Unconventional Home Loans For Buyers And Investors

One of the biggest mistakes potential homebuyers can make is assuming that they cannot qualify for a mortgage. There are numerous unconventional home loan options available to make buying property possible for more consumers. Even without the perfect credit or the money for a large down payment, you may qualify for these loans. Read on to find out what constitutes a non-conventional loan, how to qualify, and pro tips on how to proceed if you want to buy a home with a non-conforming loan.

What Is An Unconventional Loan?

A non-conventional loan, or mortgage, is a type of loan that does not have to follow traditional mortgage loan requirements. Non-conventional loans sometimes refer to non-conforming loans. Conventional (or conforming) loans use wide sets of qualifications and eligibility, such as credit scores, loan amounts, and debt-to-income ratios. Also, most conventional loans require a 20 percent down payment minimum or private mortgage insurance payments.

Non-conventional home loans offer more flexible qualification requirements, oftentimes because they have been backed by the government. The Federal Housing Administration, the U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture are all federal agencies that ensure these non-conventional loans to encourage homeownership.

Conventional Vs. Unconventional Loans

One of the main differences between conventional and unconventional loans is the credit score and down payment that they each require. Private lenders offer conventional loans and require buyers to have an excellent credit score.

Conventional loans are either fixed-rate or adjustable. Fixed-rate mortgages’ interest rates will not change. Adjustable-rate mortgages often begin with a lower interest rate and lower monthly payment. However, a change in property taxes or your homeowners’ premium results in an increased interest rate.

Government programs back unconventional loans and have lower credit score requirements and larger down payment. However, the loan limits of unconventional loans are also lower.

The two main types of government-backed unconventional home loans include FHA and VA loans. The government ensures FHA loans allowing for lower requirements to obtain these loans. Veterans Affairs Loans (VA) are reserved for military members and their families. These loans may allow for no down payment at all, but ultimately the VA will handle the approval process.

Types Of Unconventional Loans

Depending on how long you have been in the real estate industry, you have likely heard of various non-conventional loans. These loans have atypical approval requirements. Read through the list below to familiarize yourself with the various types of nonconforming loans available:

FHA: Loans secured by the Federal Housing Administration are one of the most popular non-conforming loan types. This is because of the low-down-payment requirements. Moderate income homebuyers can benefit from these loans, but they include some credit score guidelines. The application process of FHA loans is universally accessible because most mortgage providers issue them.

USDA: The U.S. Department of Agriculture backs USDA loans with the intention to develop rural areas. Loan applicants must be looking at property in a town with less than 20,000 inhabitants to be eligible. Other requirements include a stable income, and a credit score of at least 640. In addition, the property must be the borrower’s primary residence.

VA: Active-duty military personnel and certain veteran groups can apply for a VA loan through the U.S. Department of Veterans Affairs. One of the biggest benefits of this loan type is that they do not require a down payment. Read this article to learn more about VA loans and how to apply.

Crowdfunding: Crowdfunding is arguably one of the most interesting developments to come from new technologies in the real estate industry. The process refers to raising money for a property from groups of people, rather than a single loan. The breakdown of homeownership will vary depending on the stipulations established at the time of fundraising; however, this is an interesting option for investors and even first-time homebuyers to consider.

Seller Financing: This arrangement involves loaning the money for a property directly from the previous owner, who is selling the home. This non-conventional set up is attractive because it can allow homebuyers to bypass strict mortgage requirements. However, it is often in exchange for higher interest payments. Often, the properties do not advertise seller financing, so do not be afraid to ask. Make sure you have a concrete pitch when you do.

Private & Hard Money Lenders: Private and hard money are two of the most common sources of financing among today’s real estate investors. This route involves finding an investor to act as a lender and finance a property; as the buyer, you would then pay back the loan with interest directly to the lender. Again, this nonconforming financing method is a great way to work around potentially stricter mortgage approval requirements.

