As a real estate investor, there are a number of institutions you can seek out for investment property financing. Your options include banks, mortgage brokers, private lenders, and what are called hard money lenders. Many times the economy will dictate which source of financing you will choose. In this article you’ll learn about the differences between these lenders. Each institution has a place in this market. Some are better options than others.
The banks are the ideal place to apply for a loan. Their fees are low, and interest rates are usually much more competitive. However, they’ll want you to have a high credit score. An important point to keep in mind is that banks may not approve a high LTV (loan to value) like other institutions may. The LTV is the percentage of the amount financed in relation to the appraised value of the property. The bank may only approve up to 70% and other lenders may offer up to 80% of the appraised value. You must weigh your options carefully to determine the best financing option for you.
The easiest and most efficient scenario is to use a mortgage broker. The mortgage broker, unlike the bank, will shop your loan to different lending institutions. You can go to one company and they’ll present your loan to several different lending businesses. Generally a bank will only try to qualify you with their institution. If it doesn’t work they’ll just deny you and the process must start all over again with a new lender. A mortgage broker will only run your credit once. They will keep “shopping” your loan to different lenders until they find someone interested in the deal. The downside is that interest rates and fees are probably going to be higher for this service. When the bank can’t work the deal, the broker most likely can.
Private and hard money lenders really provide similar services. Both types of lenders will do things that ordinarily can’t be done. They don’t have to adhere to the guidelines of traditional lenders because they are lending their private money. This allows them to lend to whom they want and whatever project they choose. Their fees and interest rates are generally much higher, but when no one else can do the deal, they can. You can use this type of lender on an investment property that you’re going to flip (rehab and resell). The interest rate won’t matter because the fees can be calculated into the deal.
Now you should understand the roles of the different lending companies that will provide your investment property financing. If the economy is bad, sometimes it’s easier to negotiate with the private or hard money lenders despite the high fees and interest rates. When the economy is thriving, you should generally work with the mortgage broker or a bank. All of these lenders have a function within the real estate investing landscape. Use them to your advantage.