Real estate investors often use financial leverage to scale their real estate investments, which means they have to get pre-approved for mortgage loans that are right for them. In fact, getting pre-approved for a mortgage loan is one of the first steps on the action list for real estate investing because it allows investors to know their purchasing powers before searching for properties. In this article, we will tackle the financing aspect of your real estate investments and show you different financing options.

Different Types of Financing

There are many different types of mortgage loans available, each with its own benefits and drawbacks. Based on the types of lenders, mortgage loans can be generally categorized into three main types:

1. Institutional-Lender Loans

Institutional lenders are heavily regulated by lending laws so they typically have stricter screening criteria for borrowers. Some examples of institutional lenders include commercial banks, savings and loan associations, and insurance companies. They often provide a wide range of loan products including conventional loans or fixed-rate mortgages, which can help to keep monthly payments steady over time. 

Government-sponsored loans such as FHA and VA loans are also great institutional-lender loans. These loans are great for first-home buyers as they have lower or no minimum down payment and more lenient credit score requirements. But pay attention to the qualification requirements of an FHA or VA loan: you can only get a new FHA loan if the property is your primary residence. If you intend to house hack and live in the property, these loans are great options.

Here are some common institutional-lender loans:

• Conventional loans
• Federal Housing Administration (FHA) loans
• Veterans Affairs (VA) loans
• Home equity line of credit (HELOC) or a home equity loan
• Portfolio mortgage loans
• Roth IRA financing

Oftentimes, institutional lenders also require borrowers to show proof of W-2 income or 2 years of income statement if you are an independent contractor. Debt-to-Income (DTI) is one important metric lenders usually use when evaluating the borrower’s ability to repay the loan.

2. Noninstitutional-Lender Loans

In contrast to institutional loan lenders, noninstitutional loan lenders are typically hard money or private money lenders who are less regulated by laws. As a result, noninstitutional lenders often have fewer lending qualifications for buyers who have financing needs and want a faster financing option. 

Some of the noninstitutional-lender loans include:

• Private money loans 
• Hard money loans
• DSCR (Debt Service Coverage Ratio) loans

These types of loan are typically used for short-term financing needs and can be easier and faster to obtain than traditional mortgage or home loans. While they can provide faster approval and more flexibility, they also come with higher interest rates and shorter repayment terms. 

Therefore, noninstitutional lender loans are good options for investors who don’t qualify for traditional financing or specialize in flipping houses and expect faster returns. 

3. Creative Financing

There are also creative financing options such as seller-financing or rent-to-own agreements may also be available in certain situations. 

Here are some creative financing options:

• Subject to deals
• Contracts for deed
• Rent-to-own agreements
• Seller-carry mortgages
• Crowdfunding

Subject-to deals are when the buyer takes over the existing mortgage on a property, while contracts for deed involve the seller providing financing directly to the buyer. Rent-to-own agreements allow buyers to rent a property with an option to buy at some point in the future, while seller-carry mortgages involve sellers providing financing directly to buyers. Lastly, crowdfunding involves pooling funds from multiple investors in order to purchase a property.

Each of these creative financing strategies has its own pros and cons that must be weighed carefully before making an investment decision.

Summary

The right financing strategy can help you maximize your cash flow and minimize your investment risks. It is important to consider your income level, financial situation, investment strategy, time horizon and cash flow goals before deciding which financing method is best for you. Consult your local investor-friendly real estate agent, lenders and financial advisor to decide on the best financing strategy for your real estate investments.  

Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only. Read our full disclaimer here.
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