Real Estate Financing Options
Being one of the investment geniuses of the current time, Warren Buffet has certainly given a decent piece of advice for our average Joe. According to a recent survey done by Trulia, the American dream of owning a home is alive, and in fact, more people are adding it to their personal American dream, at 75% for 2016. At the same time, 22% of the respondents expect getting a mortgage to become harder in 2016 among other challenges towards homeownership.
If you already own your home or have plans to invest in rental real estate, but aren’t quite sure about getting the necessary funding, this article is a goldmine of knowledge for you.
“Never depend on single income. Make investments to create a second source.” ~ Warren Buffet
How to Get Financing for Your Next Investment Property?
Conventional Real Estate Loans:
If you are a beginner real estate investor, with a FICO score of above 700, conventional real estate loans are best to start with. You can visit any of the major banks or financial institutions for investment property funding, although make sure to keep your debt-to-income ratio low, as banks rely on this ratio to judge your ability for making repayments.
According to Freddie Mac’s mortgage rate survey, a 30-year fixed-rate mortgage was available at an average interest rate of 3.65%, whereas a 15-year mortgage came with an interest of 2.83%, as of February 11, 2016.
Portfolio Loans for Investment Properties:
Very few national banks entertain investors with four or more financed properties, making it difficult to grow your portfolio. This is where portfolio loans come in. Portfolio loans are more or less like in-house loans of small banks, with comparatively lower regulations and large credit access. The financing instruments offered by these portfolio lenders might differ from their nationalized counterparts.
The best way to find portfolio lenders is to ask around the investor community or consult your real estate agent. Considering the limited or localized clientele of these lenders, your relationship with them will have a huge impact on credit availability and lending rates. You might have to transfer all your accounts to the local bank, portfolio lender, and don’t worry, as they have competitive products to retain their customers.
Seller financing is one of the best options in place for real estate investors. For those who don’t own a seller-financed property, it simply means that the seller has agreed to finance the property at a competitive interest rate and certain down payment. These loans usually have a short-term repayment span, and the seller can either finance the entire deal or the deficit between the value of the property and qualified mortgage loan available to the buyer. Generally, the loan is amortized over 30 years with a balloon payment in five years or so.
These deals are excellent in terms of lower regulations and higher flexibility. A lot of old couples often use it for their retirement income, and seller financing is quite common among desperate sellers. The credit requirements are likely to be lower, but be ready for a credit check run by the seller. Being a buyer, make sure that the seller owns the property, and if there is an existing mortgage, the lender has agreed to the terms of the deal. It is best to work with an experienced lawyer to process these deals smoothly.
FHA 203k Loan:
If you are starting out in real estate investing with a limited capital, FHA 203k loan could be the best way to start. These loans are available for a down payment of 3.5% and you can include repair costs in the loan amount itself. However, there’s a catch. According to the current regulations, you will have to live in the property for at least one year before you can rent it out, which means it’s suitable for a buy-and-hold strategy.
A strong cash flow is a primary requisite for real estate success; however, considering the lower down payment in FHA 203k loans, maintaining a positive cash flow would be a challenge. The key is to be diligent in your calculation, considering every single dollar that you will spend to generate that cash flow.
Private Money & Real Estate Syndication:
If you are a successful real estate investor planning to upscale your investment portfolio, private money is a potential option. Under private money investing, you can borrow financial resources from a private investor, friends/family/partner, against a specific interest rate or cut in the deal. One of the primary benefits of private money is the flexibility it offers, and if you have the trust of your investor, you can take calculated risks for better returns.
Real estate syndication is a concept under which several investors pool their money as well as intellectual resources to invest in a property, which is much bigger than what they can afford individually. Real estate syndication has remained in practice for the past several decades; however, these deals weren’t available to the average investor until recently with the availability of real estate crowdfunding projects.
According to the current regulations, accredited investors, those with net assets worth $1 million or more excluding their primary home, can participate in crowdfunding projects. The good news is, these regulations are likely to scale down in the upcoming years. Real estate syndication offers due protection to all the parties while the profits are shared as per the agreed-upon arrangement.
Use Retirement Funds (Solo 401k) to Invest in Real Estate:
If you are an independent full-time realtor, Solo 401k retirement plan offers an excellent real estate investment opportunity. The IRS allows real estate investments through qualified retirement plans, including Solo 401k and SEP IRA.
Why Use Solo 401k for Real Estate Investing?
- Invest with tax-deferral benefits
- Roth Solo 401k offers tax-free capital gains upon the sale of the property
- Participant loan of up to $50,000 or 50% of Solo 401k account balance
- Complete investment freedom with checkbook control feature
- Finance real estate purchases with non-recourse loans, tax-free
- The ability to choose from a wide selection of investment assets, including properties, trust deeds, crowdfunding, private lending and more.
