Did you know that over 80% of all originated home real estate loans are first mortgages? Over 95% of all new mortgage debt originated in 2018 or later.
If you’re a first-time homebuyer, it can be exciting to imagine moving into your dream home and considering what options you can afford. Similarly, if you are a commercial real estate owner or developer, it’s possible to allow the investment ROI to cloud the reality of obtaining a loan for your purposes.
The first step you need to take is to make sense of your financial picture so that you know exactly what you’re capable of receiving in credit upfront. This way, you can approach your home design or estate development with clarity.
In this article, we will walk you through everything you need to know about real estate loans, including commercial real estate loans, business real estate loans, and personal mortgages.
What You Need to Know about Real Estate Loans for 2022
We’ve pulled together our top 15 facts that we feel are most important to potential loan recipients in the coming year. In no particular order, here are the essentials:
Loan Opportunity Is Endless Despite Market Scarcity
As in prior years, there is a significant investment opportunity both as a homeowner and as a commercial property manager. The real estate market is booming and long-term holding opportunities abound. If you’re planning on borrowing to cover a long-term property asset, it’s a great time to buy in that rent only continues to increase and interest rates are low.
However, as we’ll touch on later, the market options can be scarce right now.
But there are many different types of investments you can make, or as a homeowner, you can invest in yourself and your family. By choosing a location wisely and doing due diligence on the property to ensure no setbacks, you can maximize the effect of obtaining your loan by building a foundation for a great property.
You Need to Be a Qualified Borrower to Obtain a Private Real Estate Loan
If you have a poor credit history, or can’t make a significant down payment, it is not realistic to go into the buying process with the expectation that you will obtain a loan from common lenders. Instead, you’ll need to develop your credit or explore other options for borrowing to cover the property.
Private Loans Are Obtained Quickly
The great thing about private loans is that they won’t need to go through any underwriting from a bank. Because they are sourced from a private entity, they can go all the way from the initial application to final funding in a matter of weeks. Typically, these loans are fast enough to enter into your bank account within three weeks at the earliest.
You Might Have to Obtain a Special Loan
Depending on the property type, you might need to obtain a special loan. Traditional banks issue out loans for common properties to borrowers with good credit, day in and day out. This is not an uncommon scenario for these lenders, so they are subject to less scrutiny overall.
However, if you’re looking to purchase a unique property, such as a stadium, or alternative dwelling unit, you may need to find an alternative source of capital. There are many lenders who specialize in these unique types of loans, so you should ask around in the community of owners of the property you desire to ask where they got their funding.
In many cases, referrals from these individuals can go a long way in assuring you obtain capital, given that you have a successful financial background.
Credit Scores Are Not Everything
It can feel like your FICO credit score is used for just about everything in our society. If you want to be able to obtain money, fast, credit scores can help you.
But the reality is that your credit score is not everything. In fact, private lenders may scrutinize a borrower’s history far beyond the credit score.
They want to look at the whole picture, talk to references, and understand the full assessment of the risk you pose to them as a borrower. You may need to provide information about income, education status, tax status, and any prior history of offenses or convictions.
Choose a Short Term Loan If You Can
Overall, a shorter term on the loan only stands to benefit you as well as the lender. It helps to reduce your risk overall because it’s less likely during your loan that your circumstances will change. This naturally also benefits the lender, and they tend to be more lenient in rates and fees as a result.
You can also look into a shorter-term loan as a way to help stabilize a new property as a commercial investor. Once the property is stabilized, you can look into more traditional permanent financing options.
You Will Likely Pay Hefty Origination Fees
The creation of a loan isn’t free. You will need to pay an origination fee and any other individual fees that come from the specific lender as a result of conducting due diligence on you. This is usually nominal in the face of the overall terms of the loan, however, it can be a significant expense surprise if you are not prepared on the day you sign.
Simply asking about these fees upfront should give you a better picture of when you are ready to put your name in ink.
The Down Payment Standard Is Approximately 40%
In general, 40% of the total cost of borrowing is a reasonable ballpark number for the down payment. This should make it easier for you as an investor or homeowner to obtain a real estate loan.
It signifies to the lender that you’re more likely to pay back. It usually will leave a significant amount of equity in the property which can help to protect the bank or lender if they need to foreclose on it.