How To Qualify For An Unconventional Mortgage Loan

Non-conventional home loans facilitate homeownership opportunities for individuals who may not qualify otherwise. You will find easier requirements with these loans than their conventional counterparts. Down payment requirements for non-conventional mortgages can be as low as three percent, while acceptable credit scores in the 500’s.

It is important to note that the specifics of non-conventional mortgages will vary from type to type. Keep in mind that not everyone will qualify for every type. Some non-conventional loans include demographic limits, such as eligible military veterans and their family, or low-income homebuyers in rural areas.

As mentioned earlier, loan products that do not conform to the requirements of conventional loans are non-conventional mortgages as well, even if they are not backed by the federal government. According to NerdWallet.com, nearly half of home loans are now provided by alternative mortgage lenders. This shows that the demand for non-conventional home loans is significant and growing.

Investors hoping to secure non-conventional home loans can rely on the performance of other properties when raising funding. Depending on the loan’s source, investors can present numbers from past real estate transactions to establish rapport with lenders. Different non-conventional loan types will fit into three main sources: online lenders, marketplaces and brokers, or non-bank lenders. Investors should frame their approach depending on the source of the potential loan.

Online Mortgage Lenders

Chances are, you have seen at least one commercial for Rocket Mortgage on the television. Quicken Loans launched Rocket Mortgage – one of the most substantial companies in a new generation of online mortgage lenders. Online lenders are offering consumers with a mortgage and refinancing approvals in a matter of minutes, using loan-decision algorithms. These programs appeal widely to millennials, today’s largest group of homebuyers, who prefer to shop for products online and receive instant gratification.

Marketplaces And Brokers

As the concept of online mortgage lenders, many popular sites such as Zillow or LendingTree offer consumers a list of potential loan products to choose from. An algorithm performs a search that takes the shopper’s basic information and matches nonconforming mortgage rates and products that lenders offer. The consumer then selects their preferred product and works directly with the lender to finish processing the application. In turn, these marketplaces, and brokers, which can be thought of as middlemen, receive a fee for providing lenders with leads.

Non-Bank Lenders

Small lenders and credit unions provide an alternative to home buyers who have less-than-perfect credit. Because these entities often do not face as many federal regulations as their counterparts, the banks can provide more flexible options to consumers. As a result of the housing crisis, many big banks have decreased their roles in mortgage lending, limiting their products to the most qualified borrowers. In recent years, non-bank lenders have increasingly filled this void.

How To Buy A Home With An Unconventional Loan

It is easy to get discouraged when you want to buy a home, but cannot see the light at the end of the tunnel when it comes to paying off debt or saving up enough funds for a down payment. However, it should be known that non-conventional mortgage loans have become increasingly popular, making homeownership more accessible to those who cannot or do not want to take out a conventional mortgage. Follow the steps below if you are interested in buying a property with a non-conforming loan:

Compare online mortgage lenders: Online lenders tend to offer flexible product options, compared to their brick and mortar counterparts. Spend time comparing online mortgage lenders that provide loans for those with lower credit scores or require a lower down payment. It should be noted that interest rates will often be higher, and shoppers should mind their due diligence and perform thorough research before deciding.

Meet with a credit union: Credit unions are oft-forgotten by borrowers but are institutions that often offer great deals when compared to traditional banks, especially if you are a long-time member. Sit down with a representative with your credit union and go over their lending programs, including first-time home-buying programs, and you may be able to obtain great terms.

Identify an alternative solution: New home buyers should not automatically write off traditional lenders and should always sit down for a meeting at the very least. In some cases, a lender may be willing to work with home buyers to come up with a creative solution, such as offering to combine a graduates’ student debt with their mortgage payment, or increasing the loan-to-value ratio on the loan. For more alternative solutions, review the non-conforming loan types listed above.

 

Summary

Today’s economic landscape can make maintaining perfect credit and saving up 20 percent for a down payment a challenge for many aspiring homeowners. The burden of student loans, skyrocketing costs of living, and ever-increasing property values can make the goal of homeownership seem even farther away. However, by considering an unconventional home loan buyers have to access to more flexible, creative options. These unique financing methods have enabled countless individuals to achieve their goals of homeownership.

