Whether it’s residential or commercial, purchasing real estate requires a substantial monetary investment. According to HuffPost, the average sale price of a home in the United States is $188,900. For commercial property, the price is even higher. To cover the cost of real estate purchases, entrepreneurs should familiarize themselves with the basics of getting a loan when they begin investing in real estate.
Lenders scrutinize credit
When applying for a real estate loan, the lender scrutinizes the real estate entrepreneur’s credit to assess his or her risk of default. Lenders typically pull credit reports from the three major reporting bureaus: Equifax, Experian and Transunion. If they contain late payments, charge-offs, collections, liens, or other red flags, the lender may deny them the mortgage. However, there are plenty of lenders who are willing to work with those who have lower credit or lack an extensive credit history.
Fixed-rate isn’t always the best
Some entrepreneurs assume fixed-rate loans are better than adjustable-rate loans because the interest rate doesn’t change. Normally, however, adjustable-rate loans offer a lower interest rate during the first few years, after which it increases. So, if an entrepreneur plans to quickly flip a property and pay off the loan, an adjustable-rate loan can save them money.
Property history affects candidacy
The history of the property being purchased by a real estate entrepreneur may affect his or her candidacy for a real estate loan. If it’s an apartment complex that’s been in business for many years, the lender is more likely to approve the entrepreneur’s loan application. The lender can see that the property has earned revenue in the past, so the entrepreneur will likely make money off the property as well.
Lenders appraise property beforehand
Appraisals are an integral part of the loan application process. Before approving an entrepreneur’s application, the lender will order an appraisal of the property. This appraisal is done to assess the property’s current fair market value and ensure that the entrepreneur isn’t asking for too much. The appraised value of the property should be aligned with the dollar amount requested by the entrepreneur.
Private lenders are available
A bank-issued loan is just one way to fund real estate purchases. There are also funding solutions offered by private companies and investors. A hard money loan, for instance, is a secured, short-term loan offered by a private company.
Lack of funding shouldn’t prevent real estate entrepreneurs from pursuing their dreams. By seeking the right type of loan, entrepreneurs can cover the otherwise high cost of residential and commercial property.