Whether you’re buying your very first home or you’re in the fix and flip business, knowing how to finance your home purchase is critical to your success. Fortunately there are several loan options available, meaning you too may qualify for a home.
Traditional loans are some of the most difficult to qualify for and they’re not insured or guaranteed by the federal government. Prerequisites include a stellar credit score, income, mandatory down payment, private mortgage insurance, and other costs depending on where you’re getting your loan.
There are two types of conventional loans: conforming loans and non-conforming loans. A conforming loan is one that follows the guidelines put into place by Sallie Mae or Freddie Mac. These loans have limits depending on the type of property you’re acquiring based on stockholder-owned guidelines. Your mortgage will probably be packaged with other securities that will become a part of the secondary market.
There are some positives of a conventional loan. With these loans, equity builds faster because you have to pay a higher down payment up front. If you can afford the down payment, this may be the best way to go.
These loans are generally easier to acquire with a smaller down payment requirement. Many first time buyers opt for FHA loan because it has more relaxed credit requirements, larger income to debt ratios, only one month’s reserve funds, and an increased allowance for closing cost financing.
FHA loans have a lot of amazing benefits, but there are some restrictions that can make it difficult to get the loan you need. The biggest con to FHA loans is today’s mortgage insurance structure. Because of the loose structure of these loans, insurers require a premium monthly payment for any mortgage that exceeds 80 percent of your home’s value.
You’re also limited on the kind of homes you can buy; the FHA has strict guidelines regarding which home is acceptable for their mortgages.
If you already own a home and want to purchase another, try using your home equity. Start by looking at how much home equity you’ve built up over time and gather how you can use this to purchase a home. This is one method in which some people jump into the fix and flip business.
Understand that a home equity loan is much like a second mortgage, and you need to be financially savvy to pull it off. When you take out a home equity loan, your home becomes collateral until you pay it off. This means that if your real estate venture fails, you’ll be endanger of foreclosure on your current home.
If you are a veteran, you are guaranteed a VA loan from the U.S. Department of Veterans Affairs. Under this loan, you are guaranteed a mortgage from a qualified lender.
Those who qualify generally don’t have to make a down payment, but there is a limit according to where you plan to buy. If you are a veteran planning to apply for a VA loan, first check in with the VA to see if you are eligible.
Hard money loans are easy to attain but challenging to pay off fast. That’s because hard money loans are short term–lenders require you to pay it off usually within a year. If you’ve been rejected from a conventional loan and don’t want an FHA loan, then a hard money loan may be right for you.
Unlike conventional loans, hard money loans aren’t nearly as strict in their requirements. Lenders aren’t concerned with your credit history, income, financial status, assets, or job. Instead, hard money lenders fund owners based on the potential value of the property. Loans can be approved within a day and funding may be dispersed within a week so buyers can snatch up a property fast.
One of the biggest drawbacks is its high interest rate. Hard money loans have some of the highest interest rates, along with a short timeline to pay it off. Commercial hard money lenders are ideal for those who fix and flip homes as a business.
If you plan on buying or flipping a home, consider these options to make sure you spend smart.