Is a lack of funds keeping you from investing in real estate? Do not let it!  

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701

About:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years. © 2020 Level 4 Funding LLC. All Rights Reserved.

Hard Money Lending For Real Estate

Understanding the basics of hard money lending represents the first step of breaking down real estate financing. Hard money loans are, after all, a real estate investor’s best friend; they are the quickest path to securing a deal. Nonetheless, hard money lending can get complicated quickly, so you need to realize what you are getting into before making any decisions for yourself.

When exploring real estate hard money lending, you need to comprehend several questions: What are the pros and cons of such a strategy? When should you use private financing for real estate? Where can you find hard money lenders for real estate? The more you know about hard money, for that matter, the better. This guide should serve to lay a solid foundation for everything you need to know about one of today’s greatest sources of capital.

What Is Hard Money Lending?

Many investors looking for alternative financing that doesn’t involve their local bank may have heard the term “hard money.” They may have even asked themselves a simple follow up question: what is hard money lending?

Hard money lending is a short-term loan obtained from private investors or individuals, at terms that may be stricter than a traditional loan. Though the terms of this creative financing option may be stricter, this form of private financing for real estate generally has more lenient criteria.

Investor Q&A: What Is Hard Money Lending?

1. The Big-Picture Of Hard Money Lending

Hard money lending is another way an investor can finance their real estate projects, outside of the traditional mortgage means. This is a short-term loan secured from private investors or individuals, as opposed to other traditional institutions like banks or credit unions.

Hard money lending is often used by investors who aim to improve or renovate a property and sell it. Given that you can usually get a loan in a matter of days (as opposed to weeks from banks), this is a fine choice for house flippers and real estate developers. This is also an option for investors who only need to do quick fixes to raise a property’s value, then secure another loan based on the new value to pay off the hard money lender.

2. Hard Money Lending Vs. Other Lending Types

The main difference between hard money lending and other types of loans is that this type of financing does not focus on your credit history or income as collateral. Instead, lenders will see the property’s value as the determining factor, placing emphasis on its after-repair value (ARV). ARV is the worth of the property once your renovations are done.

Other differences include:

Hard money lenders do not invest in primary residences. Owner-occupied residential properties are subject to many rules and regulations, thereby increasing the risk for lenders.

Hard money lenders do not sell loans to Freddie Mac or Fannie Mae. Often, lenders use their own money or raise it from a pool of investors. The amount they loan are based on their property specialization (if there are any) and the risks they are comfortable taking.

Hard money loans are short term. You will not have the luxury of 15 to 30 years to repay your loans. Hard money loans are typically needing to be repaid anywhere between 6 to 18 months.

Hard money lenders have their own lending criteria. A private lender, for example, could be your friend, family, or business associate. As such, they may not have any preset criteria before lending you money, giving you more flexibility in negotiating terms. Hard money lenders, on the other hand, come with a specific set of upfront points, interest rates, and defined durations.

The Pros And Cons Of Hard Money Loans

I maintain that hard money loans represent one of the single most advantageous funding opportunities for investors to take advantage of. Few sources of capital, if any, can compete on the same level as hard money and offer the same competitive edge. It is hard money loans, after all, that many investors must thank for acquiring their deals in the first place. That said, hard money is not without its own caveats. Despite its superior benefits, there are downsides to hard money that warrant the consideration of every investor.

Let us look at the pros and cons of hard money so you can weigh the pros and cons yourself.

Pros

Securing financing with a hard money lending loan offers  you a number of benefits, including:

Speed: The Dodd-Frank Act is a financial reform legislation enacted in the past decade. It came with new regulations on mortgage lending, which then means a lot of time (often, months) is needed for an investor to close a loan. Hard money lending, on the other hand, is fast, as you can secure a loan in a days or weeks (depending on negotiations). Time is of the essence, especially for large development projects, and hard money lending can help speed that process along.

