How to Finance Real Estate

How to Finance Real Estate.

Real estate can be a very good investment. Depending upon your resources, you may need to know how to finance the real estate. When financing, there are a number of considerations and options for you to consider.

Steps,

1. Review your financial background. Prior to considering a loan you should be aware of several factors which may affect your loan approval.

Check your credit score. A low credit score may affect the interest rate that you will pay or may prevent you from getting the loan.

Make sure you save enough money to cover a down payment. Although no money down loans have existed, it is likely you will pay an upfront payment of anywhere from 3.5% to upwards of 20% of the cost of your new real estate. A second loan may help defray that cost.

You may need to establish that you have a stable level of income, and a lender may consider the ratio of your debt to income. A high percentage of debt to income could disqualify you for a loan.

2. Assess the maximum amount of mortgage you can afford. You will need to take a look at your income and expenses, including your debt. That debt should include any installment debt, mortgage debt on a second property, loans, credit card debt, child support and additional debt which will be acquired with the new property. That additional debt should include the new projected insurance, taxes and home owners fees. You should add that debt to any other monthly expenses, such as food, clothing, health care, and transportation costs to determine the amount of your overall obligations should you complete your purchase. Of course certain expenses such as your current rent payments would be excluded. Subtract the obligations from your income to determine the maximum mortgage payment you could make and decide the mortgage amount you would be comfortable making.

3. Secure pre-approval or pre-qualification for a loan with a lender. A lender will review your finances and give you an idea how much you can borrow. The pre-approval process goes through a more in depth analysis of your finances and more accurately reflects an amount that you can borrow. Neither review is binding on the lender.

4. Determine the type of loan you want or need. The first option most people consider is the conventional loan. There are several types of conventional loans.

The fixed loan locks in the interest rate and the payment amount for the duration of the loan.

In the adjustable rate mortgage, the interest rate is subject to change over the course of the loan.

A jumbo mortgage comes into play when a loan is higher then a certain amount which then results in a higher interest rate.

A loan may also have a balloon payment which usually allows for a lower interest rate for a period of years and then finishes with a final lump sum payment.

5. Pursue alternative financing if a conventional loan is unavailable or not your best interests. One option is to see if the lender will consider taking on other collateral you own to secure the loan. Also, the seller may agree to either finance part of the loan, or agree to lease the property to you with the intent to sell it to you. One other option is to secure a private money loan from private investors looking to make money on their investment.

Tips.

The process of pre-approval or pre-qualification not only gives you an estimate of your maximum mortgage, it tells a potential seller that you are a serious buyer which can give you an advantage over offers from other buyers.

Warnings.

Even though you are pre-approved for a mortgage at a certain amount, it does not guarantee that you will be able to afford that mortgage. Remember to review your current financial situation and try to anticipate any future expenses before taking on a mortgage that ends up too large to handle.