If you plan to use Solo 401k for real estate investments, make sure that capital gains or rental income go back to the Solo 401k plan only. Further, all the expenses associated with the real estate transaction should come out of the retirement plan only.
As a real estate investor or a family trying to get a traditional mortgage loan, it isn’t that difficult provided you do things the right way at the right time. If you find that a traditional mortgage doesn’t meet your needs you might consider a private money lender for financing or one of the other options mentioned in our post this month. Give us a call at 707-315-1119 or fill our borrowers form or contact form and one of our hard money loan specialists will be in touch promptly to answer your questions.
Learn from House Flipping Pros
So many people want to know how to get a loan to flip a house. It’s a question I get all the time. Although traditional mortgages are not my preferred way to fund my flips as I prefer to flip houses with no money using private money, you can learn how to get a loan to flip a house using traditional banking.
Some house flipping pros would say that with tightened restrictions on the banking industry, it’s nearly impossible to do it this way nowadays. However, I highly recommend you go the traditional bank loan route first when you are doing your flips.
So due to big demand on how to get a loan to flip a house, enclosed is a guest post from our friend Trenton Fortes from Mortgage Fit on how to get a loan to flip a house using traditional banking. Enjoy!
Traditional Loans for Flipping Homes
Traditional or conventional mortgage loans are a tad different from the mortgages that are backed by the government. Not only are they not backed by the federal government, but also the entire risk factor for the loan remains on the part of the buyer. Taking out a traditional mortgage on a real estate investment is obviously different as compared to taking out a VA or FHA loan. Especially if you’re flipping houses, these loans are even more distinctive.
The banks and credit unions also go ahead and issue a traditional mortgage loan with the assumption that if you default, then the risk is all yours. Now, with higher risk involved in a traditional mortgage, you might as well expect to make higher down payments and meet stricter lending requirements as well.
4 Essential Steps on How to Get a Loan to Flip a House
If you go by historical data, then the very first mortgages that were issued happen to be traditional mortgages. It wasn’t until later that the concept of mortgage financing came into vogue for the low-income buyers or those who happen to have special demographic requirements. Arm yourself with paper, pencil and a loan mortgage calculator and get set to do the needful as discussed below.
These four steps below will help you to get a traditional bank loan to flip a house:
1. Have a look at your credit score: Before you do anything further, the very first thing you should do is check out your credit score at the moment. This is essentially because good credit scores are extremely important for the purpose of obtaining bank finances.
You should have a minimum score of 620 if you’re looking to get approved, but the interest rates involved aren’t going to be great. The idea is to try to raise your score from a few months before you actually go ahead and apply for a mortgage loan. Preferred loan rates start at 700 and get even better above 750.
2. Have all your documents in order: It’s rather important that you have all your documents in order. It’s also necessary that you get your income and assets verified if you’re looking to get a traditional mortgage loan. Moreover, you need to be prepared to put down the value of at least 20 percent of the value of the house or pay Private Mortgage Insurance (PMI).
This Private Mortgage Insurance is obviously required by lenders essentially because of the risk of default. Amongst all other documents that you’ll be required to produce include W-2 tax forms, your most recent pay stubs, plus your employment history as well as bank and account statements.
3. Send applications to several places: Once you’ve come to a definite conclusion about mortgage requirements with the help of a loan mortgage calculator, then it’s time you contacted several lenders regarding this.
This is essentially because the terms keep varying across lenders and you might feel that the bank where you conduct your day-to-day transactions isn’t the ideal choice. You should also run a check of the credit unions that are known to offer better rates to their members.
4. Supply extra documents when requested: You’ve got to understand the fact that due to the increasing number of house defaults, lenders are also scrutinizing mortgage requests far more carefully.
For instance, if you’re self-employed you should be prepared to submit copies of your last 2 years’ taxes at least. Massive layoffs have given lenders all the more reason to ensure the fact that you’ve got cash reserves after you’ve bought the home.
Keep in mind the above steps when you’re going to take out a traditional mortgage. Make sure you’ve got an approximate estimate with the help of a loan mortgage calculator before you go about doing anything.
As a house flipper, getting a traditional mortgage loan isn’t that difficult provided you do things the right way at the right time. If you find that a traditional mortgage doesn’t meet your needs you might consider a private money lender for financing your houses you want to flip. Give us a call at 707-315-1119 or fill our borrowers form or contact form and one of our hard money loan specialists will be in touch promptly to answer your questions.
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