Real Estate Is Often a Better Investment Than Money in the Bank
When you become savvy with your real estate investments, you are likely to see far better returns than simply accruing interest on your bank accounts. You should consider planning to develop upside with your home equity capital on all the properties that you have been able to purchase.
In 2021, Most Homes Spent 47 Days on the Market
This means that there are slim pickings for you as a buyer. Houses stayed on the market approximately 10 days fewer than they did in the prior year. There is little indication that this will reverse any time soon.
It’s likely that this is in large part a result of the pandemic, so if you are planning on purchasing a new home, make sure that it is really the right time for you and your family.
You may need to sacrifice some of your desired elements in a home. Instead, you may have to expand your search to cast a wider net in less popular neighborhoods. If you can, try to get preapproved as soon as possible before you go out househunting in the market.
Prices Are Still Rising
Overall, the median home price increased to nearly $400,000 by the end of last year. Just like everything else in our society, inflation has been hitting the market hard. However, the rate of increase has started to show signs of slowing.
In 2022, it can be expected that these prices will continue to go up, although the rate of increase in growth may start to level off.
If Able, You Should Apply For a 15 Year Fixed-Rate Conventional Mortgage
15-year fixed-rate mortgages are typically some of the lowest-cost home loans. By going with a 30-year mortgage, or other types of adjustable-rate mortgages, you often get charged tens of thousands of dollars extra interest in fees.
This can have a profound effect on your finances for decades to come. Pass on this option, and choose a 15-year fixed-rate mortgage if you can.
Interest Rates Remain Low at the Present Time
The good news for buyers is that the interest rates continue to remain at extreme lows. Many economists, however, are starting to think that the Federal Reserve will increase interest rates in the coming year. They may go up to approximately 3.5% for a 30-year fixed-rate mortgage.
If you are a buyer in this market, you stand to benefit from these low rates. However, don’t make the mistake of buying too much house or buying too much property than you can truly afford. It’s still a bad deal if you get a low-interest rate mortgage for a house whose total cost you really can’t afford.
Explore Online Services Because They Are Growing Fast
The past few years have seen the maturation of major real estate service providers like Zillow. You can very quickly look through a wide variety of homes in your area with exceptional precision.
You can probably avoid a lot of hassle and extra fees that you would otherwise see going through an agent and offering them a commission. However, Zillow and other third-party agents still require a service fee, which takes some money out of your bottom line.
It is still worth trying to identify a superb agent in your area who truly understands the local market. If you’re also selling your property, they might be able to negotiate for more money to couple with a real estate loan.
Riskier Buying Options Are More Prevalent Than Ever
If you are not able to obtain the personal or business real estate investment loan that you want at the present time, don’t stoop to bad financial deals like rent-to-own agreements. These offers suggest that you will rent the home for several months to several years, and then ultimately assume ownership.
The advantage of the strategies is that you can get into your home fast, without needing to pay a down payment.
However, your rent will be more expensive than it would be otherwise. Ultimately, this will take more money out of your pocket and should be avoided at all costs.
Also, avoid risky down payment loans. It is a poor sign that you might be unable to afford your loan if you cannot put the 40% down at the time of signing. Purchasing a home or property with no money down is simply a bad idea in every circumstance.
One Last Word: Understanding Hard Money Loans
It’s also possible to obtain 100% hard money financing toward a commercial real estate loan or mortgage.
These loans are short-term and nonconforming. They don’t come from traditional lenders like banks but instead are issued by private companies or individuals that will take property or assets as collateral. If you are unable to hold up your end of the deal, the companies assume ownership of the collateral assets.
Oftentimes borrowers will look to hard money loans when their mortgage application doesn’t go through.
Hard money loans are secured loans because of the collateral property that is being used. Their approval process is typically much faster and less stringent, making it ideal for buyers who want to capitalize on a market opportunity before it vanishes. It’s possible to close on a home with a hard money loan in just a few days.
Hard money lenders will be interested in credit scores and debt-to-income ratios. However, they are free to determine their own guidelines as they see fit.
Real Estate Loans in 2022
At the end of the day, you want to be as careful and meticulous as possible when examining and comparing real estate loans. Whether this is for a new business property or for your first home, terms and conditions can vary widely by lender.
It is a good time to obtain a loan given rock-bottom interest rates; however, in most regions, the buying market is still scarce. You want to make sure that you are not attempting to purchase a property that is out of your affordable range.
If you liked this article about homeownership and hard money real estate loans, please check out our other articles on financialslot.com!