Updated: Feb 26
When investing in real estate, financing is an integral part that can make-or-break your plan. Where is the funding source? How will it influence the investing process? There are tons of financing options, and it's not problematic to acquire a loan for your real estate investment. However, finding a suitable loan for your investment requires a lot more work.
Tips To Get The Best Loan Possible
In case you are a qualified borrower, you can find anyone to lend you cash for your investment. However, you do not require just any loan but the best loan you can get.
To achieve that, you need to be the most suitable applicant feasible to lenders. With that in mind, below are ideas to help you find the best loan for your investment.
Work On Your Credit Score
Your credit score will come into play whether you apply for a commercial asset-based loan or a conventional mortgage. Lenders check your credit score and use it to assess your eligibility, the down payment, and interest rate.
Get Your Employment and Income Documentation In Order.
Some lenders don't care about your employment history or income when applying for a loan. Conventional lenders offer better terms than asset-based lenders and consider your employment and employment position when making loan decisions. In case you are applying for a conventional loan, you cannot have a debt-to-income ratio exceeding 45%, including the expected settlement on your new loan. You can incorporate three-fourths of the investment's expected income for eligibility purposes, but you will be required to document other sources of income. So, before you embark on searching for a loan, it's essential to put together all your income documentation. Also, include a contact number for someone (employer's HR department) who can verify how long you've been working at your current job.
Repay Other Debts
Debt reduction boosts your qualification for any loan. For conventional loans, debt reduction improves your debt-to-income (DTI) ratio, which can help you get better loan terms.
Debt reduction raises your credit score, which will help your chances of approval and improve your loan terms with any lender type.
Make Sure Your Target Investment Will Produce Enough Cash Flow.
When you use asset-based lenders to finance a real estate investment, the good news is that they don't dig into your income, your debt, or how long you've been with your employer. You won't have to dig up your income documentation or previous tax returns. The property requires to justify the loan where the cash flow needs to be sufficient to cover mortgage payments, taxes, and insurance. Many lenders use a metric called debt service coverage ratio or DSCR, calculated by the expected income divided by your monthly expenses.
Apply With As Many Lenders As You Can.
The most common mistake investors make when trying to finance a property is to apply for a single mortgage and agree to whatever terms they're given. You might be shocked by the differences between other loan terms and interest rates you can get when you make a comparison. A low origination fee can make a huge difference in your property's profitability.
Plus, you won't have to worry about many mortgage applications hurting your credit score.
So, apply to at least a handful of lenders before deciding; the more, the merrier.
Sources of Financing:
Bridge loans provide the loaner with instant cash flow. In most cases, this loan is temporary and used to finance the immediate needs of a project. Loaner opt to acquire them while waiting for long-term financing. Commercial bridge loans can be used for refinancing or purchasing:
Raw land (developed for commercial purposes)
Bridge loans are given by private lenders and require a good credit score and proof of income. Think of this loan as a way to "bridge the gap" between what you need to do when purchasing a property and long-term financing.
SBA Commercial Loans
The Small Business Administration provides SBA Commercial Loans. This loan has two types of programs: SBA 504 and SBA 7(a). The 7(a) loan is a business loan that can be used in different ways; this includes repairing and buying commercial property.
A standard term lasts for 25 years, with rates between 7% to 9.5%. A 504 loan helps business owners purchase anything categorized as "property and plant"
504 loans may be used to:
Purchase of machinery
Purchase of land or land improvement
Purchase existing buildings
Construction of new facilities or renovations
This loan is structured to have the Small Business Administration financing 40% of the total costs, the lender covering 50% of prices, and the loaner covering 10% of the costs.
Hard Money Loans
Borrowers can acquire this loan from both investors and private lenders. Hard money loans use a borrower's commercial real estate as collateral for the loan making the property protection against loan default. Hard money lenders loan little money with a higher interest rate. Even though there is a higher interest rate, there's a higher chance that the borrower will qualify. It is easier and quicker for a business that is starting to acquire this type of loan.
Traditional financing includes mortgages and bank loans, going through a credit union, mortgage broker, or a banker. This approach requires an average interest rate but consists of a lot of rules and guidelines. If you have adequate money in the bank, a clean background check, an above-average credit score, this will work for you.
Banking; Non-Traditional Options and Loans.
Banking includes non-traditional options and loans, with less strict options. Seller financing, Personal loans, and Buyer's financing are a few of the possibilities. This avenue of funding requires adequate assets and a cleaner record. There are more creative avenues within this option as well, for specific real estate investments. Banking options are accurate, helpful, and safe financing options to utilize.
Private Money: Networking at Its Finest
Private money works well when parties involved have a well-established, trusting partnership. This approach is a risky option but has proven to be extremely successful. If an individual is lending hard money, it's because that is their full-time job. Private lenders are more likely to be people interested in investing but have full-time jobs that supplement that type of income. Once you establish relationships with various professionals, you may not have to use a more traditional or formal financing approach. Private money financing can be individualized, and the terms are typically customized for each investment.
Seller financing in real estate is a situation where the seller plays the role of the lender. It is a real estate agreement in which the financing provided to the Buyer is given by the seller. This type of financing in real estate becomes an option when the Buyer has a low credit score to purchase a respective property. Given that the seller can offer terms both sides can agree upon, seller financing in real estate benefits everyone involved.
Types of Seller Financing
This is a type of loan generally of lower priority than a first loan. This second mortgage is given after a primary mortgage loan has been approved. Since the junior mortgage is recorded after the initial loan, it is considered inferior to the first loan.
In this type of loan, the seller carries the mortgage and promissory note for the home price's entire balance, minus any down payment.
Land contracts give the buyer "equitable title," a temporary co-ownership. The Buyer pays the seller and, after the last payment, the Buyer gets the deed.
This type of mortgage allows the Buyer to take the seller's place on the existing mortgage loan.
The seller leases the said property to the Buyer for a contracted period except that the seller agrees, in return for a deposit, to sell the property to the Buyer within a certain amount of time in the future, at agreed-upon terms.
Buyer financing occurs when a property buyer finances a property directly through the seller, instead of through a bank or mortgage lender.
As you can see the beauty in real estate is that there are several different ways to invest in real estate. Before tackling the many ways to be financed we wanted to ensure you were informed that your personal financing has to be in order first. There's no need to rush into financing for real estate deals if you are in debt up to your eyeballs. If you are not ready right now that's ok. I rather you be prepared then to jump head first without a paddle. Always remember that there's a way you can finance a deal you just might not know how. Hopefully this article gave you some options you did not know was available to you.
Comment on what unique financing you used to help others reach their real estate investing goals.
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