The Main Types of Real Estate Financing: A Basic Guide

Whether you’re a first-time homebuyer or someone looking to invest in real estate, the lack of real estate financing knowledge can make it hard for you to achieve your goals. Investing in real estate has many benefits, including home appreciation, tax benefits, and increased cash flow. However, many individuals think homeownership and real estate investment aren’t options available to them because of their credit lines, poor credit history, or lack of money available for down payments for mortgages.

In this article, the top realtors from Robert DeFalco Realty break down the various real estate financing options available for both residential and commercial real estate.

Conventional Loans

Conventions loans refer to loans that the federal government doesn’t insure. They can be either conforming or non-conforming loans. The difference between these is that conforming loans fall within limits imposed by the Federal Housing Finance Agency, while non-conforming loans exceed these limits. The most common type of non-conforming conventional loan is a jumbo loan.

Because the borrowing costs for conventional loans are lower than for other types of mortgages, the general public usually prefers these. This holds even if the interest rates are slightly higher than other types of loans. Additionally, you can use them to buy a primary home, second home, or even an investment property. That said, they require significant documentation and have a higher down payment than government loans.

Jumbo Loans

The previously mentioned non-conforming conventional loans are usually jumbo loans, i.e., loans exceeding the federal limits. For 2021, the floor and ceiling mortgage limits are $356,362 and $822,375. As a rule of thumb, jumbo loans are more common in more affluent areas and allow users to borrow more money for competitive interest rates. However, before deciding on this type of loan, it’s important to note that individuals need high FICO scores and a down payment of at least 10-20%.

Real Estate Financing Options

Government-Insured Loans

While the government doesn’t insure conventional loans, some government agencies back mortgages. These agencies include the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA). While government-insured loans are more flexible and often have relaxed credit requirements, they could have higher overall borrowing costs than conventional loans. Despite this, they’re a good option for individuals who don’t qualify for conventional loans.

FHA Loans

These loans are backed by the Federal Housing Administration. They make homeownership a possibility for individuals with credit issues who don’t have enough money to make a sizeable down payment. However, before opting for such a loan, it’s important to note that there are two mortgage insurance premiums on it. While one is paid up front, the other is paid every year for the loan’s lifetime. However, this is only if less than 10% of the down payment is contributed.

USDA Loans

The U.S. Department of Agriculture backs these loans, which primarily help people from low-income families purchase homes in rural areas. In addition to the homes being in eligible areas, those applying for the loans must meet income requirements set by the agency. While some USDA loans require a down payment, others don’t – this depends on income level.

VA Loans

The U.S. Department of Veterans Affairs backs low-interest and flexible mortgages for those in active duty and veterans of the U.S. military. These loans don’t include mortgage insurance or down payments but change a funding fee to cover the program’s cost.

Hard Money Loans

These are loans from private lenders instead of regulated financial institutions. These are short-term loans, and people use them to bridge the gap between purchasing investment properties and long-term financing. While these are easier to qualify for because of their somewhat relaxed guidelines, they have higher interest rates than other types of loans, which can add up quickly.

Commercial Real Estate Mortgage Loan

The most common real estate financing option for commercial real estate is commercial real estate mortgage loans. When considering these loans, it’s essential to pay attention to interest rate, loan-to-value ratio, amortization period, and the bank’s flexibility when repaying the loan. When taking out the commercial real estate mortgage loan, keeping these aspects in mind can set you up for success.

Working Capital Loan

Working capital loans are short-term loans that can be used to help businesses pay for investments during growth. They’re usually amortized for 5 or so years and can be used to purchase real estate properties. This, combined with a principal holiday, can be an excellent real estate financing option for a growing business.

Hire Top Realtors at Robert DeFalco Realty

Now that you know all about the various real estate financing options available to you, you can determine whether or not to buy a home or invest in the real estate market. If you plan on doing so, you’ll need a buyer’s agent to guide you through the entire process.

Whether you’re in the market for a residential or commercial real estate property, Robert DeFalco Realty can help. We have offices across New York, including our main office in Staten Island and other Brooklyn, Manhattan, and New Jersey branches. Our experienced real estate agents can take care of all your real estate needs. Call us at 718-987-9700 or contact us here for more information, and we’ll be glad to guide you through the real estate purchasing process.