There are many properties you can purchase for your real estate investment, but buying residential can provide an excellent return on investment—if you take out the right loans. You can use several different types of residential real estate loans for your projects, but it’s always a good idea to ensure they’re suitable for the specific investment you choose to move forward with. Let’s examine a few loans you can take advantage of for your next venture.
Fixed-Rate and Adjustable-Rate Loans
A fixed-rate loan is a type of residential real estate loan with a static interest rate that external factors such as the market won’t affect. Generally, most fixed-rate loan terms range from 10 to 40 years. This is a great financing option because it provides stability and predictability, enabling borrowers to know exactly what they’re paying each month.
An adjustable loan is the opposite of a fixed-rate loan. The interest rate varies over time and relies heavily on the rise and fall of the market. Many people enjoy this type of loan because it starts with a lower rate and because they could pay less in monthly payments.
Federal Housing Administration (FHA)
The government insures FHA loans, which a traditional banking system or an approved lender distributes. These loans typically have lower interest rates and credit score requirements, making them beneficial funding options for investors who are just starting out in the industry.
There are two types of conventional loans: conforming and nonconforming. The federal government doesn’t guarantee or back conventional loans, which typically have strict credit score requirements. A borrower also needs a 50 percent or less debt-to-income ratio. Additionally, many conventional loans don’t have specific sets of guidelines.
Conforming loans can be sold to Fannie Mae or Fannie Mac government-sponsored enterprises if they meet the sell requirements—and they do, in most cases. “Nonconforming” simply means the loan does not meet Fannie Mae or Fannie Mac requirements and thus cannot be sold.
Private money loans refer to loans that do not originate from traditional banking institutions. Instead, these types of loans come from individuals or private companies. Most private lenders prefer to accept real estate properties as collateral instead of credit scoring. Additionally, a private lender might be able to review and approve a loan within a week rather than several months, like a traditional bank. Private loans can be advantageous for many real estate investors due to the approval speed, interest rates, and wider freedom to use the loan.