Financing Success

When it comes to borrowing money, banking institutions will have set criteria for mortgages and profiles of individuals that they will lend the money to.  Many full-service banks will provide complete financing, but they don't necessarily tell you everything.  So you may have to do some of the homework yourself instead of relying 100% on these lending institutions.  They will structure a loan that is most lucrative to them.

Construction/Permanent Loans

This is one way of financing a real estate purchase.  A construction loan is a loan package consisting of two loans in one.  The first one is to enable borrowers to purchase all the materials needed to build the house.  When the house is finished, the loan is converted into a typical permanent loan.  A closing takes place before any monies are released by the bank.  So you and the bank will have to agree to a fixed amount prior to any closing or any withdrawals. 

EXAMPLE: Say you need $250,000.  After closing, you need to withdraw an amount to pay for the land.  The bank releases the funds.  Then you'll need to funds to buy the construction materials and pay for the contractor's time.  How many withdrawals you can make and at what intervals vary from one institution to another.  When the house nears completion, you take one final amount to pay for the rest of the bills.  The final amount you pay, say $200,000.00 out of the $250,000.00 you originally borrowed, can be converted into a permanent loan.
 
Since construction loans are interest only loans, remember that the principal is not paid monthly along with the interest!  You will receive a monthly bill for the interest on the outstanding balance.  Chris Condon recommends two techniques you can use:

1. Do not overestimate the loan amount.  Borrowers pay "points" on the loan.  In the previous example, you used only $200K out of the $250K.  This can represent a waste of money because you could be paying points on money you'd never use.

2. Draw the right amount.  Bank inspectors will usually make inspections of the house to verify whether the amounts you have drawn are justified.  Most construction loans allow a certain number of free inspections before they start charging for the inspection.  The trick is to decide which is more expensive to you:  the interest fee or the inspection fee.  Chris Condon advises exploring the possibility of taking smaller but more frequent draws.

Permanent Mortgage Loan

Many types of permanent mortgage loans exist.  Not all options are available with a construction/permanent loan so ask the right questions.  Monthly payments include principal and interest.  Types of permanent loans are:

Conventional Loans
Conventional loans - any permanent, long-term financing that does not fall under VA or FHA.

VA Loans
These provides veterans with access to loans not requiring a down payment.  It's the VA that acts as guarantor.

FHA Loans
To eliminate the lender's risk, Federal Housing Administration provides lenders with an insurance policy.  This helps to offset any fees tied to any of the usual lender's risks.

Fixed and Adjustable Mortgages and Loans

Fixed rate mortgage - loans are amortized over a period of 10, 15, 25 or 30 years.  Interest rate is constant for the term of the loan.

Adjustable rate mortgage - also knows as the variable rate loan; interest rate is calculated on the basis of prime rate set by the Federal Reserve.  If prime rate goes down, your monthly payments go down, if they go up, so do your principal/interest payments.

Home equity loan - when you've built enough equity on your house; i.e. it is 75% paid for, you can borrow funds against this equity to pay for renovations in the hopes of an eventual sale.  Banks' terms and conditions on home equity loans vary, so speak to your lender about the ramifications of the home equity loan.

Reverse mortgage - some banks will actually try to convince you to do a reverse mortgage.  Details are too cumbersome to discuss here, but speak to your bankers.  It is not for everyone.

Seller Financing

Another type of financing is suggested by Ilyce Glink called seller financing.  It means that you, the seller, lend the money to the buyer to buy your home, thus becoming the buyer's bank.  If seller and buyer agree to the logistics of seller financing, it can be a wonderful arrangement for both parties. 

The advantages to the buyer include:

• quick and easy loan approval 
• competitive interest rate 
• lower fees than banks and other institutions usually charge 
• less paperwork 

 The advantages to the seller include:

• equity in your home turns into an investment from which you can earn a stable rate of return 
• the loan is secured by an asset - your own house 

IMPORTANT: One disadvantage, however: If the buyer defaults on the payments, you will need to bring legal action to get either your money or house back.

More about Seller Financing

If you decide to go with seller financing, you should be able to spot the good candidates, just like banks do with people who apply for a loan.  Borrowers should provide the following data:

• Their name, address, Social Security number, three previous addresses, employer's name/address/phone number 
• How long they have been at their present employer, as well as the names and numbers of their last 3 employers 
• A copy of their latest federal and state tax returns, 
• Year-to-date statement showing income, assets and liabilities, 
• Copies of their most recent pay stub (if you believe this is necessary), 
• They must sign an agreement for you to obtain a credit report on them. 

 
Tips for Real Estate Loan Applications

If you're applying for a real estate loan, here are some tips from Hicks that come in handy:

• never submit a handwritten application.  Professionalism will make lenders more comfortable 
• ensure that the loan amount you seek is appropriate to the lender.   
• find out from the channel what the debt cover ratio is for income properties, so that you can position your approach.  Ten years ago, the acceptable ratio was 1.5 or higher.  Check this figure out as this might have changed, 
• prepare a good real estate business plan for the property you want to buy (this applies to commercial properties).  Attach this business plan with your loan application.  This gives the lender the impression that you've done your homework, 
• Have a co-signer for the loan.  It adds to the comfort level of lenders. 

If you're borrowing money to purchase property you won't be living in, muster up enough courage when it's time to approach a lender. 

Bankers usually turn detective when commercial loans are on the table.  Be aware that interest rates on loans for buildings that are not owner-occupied are much higher and down payments are sometimes higher than 25%.

When applying for commercial loans, be prepared to answer the following questions:

• what is your total monthly income 
• do you have copies of your income tax returns for the last 3 years? 
• can you verify your down payment requirement, and 
• have you borrowed any of your down payment? 

Conclusion
 
As we noted earlier, real estate is a very dynamic field and that's one of the reasons why some people are hesitant to explore it, and to exploit its profit potential. 

The way to overcome this obstacle, and to realize incredible profit in real estate selling, is to understand this dynamic field from the inside; that is, to know the tips, techniques, and strategies that turn ordinary real estate transactions into extraordinary ones.

You, now, are one of the insiders.  You now possess information that millions of people simply don't have access to.   Use your new information wisely and professionally, and you'll soon discover why people who enter the real estate selling game - and play it well - stay there for life. 

It's fun, exciting, always interesting, and best of all: profitable if you're an insider - and that's what you are right now!

For lots more helpful and informative content on real estate investing and related topics, see our Topical Articles.