A Brief Overview of Real Estate Financing
When investing in real estate, it is crucial to thoroughly conduct research to find the best option for your financing needs. Becoming acquainted with key terms, knowing your options and working with your broker can enhance your financing experience.Financing is the process by which an individual receives a loan or large sum of money from a third party in order to make a substantial purchase. Over time the individual makes payments, with potential interest, to the third party.We have compiled some five key terms--with corresponding information--about financing that we believe would be beneficial to your search (disclaimer--these terms and definitions are subject to change. Be sure to check with your trusted financial advisors or agents before proceeding with these financing methods):
1.) Traditional Financing
To be considered for this type of financing, an individual must have a credit score of 680 or higher. The process normally begins with a 10% down payment of the financing total. Also, there are a variety of different payment plans available such as 5, 10, 15 and 30 year fixed rates.When you take the traditional route, you will need to have full documentation of debts owed and annual income.
2.) Seller Carry Back
In this instance, an owner no longer wants their property and is willing to sell it to the buyer in an untraditional way. Rather than make payments to the bank or third party, you will be making small installments to the seller over a period of time.Seller Carry Back financing also deals with time limits. Normally, the seller will ask the buyer to have the property paid off within 5-10 years.
3.) Seller Second
This often-used means of financing involves the seller providing a second mortgage on a property.In most cases, this "second" will be enough to cover most of your down payment going into the deal. The advantage is preserving your cash on hand while securing the property. Be sure to make sure the loan you're evaluating allows a second mortgage before exploring this option.
4.) Lease Option
This lease option allows you to get into your property for little to no money down. It also preserves your right to buy the property somewhere down the road if you decide to go that direction. There's also a way to set this up so a portion of your monthly lease payment will go into paying the balance of the property.
This is also known as "subject to existing financing." Basically, this allows the buyer to purchase a property while the owner retains the financing system already in place. The buyer will continue to pay the financing payments, but won't have to shoulder the down payment.
This is commonly used for pre-foreclosure properties.