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Real estate finance: How to get loans for real estate purchases

Loans for rental property will be long-term notes, usually for 30 years, as with owner-occupied home loans.

The application process for rental property is similar to that of an owner-occupied mortgage, but you should understand that the mortgage interest rates you hear and read about don't apply to you as an investor.

Lenders consider investment (i.e., non-owner-occupied) property a riskier loan and will charge a higher interest rate and perhaps higher fees or "points" than for a traditional mortgage loan on an owner-occupied house.

Additionally, be aware that the minimum down payment for non-owner-occupied real estate loans is generally higher than for owner-occupied financing.

Depending on how much you put down and your personal credit rating, expect to pay from 1.5–2.5% more than the going rate for owner-occupied mortgages. Typical closing costs are about 3% of the sales price, and this can either be paid for by the seller or wrapped into the loan.

For fixing and flipping

The financing for renovating and reselling houses is different.

These are short-term loans, generally no longer than a year — enough time to complete the renovations and sell the property. The down payments will vary by the deal and will depend, in large part, on how much work needs to be done on the house.

The loans on rehabs will vary based on the Prime Rate, with fees and points in the 1–3% range, depending on your financial strength. Your experience in residential renovations may also be important.

If you plan to renovate your property, a "purchase and renovate" loan is probably the best option for you. This type of loan combines the cost of the improvement work and the purchase of money funds so you have few out-of-pocket costs. The lender will probably require an estimate from a general contractor.

You may also qualify for a Fannie Mae long-term rehab program called the HomeStyle Renovation Mortgage loan, which provides a convenient way for borrowers to make renovations, repairs, or improvements totaling up to 50% of the as-completed value of the property.

The funds can be used for any repairs or renovations that are permanently affixed and add value to the property. Investors are eligible borrowers for this loan, which will be offered at a rate not too much higher than a regular mortgage loan.

Rudy Dvorak, director of acquisitions of the real-estate development firm Reinhabit, oversees the renovation of a Tudor-style home in the Silver Lake neighborhood of Los Angeles, California August 5, 2013. (Photo: REUTERS/Jason Redmond)
Rudy Dvorak, director of acquisitions of the real-estate development firm Reinhabit, oversees the renovation of a Tudor-style home in the Silver Lake neighborhood of Los Angeles, California August 5, 2013. (Photo: REUTERS/Jason Redmond)

Where to find loan information?

To find the best terms on loan interest rates and closing costs, call around to check out what your local banks or credit union are offering.

Alternatively, you can ask your real estate agent to recommend a mortgage broker. The function of a mortgage broker is to work as a middleman between a borrower and a mortgage lender.

A mortgage broker will have connections with real estate lenders, which means that they are better able to help you get a good deal on mortgage loans. They can help you assess your individual situation and provide you with customized home loan options to choose from.

Mortgage brokers allow you to effectively comparison shop for mortgages while they handle the legwork.

While the convenience that is involved with using mortgage brokers is definitely an advantage, it comes at a price. A typical mortgage broker works on a commission basis.

In some cases, you pay the commission, and in others, the lender pays the mortgage broker a commission fee. It's also possible for both you and the lender to have to pay the broker fees.

It's important to take the time to shop around for a mortgage broker and understand the different fees you may be charged.

Using your own home

Finally, another option is to use the equity in your own home to secure a credit line.

That will give you maximum flexibility and the least amount of hassle.

Of course, to get a home equity loan or line of credit, you have to convince the lender you can handle the debt, which means you need pretty good credit and income.

Dive deeper: Real estate investing: The full breakdown

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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