA and VA loans.

A conventional loan will require the largest down payment of the three major types of loans. This loan will usually come with private mortgage insurance, which is a fee that protects the bank in case you default. FHA loans usually will not require as high of a down payment as a conventional loan, FHA loans are backed by Federal housing administration which is part of HUD. A borrower will usually need to pay a mortgage insurance premium with a FHA loan. VA loans are very popular as well and are available to veterans and their spouses. VA loans are backed by the department of veteran affairs and usually offer the lowest down payment and very strong rates. Interest rates are dictated by the Federal Reserve System (Fed) by the discount rate (interest rate) they charge when lending money to their member banks. Be aware that individual banks choose what interest rates to charge, but a lot of this is dictated by the discount rate the fed charges.

Of course there are other loans out there but the three mentioned above are most popular. A bank will look at your income, credit score and expenses before approving you for a loan/amount, the higher your income and credit score, the better chance you have for approval on that loan and amount. As a real estate investor, you may need to seek private investors/hard money lenders when financing that rental property or flip. Be aware that you will need to pay a higher interest rate when dealing with hard money lenders, however it could be well worth the cost, especially if the return on investment is strong. The bottom line is you need to do your homework to find the best loan. There are great resources out there, I would recommend getting in touch with mortgage brokers as well as private investors.

Happy Investing.