Flexibility: Terms can be negotiated with hard money lending loans, since you are dealing directly with individual investors. Banks are not as flexible.

Collateral: With hard money financing, the property itself is your collateral for the loan. Some lenders even accept other assets, like your retirement account or a residential property under your name, as a basis for starting a loan.

No “Red Tape”: Getting a loan for an investment property with a traditional mortgage is difficult, if not impossible. Traditional borrowers need to worry about credit score, LTV ratios, debt-to-income, and several other indicators they need to meet criteria for. Hard money lenders, however, function as asset-based lenders who are more concerned with the property than the borrower’s credentials.

Convenience: There is something to be said for the convenience of being able to close with cash. Having to supply a lender with bank statements, income documentation, tax returns and leases can become overbearing and consume your focus and energy. Hard money, on the other hand, cuts out the middleman and a lot of the headaches.

Volume: Hard money lenders allow investors to leverage other people’s money. That means investors could potentially fund more than one deal at a time. Traditional loans will do no such thing. If you want to fund multiple deals at a time, you should really consider a hard money loan.

Competitive Edge: Hard money allows investors to beat out the competition, or at least those using a traditional loan. If for nothing else, sellers prefer the two things hard money offers: cash and a timely transaction.

Cons

There are, however, certain disadvantages to using hard money for real estate investments:

Cost: The convenience that comes with hard money lending may be its primary benefit; however, it is also its main drawback. Given that hard money lenders are at higher risk than borrowers, many may demand up to 10 percentage points higher than traditional loans. Interest rates range from 10 to 15 percent. Expect other fees to be also at a relatively increased rate, including origination fees and closing costs.

Short Repayment Schedule: A shorter repayment period is the price to pay for being able to get a property listed on the market ASAP. This can be anywhere between 6 to 18 months. Make sure that you can sell the property and profit in the soonest time possible.

When To Use Hard Money For Real Estate

Though hard money lenders will often issue loans for almost any type of property, there are certain types of property investments which were absolutely made for hard money. Rehab projects, construction loans, and land loans were made to be financed through hard money.

This does not mean that other types of investments should not be financed through hard money. If you, the buyer of a property, has credit issues, or you need to act quickly on a deal before it disappears, the speed and convenience afforded by a hard money loan can be worth its weight in gold.

Finding Hard Money Lenders For Real Estate Investing

Many new investors fret over how they will find hard money lenders to get moving on the financing of their project. But here are a couple of simple ways to approach this:

REIA or Meetup Meetings: Often hard money lenders will speak at local real estate events. If not, ask fellow members to see if they know any trustworthy lenders.

Real Estate Agent or Traditional Lender: Ask that realtor, or mortgage broker, in your real estate network if they know a hard money lender you could do business with.

Google “Hard Money Lender”: Just be careful, there are some unscrupulous individuals out there. Be sure to ask for references and talk to fellow investors to get their opinion.

How Does Hard Money Lending Work?

Given that these are private individuals, every hard money lender is different. As stated above, these lenders come with their own requirements, which include the process they need to close the transaction.

To give you a general idea, this is the usual course hard money lending takes:

Step #1: Find a hard lender near you. Do not let the rejection of a bank loan drive you to desperation. Research and make sure the lender can be trusted. Do they have a legitimate website? Are they in good standing with their own investors? Do they have pending lawsuits over bad loans?

Step #2: Arrange a meeting with the lender. This is also the time when you can inquire whether they specialize in a kind of investment property or if they have worked with projects previously that mirror yours. Assess the time frame specified for the loan and see if this is something you can work with.

Step #3: Prepare a contract. Make sure that you are offering a good deal with a sound financial plan.

Step #4: Inform the lender of your contract price. Most lenders are willing to fund 60 to 70 percent of the property’s ARV. The remaining 30 to 40 percent is up to you. You will increase your chances of getting approved if you already have this at hand.

