Finally found the dream home you’ve been looking for? The next step is paying for it.
Unfortunately, it’s not as simple as paying for groceries, buying a TV, or even a brand new car. Whether you’re planning to use the property as your permanent home, a long-term investment, or something you’ll flip immediately, this guide will show you some of the ways to finance real estate.
For investment properties, it is possible for you to pay all cash. According to a recent study, around 24% of investors in the US finance their deals using all cash. Don’t be fooled by the term though – it usually means no actual cash is traded in an all cash deal. A buyer typically brings a check to the title company, who will then write a check for the seller. Paying with all cash is the easiest way to finance real estate, although it’s not always a viable option for everybody.
The term “hard money” refers to money obtained from businesses or private individuals for the purpose of financing a real estate investment. Terms and styles change constantly, but this type of payment usually has defining characteristics such as:
- High interest and loan points
- Based on the value of the property
- Do not require income verification or credit references
Hard money is the best use for very short-term loans, but there are many investors using hard money lenders who have experienced being in tough situations after the short-term loan expired, so use this with caution.
Many investors opt to pay a down payment of up to 50% of the property’s purchase price to finance their investment. Conventional mortgages usually require a minimum of 20%, which can also hit around 25 to 30% for investment properties. This is the most common form of mortgage used by most home buyers.
The US Federal Housing Administration or FHA is a government program which issues mortgages for banks. Their loans are designed specifically for homeowners who plan on living in the property, but investors can take advantage of this as well – there’s a rule that allows a home to be divided into four units. This allows buyers to purchase a small multifamily home by paying an affordable down payment, which is currently 3.5%. The negative side of FHA loans, however, is that it requires additional payments and the small down payments actually result in a higher loan.
The 203k loan is a subset of the FHA loan. It allows a buyer to purchase a home that requires some work and can finance the repairs and improvements into the loan itself. The downside with 203K loans is that it involves plenty of paperwork, and there’s potential for problems, which could result in delayed closings.
Similar to the FHA loan, a HomePath Mortgage is a government-backed loan and is offered by the government-owned Fannie Mae. It allows for no mortgage insurance, smaller down payments, and other benefits. The program is open for investors, and it features the option to finance repairs into the purchase as well. A HomePath Mortgage, however, is only available through Fannie Mae-owned Bank Repos.