The Truth About Financing Property

Everything You Need To Know About Financing Your Property

Real estate has turned out to become one of the most flourishing businesses at this point and millions of people earn a living through real estate. Not only through conventional selling of properties but also in the appraisal, property management, financing, construction, development, counselling, education and several other fields. Many professionals like accountants, architects, banks, insurance companies, lawyers and surveyors also at some point depend on this business.

There are reasons behind why people choose to invest in property rather than going for the stock market or any other investment tools. Purchasing an investment property is a great way to diversify your portfolio, moreover one can also enjoy appreciation of the property value by holding on to it. Along with these, there is a scope of passive income stream which is created by renting the property.

Real estate financing is using several methods by potential investors for securing an independent capital investment for themselves. Unlike the stock market, investing in real estate incurs high start-up costs and requires proper research to find a good deal that is profitable to the investor. There are various ways at this point via which an investor can secure their finances.

Choosing the wrong source of finance will affect the success of the investment, so you must understand the requirements and outcome of the finance before going for it. Some of the best ways to finance your investment are discussed below:

Conventional mortgage or loans

A conventional loan is a type of home buyer’s loan with a fixed interest rate and is not secured by a government entity. Rather, it is available through private lenders, such as banks, credit unions, and mortgage companies.

But some conventional mortgages are guaranteed by two government-sponsored enterprises which are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. In conventional financing, the down payment is 20% of the home purchase price and 30% of the fund in the case of investment property. Your credit score and credit history play an important role in getting this loan approved.

Foreclosure on a property

Foreclosure is a legal process in which a lender takes ownership of a mortgaged property and sells it to recover the amount owed on a defaulted loan. A default can arise when a borrower misses paying their monthly installment or cannot meet the terms of the mortgage or deed of trust contract. This failure gives the lender the right to use a property as collateral.

When the borrower misses their first installment, a missed-payment notice is sent by the lender and if the borrower misses two payments, a demand letter is sent stating that month’s payment hasn’t been received. The lender then sends a notice of default after 90 days of the missed payment and the borrower gets 30 days to settle the payments. If they miss out on that period as well, the foreclosure begins.

Short sale (real estate)

People usually get confused between short sales and foreclosure, but there is a considerable difference between short sale and foreclosure. Short sale of real estate happens when the homeowner faces financial distress and sells their property for less than the amount due on the mortgage. The buyer of the property is known as the third party (not a bank) and all the consideration earned from the sale goes to the lender (a bank) of the property.

In this scenario, the lender can either forgive the remaining balance or go after the homeowner through a deficiency judgement, which will require the homeowner to pay full or part of the difference as agreed by the lender. A short sale is a lengthy and paper-intensive transaction and can take up to an entire year to get settled completely.

A pre-foreclosure is signed by the mortgage lender before the commencement of the process to execute the decision of the short sale. During the process of a short sale, there are high chances that the lender ends up losing a lot of money and hence the lender is required to present the documentation explaining why a short sale makes sense.

Private money loans

Private money loans are loans that are usually taken from the friends or family of an investor. These loans are taken from an individual to another who can loan money to you for an investment property purchase. In case you don’t have friends or family to grant you a loan, you can also go to local real estate investment networking events where you can find a lot of potential investors who are ready to grant you a loan.

The terms and interest rates on private money loans can vary notably depending on the relationship between the borrower and the lender. These loans are bonded by a legal contract that will allow the lender to foreclose the property if there are defaults in the payments.

Home equity loans

Home equity loans, also known as equity loans, second mortgage or home installment loans, allow homeowners to borrow finance against the equity in their home. The basis of this loan is the difference between the homeowner’s mortgage balance due and the home’s current market value. This loan has a fixed rate and the equity in the home acts as collateral for the lender.

The credit score and payment history play a vital role in determining the amount of the loan and the rate of interest. These loans have set repayment terms in which the borrower needs to make regular and fixed payments that will cover both principal and interest.

Conclusion

Investing in real estate is a risky venture but comes with big payoff cheques. In this scenario, all you can do is conduct proper research and check all the finance options available before sticking to one. You need to compare different borrowing schemes keeping in mind both short-term and long-term costs and if you will earn profit at the end after deducting all the expenses.

Real estate has its advantages, whether you are buying and holding property for future development, or purchasing a property for rental income, or enjoying the appreciation when it sells or flipping a property. There is not one genre where you might face loss and is a great way to broaden your income source.