Step #5: Get the property appraised. The lender will either send a list of their trusted appraisers or have their own.

Step #6: Prepare additional documents needed. Some lenders may require that you present other documentations, like W-2s, bank statements, pay stubs, etc.

Step #7: Wait for lender’s approval. If it is a deal that the lender finds satisfactory, then they will inform you of the amount and terms for payment.

Step #8: Consult with a lawyer. Make sure that you are legally protected, especially after getting the lender’s counteroffer.

Step #9: Close the loan. This will be done typically at a title company or a lawyer’s office. The lender will then put the money into escrow at the title company. The title company would make sure all paperwork is completed, and that checks issued to all parties involved. Additional costs may include any closing fees and property insurances.

Often, lenders grant money to properties that will not be in the market for long, that have good selling potential. Make sure your team budgets ample time to complete renovations. There is no sense in coming up with unrealistic projections. This cannot only set you back financially, but possibly burn a possible future relationship with your hard money lender.

Summary

Using hard money lending for real estate acquisitions has become commonplace in the housing sector. If for nothing else, a hard money loan gives investors an edge over those that are using traditional financing methods. Not only should hard money borrowers be able to secure capital faster, but sellers will also favor their offers because they are made with cash. That said, if you are looking to fund a deal, you may not want to ignore hard money; it could be the one thing that gets you what you need.

Have you ever bought an investment property with hard money? What was your experience like? Feel free to let us know how things went in the comments below.

 

Dennis Dahlberg 
Broker/RI/CEO/MLO 
Level 4 Funding LLC 
Hard Money Lender 
Hard Money Loans 
Hard Money Loan 
Arizona Tel:  (623) 582-4444 
Texas Tel:      (512) 516-1177 
Dennis@level4funding.com 
Dennis Dahlberg Broker/RI/CEO

NMLS 1057378 | AZMB 0923961 | MLO 1057378 
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027 
111 Congress Ave | Austin | Texas | 78701 
About:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years. 
© 2019 Level 4 Funding LLC. All Rights Reserved.

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A Guide To Real Estate Financing

A Guide To Real Estate Financing

As a beginner investor, understanding how to finance a deal is just as important as finding one. A lack of real estate financing continues to hinder most new investors in today’s market, simply because they are not aware of the different financing avenues. Whether you have access to working capital or not, there are always ways to acquire capital.

Investing in real estate is never a bad idea. It offers potential investors a slew of financial and personal benefits such as increased cash flow, home appreciation, and tax benefits. In fact, real estate investment continues to be one of the most popular vehicles in producing financial wealth. According to the IRS, approximately 71 percent of Americans that declared more than a million dollars on their income tax returns in the last 50 years was in real estate. Ironically, beginner investors face the challenge of learning how to obtain real estate investment financing before they can start creating wealth. Read on to learn about some of the most common types of real estate financing options out there, as well as prominent loans for real estate investing.

What Is Real Estate Financing?

Real estate financing is a term generally used to describe an investor’s method of securing funds for an impending deal. As its name suggests, this method will have investors secure capital from an outside source to buy and renovate a property. Not unlike traditional financing, however, real estate financing comes complete with terms and underwriting, not the least of which need to be fully understood before entering into a contract.

How To Obtain Real Estate Investment Financing

One of the biggest misconceptions of real estate investing is that you need to have a lot of money to get started, which simply isn’t true. The secret that many professionals don’t understand, however, is the fact that there is a multitude of different real estate financing options available to fund every investment. Because the method in which a specific deal is funded can greatly impact its outcome, understanding the financing aspect is imperative.

As an investor, there are a few different ways to go about financing real estate investments. Each one will have its own set of pros and cons, and your financing approach will depend on the property and the situation. For beginner investors, it’s important to remember that not all real estate investment financing options are created equal. What works for someone else may not necessarily work for you, but the trick is understanding which real estate financing option will compliment your business strategy. By taking the time to research the various real estate financing options out there, new investors are sure to realize how accessible investing can be. Broadening one’s toolkit of real estate investment financing options is simply a matter of being knowledgeable about what strategies exist, as well as proper ways to leverage them. Keep in mind that all investors have faced the financing hurdle at some point in their career; when in doubt, there is nothing wrong with tapping into your investor network and ask for advice.

