The Different Types of Residential Real Estate Loans
There are many properties you can purchase for your real estate investment, but buying residential can provide versatile opportunities. Whether you’re seeking immediate returns or real assets for long-term capital appreciation, residential real estate can add value to your portfolio.
There are several types of residential real estate loans, but it’s always a good idea to choose one that’s suited to your specific investment project. Let’s examine a few loans to consider for your next venture.
Types of Mortgages
Residential real estate loans are primarily characterized by whether they conform to government-sponsored underwriting guidelines and whether the interest rate is fixed or variable.
In addition to conforming with federal guidelines, a limited number of home financing options are backed by government agencies with distinct qualifications based on income, location, or military status.
Fixed-Rate vs. Adjustable-Rate Mortgages
Fixed-rate mortgages will have the same interest rate for the full loan term unless refinanced. This is a great financing option as it provides stability with consistent monthly payments unaffected by the market. Most fixed-rate loan terms range from 15-30 years.
An adjustable-rate mortgage (ARM) will vary over time. After an introductory period, the interest rate will adjust annually or semi-annually to reflect market conditions. Rate changes are based on the designated index and margin set by the lender.
Government Home Loans
The federal government offers residential real estate loan programs to make homeownership more accessible. These programs are led by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA) and financed by approved lenders with competitive terms.
Although these loans are guaranteed by government agencies, the borrower is responsible for covering the cost of mortgage insurance.
FHA Loans
These loans are guaranteed by the FHA and typically have lower interest rates and credit score requirements. Down payments can be as low as 3.5 percent, but the property must meet FHA requirements and fall within FHA loan limits.
VA Loans
Guaranteed by the VA, these loans are available to active service members, veterans, and eligible spouses. In most cases, no down payment is required.
USDA Loans
These loans are available directly through the USDA and approved lenders to low-income borrowers in designated rural areas. No down payment is required, although income limits and loan limits apply.
Conventional Loans
Most home buyers financing with a local or national bank will be offered a conventional loan. This simply means the mortgage isn’t guaranteed by a government agency.
It’s common for conventional loans to still conform to government standards for income requirements and loan limits, but because the loan isn’t federally guaranteed, lenders can apply their own standards. This can make conventional mortgage loans more difficult to qualify for when the lender’s standard for credit score and debt-to-income ratio are more stringent.
Conforming Loans
Conforming loans meet the loan limits set by the Federal Housing Finance Agency (FHFA) and the underwriting guidelines for government-sponsored enterprises (GSEs) that purchase mortgages.
The benefit of conforming loans for a lender is they can be sold by to Fannie Mae and Freddie Mac for the secondary market. This allows banks to recover profits more quickly and meet mandated cash reserve requirements.
The benefits of conforming loans for borrowers are that they may be easier to qualify for, have lower interest rates, and lower down payments than other home financing options.
Nonconforming Loans
Nonconforming loans do not meet FHFA or GSE requirements and cannot be sold. Terms are set by the lender and often have higher interest rates to offset risk. However, these loans are not systematically restricted by property type, loan structure, or credit score.
Most conventional loans only require mortgage insurance if the borrower’s down payment is less than 20 percent, whereas all government-backed loans are insured. The additional risk of uninsured financing and expanded loan criteria comes with tradeoffs.
Jumbo Loans
Jumbo loans are used for high-value properties that exceed the conforming loan limit. They are more difficult to qualify for than conforming loans with strict credit score requirements, higher interest rates, and higher down payments.
To account for different price ranges in regional real estate markets, the loan limit threshold is assigned by county.
Private Money Loans
Private money lenders also offer residential real estate loans. Unlike mortgages financed by a bank, private money loans are financed by individuals or private investment companies. These loans can be structured in several ways to accommodate the borrower’s needs.
Private money lenders prefer to secure loans with real property as collateral. This allows for more flexible borrower requirements based on the loan-to-value ratio (LTV) instead of the credit scoring model used by banks.
Additionally, a private lender might be able to review and approve a loan within a week rather than the lengthy process with conventional lenders. Private loans can be advantageous for many real estate investors due to the approval speed, interest rates, and overall freedom to use the loan.
Finance Your Residential Investment Property with Val-Chris
Whether you’re buying your first investment property or have questions about funding options, our expert specialists can help determine what’s best for your situation.
Get in touch to learn more about our private residential loans.
