There are many different types of loans, so how do you know which loan will work for you and your specific needs? There are loans for real estate investors, some are suitable for rental loans, and others are for shorter terms investments. Follow along with us to determine what kind of loan fits your needs!
Conventional Bank Loan:
If you are already a lucky homeowner you are probably familiar with conventional mortgages. These types of loans are not backed by the government and are issued by a private lender such as a bank, credit union, or mortgage company.
Typically a conventional mortgage lender will require around 20% of the home’s purchase price for a down payment, where investment properties may require up to 30%. If you can make a sizable down payment, this can help lower your interest rate as well.
Since these loans are not federally sourced they typically have stricter lending requirements. You will have to fill out an application as well as possibly pay an application fee. An extensive background check will be run on your credit history and your currents credit score; this information will determine their eligibility for a mortgage and their interest rate.
As the borrower, you must be able to show proof of income, assets, and employment verification. This proves to the lender that you can afford their existing mortgage and monthly loan payments. Lenders typically expect borrowers to have at least six months of cash reserves to cover their mortgage obligations.
Hard Money Loan:
Hard money loans are secured by real property and are issued by individuals or companies, not a bank. These loans are also known as short-term bridge loans. These loans can be more flexible in the terms because they are issued by individuals and you as the borrower may be able to negotiate fees and repayment.
Hard money loans are also usually faster to receive and can be issued within weeks, compared to the conventional mortgage loan which may take months. A fast turnaround can be crucial in real estate.
Typically the duration of a hard money loan is usually too short for a rental loan, hard money lenders typically offer longer-term rental loans for longer-term investments.
Home equity loans:
The next most common type of loan is home equity loans, aka a second mortgage. These loans are based on the equity in your home as collateral and are underwritten by a bank.
These interest rates are extremely competitive. Since they have a lower interest rate than a credit card and other loans they are often used for remodeling projects. However, the downfall in this is that when you use the equity in your home as collateral, you are exposing yourself to a great risk. Lenders will place a second lien on your home, meaning if you fail to make payments you can lose your home and your investment property.