Real Estate Financing Options

Investors with a deal lined up have already accomplished one of the most important steps in home flipping. However, finding a viable deal is only one piece of the puzzle. Once you find a good property to invest in, you need to then be able to finance the impending transaction.

Financing a real estate deal tends to send new investors into a fit of anxiety or is even enough to compel them to pack up their dreams and retreat to their nine-to-five job. However, if an investor commits to doing his or her due diligence, the fear of a lack of funds is irrational.

If you have a great deal on the table, there is no limit when it comes to ways to fund it. A great example would be leveraging a self-directed IRA, which would require some careful consideration beforehand; however, it goes to show that there are many available options for real estate investment financing. For investors wondering how to finance an investment property, I will explain some of your real estate financing options:

Cash Financing: Great for investors who have access to a significant amount of capital, either personally or through their network, and wish to purchase properties free and clear.

Hard Money Lenders: Accessible to investors who have less-than-perfect credit or financial history and are in need of a short-term loan.

Private Money Lenders: Investors who are well-connected can often tap into capital from personal connections, borrowing money at a specified interest rate and payback period.

Self-Directed IRA Accounts: Individuals who have elected to create savings through a self-directed IRA may make the decision to tap into their account as a way to access capital.

Seller Financing: Buyers and sellers can sometimes strike up a mutually beneficial agreement, allowing the investor and seller to avoid having to go through a private lender altogether.

Peer-To-Peer Lending: This is a great option for investors trying to raise the last portion of funding for a project. Peer-to-peer lending can offer high flexibility and low-interest rates.

Cash Financing

As an investor, cash is a monumental tool for getting what you want. Along with getting more offers accepted, cash financing enables investors to save on interest, increase their cash flow, and receive instant equity in their investment. It also has the ability to save investors on the purchase amount.

In the first quarter of 2016, all-cash homebuyers for single-family homes and condos paid, on average, 23 percent less per square foot than all homebuyers nationwide, according to RealtyTrac.

In addition, it is important to remember there will be times when paying cash for property makes sense and other times when other financing options should be considered. If you have your own capital, however, you should always consider using it in the best possible scenarios.

Hard Money Lenders

 

Funded by private businesses and individuals, hard money lenders provide short-term, high-rate loans for real estate investors. This financing option, which does not conform to bank standards of creditworthiness, is typically used by rehabbers looking to renovate a property.

Hard money financing is generally determined by the value of the investment property itself, with lenders analyzing the “After Repair Value” (ARV) to determine the size of the loan. Hard money lenders generally will not fund an entire deal, but rather fund a percentage of the purchase price or the after-repair value, which will range from 50 to 70 percent.

Hard money lender also charges fees apart from the interest on the loan. These fees are generally delineated in points (three to five), which represent additional percentage fees based on the loan amount. In general, hard money lenders charge much higher interest rates – sometimes double the amount of a traditional mortgage, plus fees. In the end, all hard money lenders will have different requirements, and real estate investors need to be fully aware of what they are getting themselves into.

Private Money Lenders

Private money lenders are integral to the growth of every new investor. They have the means and intent to invest capital into your business, and they are just as interested in working with you, as you are with them.

Private money lenders will provide investors with cash to purchase real estate properties in exchange for a specific interest rate. These terms will generally be established upfront and with a specified payback period – anywhere from six months to a year. These loans are most common when investors believe they can raise the value of a particular property over a short period of time, typically through renovations. It’s also important to understand that, as hard money, private money should only be used when you have a clearly defined exit strategy.

