So Many Mortgage Loans, So Little Time – Part I

One of the top things about investing in real estate is the use of leverage. Leverage comes in many different shapes and sizes. In this article, we will explore the different kinds of mortgage loans that are available for real estate purchases.

There are many categories of mortgage loans, for example:

• standard mortgages, used to purchase either a home or investment property

• bridge loans such as hard money loans used for short term projects

• loans for individuals with down payment or credit challenges

Standard mortgages can be broken down into two basic types: Government-Insured and Conventional Loans.

Types of Government Insured Mortgage Loans

 VA Loans:

These are loans that are offered by the Department of Veterans Affairs.  This program can be used by military service member and their families.  The biggest advantage to these loans is that borrowers can receive 100% financing and are not required to pay PMI (Private Mortgage Insurance). PMI is a required fee when there is less than a 20% payment for most other loans.

FHA Loans:

This is a program by The Federal Housing Administration which is managed by HUD (Department of Housing and Urban Development).  One of the big misconceptions about FHA loans is they are only available to first time home buyers. FHA is available to all types of borrowers. One of the big advantages of this program is that buyers can use as little as a 3.5% down payment.  The negative thing about these mortgage loans is the borrower will have to pay PMI.

USDA/RHS Loans:

This is a program that is offered by The Department of Agriculture and managed by RHS (Rural Housing Service).  These loans are specifically for individuals in rural areas. The income qualifications vary from county to county.  No down payment is typically needed, but the borrower must fall under the qualifications.

Conventional Mortgage Loans

One of the differences between government and conventional loans is that conventional loans aren’t guaranteed or insure by the government. Conventional loans are guaranteed by private lenders or by one of two government-sponsored enterprises known as Freddie Mac (Federal Home Loan Mortgage Corporation) or Fannie Mae (the Federal National Mortgage Association). I know it sounds as if I’m contradicting myself, but the difference is conventional loans “can” be purchased by these government agencies or not.  Lenders can sell these loans directly to Fannie or Freddie, they can be packaged together and sold to a servicing entity or the private lender can hold the loans.  All that matters to the borrower are the guidelines the loan has to meet.

The guidelines and cost associated with these loans are based on a variety of factors such as personal assets, credit (including your debt to income ratio), and the size of the down payment.

If credit and/or down payment are an issue, look into a State Bond Program. Each state’s program is specific; for example, Florida’s program offers up to $15,000 toward down payment and closing cost. To be clear, this is not a handout but it can be a way to get started.

In this article, we’ve covered government and conventional financing which can be used to purchase investment property under certain conditions.  Part two of this article will focus on loans used for fix and flips and multi-unit properties.

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