PHILADELPHIA - Real estate purchases are generally funded with a portion of the purchaser's savings. However, the buyer's savings only make up a small percentage of the total purchase price. Therefore, he or she must be aware of all the available sources of funds. Generally, there are four common sources of real estate financing. These are primary sources, secondary sources, financial middlemen, and the secondary mortgage market.
Home equity loans
Home equity loans are a common source of real estate financing for both home buyers and sellers. Like other types of loans, these loans require borrowers to pay back a fixed amount over a specified period of time, typically five to fifteen years. These loans require good credit, a stable income, and the ability to make monthly payments.
Home equity loans can be revolving lines of credit or conventional loans and are usually issued with fixed interest rates. This helps borrowers avoid payment shock later on.
Home equity lines of credit
A home equity line of credit, or HELOC, allows you to borrow a certain amount of money against the equity in your home. The funds are available for use as you see fit and are tax-deductible. The interest rate on HELOCs is usually less than that on a standard bank loan.
One of the most common uses of home equity loans is to make home improvements. These renovations can increase the value of a home. Many people take out home equity loans to make these improvements, even if the expenses exceed the loan amount. Taking out a HELOC will also let you add space to your home without having to dip into your personal savings.
Hard money loans
Hard money loans are a common source of real estate financing and can help you complete projects faster. In addition, they do not require strict underwriting criteria, making them an excellent choice for people with bad credit. These loans can be used for virtually any legal business purpose and are often much easier to obtain than traditional bank loans.
Hard money loans range in size, but most start around $50k or $75k. The top end can be $1 million or more. The amount of money you can borrow depends on your credit, the value of the property, and the loan-to-value percentage, which is based on the purchase price.
Private money lenders
Private money lenders provide real estate investors with an alternative source of financing. While many funding sources are available, there are some important things to remember when looking for private money lenders. First, be sure to know what they require from you. Private money lenders often don't offer loan guarantees, and a failure to make payments may have a negative impact on their ability to borrow in the future. If you need a loan for your real estate investment, consider seeking the advice of a real estate attorney.
Private money loans are especially appealing to those looking to rehab properties. This is because the private money lender will typically underwrite the property and the borrower's credit, emphasizing the value of the property. Although private money lenders charge higher interest rates than conventional banks, they bypass many of the red tape that banks have to deal with. These advantages make private money a viable source of real estate financing.
Development facilities
Real estate development facilities are loans that provide borrowers with funds to break ground on a development project or to complete the construction of a finished building. These loans are typically used by investors who need money to acquire raw land or tear down an existing building. The loans are used to cover the costs of initial construction, site preparation, and leasing.
These sources of financing are categorized into two types: senior and junior debt. Senior debt, secured by property, is the lowest risk debt. Common equity is the lowest priority and the riskiest type of debt. Common equity is only repaid when the rest of the capital stack is repaid.
Portfolio loans
When you need to invest in real estate, there are several sources to choose from. Some are geared specifically toward investors, while others are available to anyone with any type of credit score. Portfolio loans are especially helpful for those with less than stellar credit, as they can offer borrowers an opportunity they would not otherwise have. Portfolio loans also do not require a specific credit score and are often more flexible than other types of loans.
Portfolio loans are mortgages that a lender holds in his or her portfolio instead of selling them in the secondary mortgage market. This means that lender can set their own standards for these loans and do not need to abide by the rigorous guidelines of traditional lenders. This can benefit those seeking to finance a real estate investment.