Self-Directed IRA Accounts

A self-directed IRA (Individual Retirement Account) is, at its most basic level, a savings account that allows for compounded, tax-free growth, over time. Self-directed IRAs are unique from other types of savings accounts, such as a 401K, as the owner can control a wide array of investment options, including real estate.

Owners of self-directed IRA account enjoy a unique benefit of being able to purchase, rehab and sell properties while still being able to defer taxes. However, it is important to note that owners under the age of 60 are typically subject to a penalty for withdrawing funds early.

Seller Financing

There are some scenarios when both an investor and a seller can strike up a mutually beneficial seller financing deal. In seller financing, the buyer of the property will make payments directly to the seller of the property, rather than going through a bank. This can help a motivated seller sell the property more quickly, and the investor can avoid having to jump over traditional mortgage lending hurdles, such as financial and credit score minimums.

Together, the buyer and seller can often enjoy a faster transaction process, as well as avoid many costs and fees associated with the closing process. Furthermore, the owner has the option to sell the promissory note if they no longer want to manage their own owner financing.

Peer-To-Peer Lending

Peer-to-peer lending allows investors to borrow money from other investors, or groups of investors (hence the name). The basic process can be thought of similarly to hard or private money lending, though the specifics are quite different. Like these methods, investors are able to bypass the strict requirements of traditional funding and allow their portfolios to do the talking.

This form of real estate financing does typically involves a lower loan-to-value ratio when compared to other types of funding. This often prevents investors from borrowing the entire loan amount needed to purchase a property; however, don’t be afraid to seek out the financing you need. Peer-to-peer financing as a whole offers a high degree of flexibility overall.

Best Loans For Real Estate Investing

When examining the large umbrella of different real estate financing options, one should also take into consideration loans that are offered by the government, traditional lenders, as well as methods of leveraging personal equity. Read on to find out some of the most popular loan options that are used creatively by investors, including real estate investment loans on bad credit:

203K Loan: A special type of loan backed by the Federal Housing Administration, 203K loans support the purchase of older or damaged properties in need of rehabilitation.

Home Equity Loan: Homeowners who have built up equity in their property are able to take out a loan in the form of a line of credit, allowing them the flexibility to expand their portfolios by using their equity as collateral.

FHA Loan: Consumers with less-than-perfect credit or those who do not have access to capital to satisfy a large down payment can achieve homeownership by taking out a mortgage backed by the Federal Housing Administration.

Traditional Mortgage Loan: Conventional home loans financed by banks still remains one of the most popular methods of financing real estate deals.

Conforming Loan: As its name suggests, a conforming loan is a mortgage that is equal to or less than the amount established by the conforming loan limit set by the FHFA. Perhaps even more importantly, conforming loans are in compliance with Freddie Mac and Fannie Mae.

Portfolio Loan: Portfolio loans are serviced by the initial lenders that first issued the funds. Instead of selling the loan to the secondary market, however, the servicer will keep the loan in its own portfolio.

VA Loan: A VA loan is a mortgage that is guaranteed by the United States Department of Veterans Affairs.

203K Loan

203K loans are a special type of loan backed by the Federal Housing Administration and is designed specifically for those who plan to rehabilitate older or damaged properties. The loan includes the price of the purchase of the property, plus the estimated costs to make renovations. 203K rehab loans are attractive to some because of the low-down-payment requirement of 3.5 percent and allow the funding of cosmetic or major repairs as needed. In addition, the borrower can include 6 months’ worth of mortgage payments in the loan.

This policy is designed to help homeowners make mortgage payments during the time that they cannot live in the property during its rehabilitation phase. Investors should be aware, however, of some potential downsides to this loan. First, 203K borrowers are required to hire a licensed contractor and construction consultant, meaning that DIY projects are not allowed. In addition, fix and flip investment properties are not eligible. Those would be able to take an owner-occupied approach, by purchasing a property with 1 to 4 units.

