Part 2: How to Procure Financing for Investment Properties

 Part 2- How to Procure Financing for Investment Properties-150x150Question: Which type of lender should you target for a real estate loan?

Answer: There are several types of real estate lenders out there. With all of the options, it can be difficult to make a decision as to the best choice for your situation. Whether you choose a mortgage bank, mortgage broker, or other type of lender, there are pros and cons associated with each. Let’s take a look at the advantages and disadvantages of each to find one that works for you!

Types of Real Estate Lenders

1. Mortgage banks- Mortgage banks sell their products in the secondary market. Once you complete an application for a loan, the bank’s employees will carefully review your application and then make a decision.

Advantages of mortgage banks

  • Speed- mortgage banks process loan applications faster than all other providers.
  • First time program implementers- if the federal government launches a new program, mortgage banks are always the first ones to implement it.
  • Reliability- a local mortgage bank is an established institution. It has strong ties with members of your community and follows state and federal regulations to the ‘T’.
  • Savings- since a mortgage bank is the loan originator itself, you will end up with a lot of savings on the loan offer based on the mortgage terms and your deposit in the bank.

Disadvantages of mortgage bankers

  • Limited options- mortgage banks only offer their programs. They tend to be inflexible to the borrower’s needs.
  • Economies of scale- a mortgage banker may not bother to listen to you extensively because of the large customer base. They can be bureaucratic at times.

2.    Mortgage brokers- Mortgage brokers are middlemen who have access to mortgage loan information from different lenders across the country. A broker aims at finding you a loan that matches your needs. After loan application approval, you can get in touch with the lender directly.

Advantages of mortgage brokers

  • Savings- you may definitely access a mortgage at a very low cost because a broker has access to a variety of lenders.
  • Variety- a mortgage broker simply finds you the best loan product that matches your needs because they compare hundreds of lenders.
  • Speed- since brokers are professionals in their field of work, they get you the right lender very fast.
  • Easy qualification- an experienced mortgage broker will even assist you in putting together the required paperwork before directing you to a lender who will easily accept you without hassle.

Disadvantages of mortgage brokers

  • Hidden charges- many mortgage brokers increase their profits by including their price in the loan offer.
  • Not guaranteed estimates- many mortgage brokers rush to seal the deal so that they can walk away with a profit. That’s why they may present you with an offer that does not necessarily coincide with the bank’s terms.
  • They may not compare all lenders- mortgage brokers may not compare all lenders in order to find you the best offer. Moreover, some lenders don’t deal with brokers.

3.    Commercial banks and credit unions- The most popular lender in the world is a commercial bank. Credit unions in the United States are also popular. Understanding their upsides and downsides can help you in making an informed decision.

Advantages of commercial banks and credit unions

  • Competitive rates- compared to other traditional mortgage lenders, commercial banks offer competitive interest rates with very reasonable repayment terms.
  • Always available- since commercial banks have to keep their customers’ money working and earning interest, they are always available at your service.
  • Better terms- commercial banks offer affordable and friendly loan terms compared with a traditional mortgagor.
  • Customers are the actual owners- both commercial banks and credit unions treat their customers very well because they also have a stake in the company.
  • Credit unions are actually non-profit institutions- the aspect of non-profit basically means that they share their profits with their customers. You also get to save in taxes because credit unions are exempt from federal tax.
  • More savings- in addition to the lower fees that a loan from a credit attracts, you will also benefit from lower interest rates as long as you have a high credit rating.

Disadvantages of commercial banks and credit unions

  • Delay in loan approval- if you need access to your loan very fast, then a commercial bank may not be the best option because they take a long time to approve loans.
  • Tough qualifications- commercial banks have tough requirements for low-interest loan qualification, which typically includes excellent credit score requirements.
  • Limited access to new technology with credit unions- credit unions sometimes aren’t up to speed technologically, which may make it difficult at times for you to access their services when needed.
  • Restricted membership- credit unions center their focus on particular communities, professions or groups of people. This can make it difficult to find a credit union for which you qualify.

4.    Real estate agencies and home builders- There are many real estate agencies and home builders. A number of them are affiliated with mortgage brokers and bankers. Additionally, their services can be accessed online.

Advantages of real estate agencies and home builders

  • Pricing prowess- real estate agencies can easily tell how much it will cost you.
  • Experience- approaching home builders gives you assurance of the best residential property because of the experience they have in developing such property.
  • Speed- home builders working together with real estate agencies process your loan request very fast.
  • They do all the paperwork- if you are not very familiar with real estate jargon or not experienced with paperwork, then real estate agencies may be the best for you because they will handle the loan documentation paperwork for you.
  • No closing problems- there are several pitfalls that can kill a deal in its final hours of execution. Real estate agencies ensure that your property is in order.

Disadvantages of real estate agencies and home builders

  • Ethical considerations- some agencies may not consider all of the professional ethical considerations in conducting their business. This may land the investor in trouble with legal authorities.
  • Extra charges- since real estate agencies and home builders don’t directly deal in the money lending business, using those results in an extra cost because they are middlemen.

5.    Internet lenders- The internet is a business powerhouse worldwide. Many lenders have flocked to the internet, giving people  access to a loan at competitive rates.

Advantages of internet lenders

  • Easy access- shopping for an internet lender is very easy because you can do it from your PC or smartphone. You can access them 24 hours a day, 7 days a week.
  • Competitive rates- unlike other mortgagors who have a physical office, they save you extra costs because they don’t pay property taxes and other overhead costs.
  • Comparative base- there are many online sites where you make comparisons on loan amounts awarded, interest rates and repayments.
  • Convenience- you can apply for a mortgage from an internet lender any time you want and wait for approval from the lender without strict deadlines.

Disadvantages of internet lenders

  • Lack of personal advice- since you don’t meet the lender face to face, a lack of personal touch may not be the ideal experience for you
  • Scams- there are many illegitimate internet lenders who may con you and disappear with your money when you give them your personal information.
  • Out of date sites- there are many online lenders’ sites that remain out of date. This may not give you the right idea of current mortgage rates today.

As you can see, there are many options for you when it comes to choosing a lender. This information should give you a complete overview of what to expect with each lending option. Look out for part 3 of this question, where we discuss lenders for both commercial and residential investment loans as well as what lenders are looking for in borrowers.

 

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