Home Equity Loan

When an investor has built up equity in the form of their personal residence, then they have the opportunity to take out a loan against that equity. A home equity loan, more formally known as a Home Equity Line of Credit (HELOC), allows homeowners to leverage their home equity as collateral in order to take out a loan. Common uses for a home equity loan include home repairs, education, or the resolving of debt.

A major benefit of a home equity loan is the low rates that are typically based on the prime rate, currently at a low. In addition, borrowers enjoy the flexibility to use the loan how they would like, as well as manage their own repayment structure. This flexibility creates an avenue for homeowners to expand their portfolios on their own terms.

FHA Loan

The FHA loan is one of several home loan options offered by the federal government. The Federal Housing Administration (FHA) established the loan to help broaden access to homeownership for consumers with less-than-perfect credit profiles, as well as those who do not have the financial means to save up for a large down payment. When a new homebuyer shops for mortgage loan options, they can search for lenders that offer mortgage loan products that are backed by the FHA. These loans offer a down payment requirement of as low as 3.5 percent, while still allowing for a low-interest rate.

It should be noted, however, that putting down less than 20 percent on a home loan will result in a required private mortgage insurance payment. In addition, the FHA loan only allows owner-occupied properties but does allow for the purchase of a property with more than one unit. According to The Lenders Network, the current loan limit for a single-unit property ranges between $294,515 to $679,650, depending on whether the market is a low-cost or high-cost area.

Traditional Mortgage Loan

One of the more popular financing methods in real estate is through traditional lenders, which includes conventional and FHA loans. Many investors are pursuing traditional lender financing options in today’s market because interest rates are at historic lows.

However, traditional lenders follow strict guidelines with many demands that other financing options don’t require. The hurdles with traditional loans, such as a conventional mortgage loan, include a sufficient down payment (anywhere from 15 to 25 percent), an adequate credit score (a minimum of 680), and documentation of income. In addition, the money used must be what is called “sourced and seasoned” for at least 60 days and cannot be a gift. In many cases, this could limit many investors.

Conforming Loans\

Conforming loans, as their names suggest, conform to standardized rules set forth by Fannie Mae and Freddie Mac. More specifically, however, the “conforming” part of these loans refers to the amount loaned out. Conforming loans must be less than the conforming loan limit, set by the Federal Housing Finance Agency. The 2019 limit for conforming loans is set at $484,350, or $31,250 more than the conforming loan limit set the previous year.  It is worth noting, however, that the conforming loan limit isn’t universal across every market. In higher-priced areas like New York or San Diego, the limit is higher.

Outside of the size of the loan itself, conforming loans are also characterized by the following:

Loan-To-Value Ratio

Debt-To-Income Ratio

Credit Score & History

Documentation requirements

Portfolio Loans

Portfolio loans are financed by the loan originator, but instead of being sold to a secondary market—like most traditional lenders tend to do—the lender will retain the loan for their own portfolio. As a result, borrowers won’t have to establish a relationship with another lender and can, instead, maintain the connection with their current lender. In other words, it’ll be much easier to maintain an open line of communication.

VA Loans

VA loans are intended to service United States Veterans, Service Members, and their spouses. VA Loans are issued by qualified lenders and guaranteed by the U.S. Department of Veterans Affairs (VA). Specifically, the VA will guarantee a maximum of 25 percent of a home loan amount up to $113,275, which limits the maximum loan amount to $453,100. Meanwhile, “the reasonable value of the property or the purchase price, whichever is less, plus the funding fee may be borrowed,” according to VAloans.com.

Using lender financing is a great option for beginner investors, but it’s important to be patient and prepared. Make sure you understand the process and what is required to get approved.

Summary

When it comes down to it, real estate is a commodity that must be paid for. As an investor, it is up to you to determine which real estate financing will work best for each deal. Ultimately, understanding the importance of real estate financing, including the different financing methods used by real estate investors, will assist in getting started. Now that you have been equipped with some of the most popular financing strategies, there is no need to hesitate to take on your next venture.

Which real estate financing option was the most compelling to you? Share your thoughts in the comments below:

 

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701

About:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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