Real estate financing doesn’t always fit into a familiar box. Loan products from your local bank and government entities like FHA, Fannie Mae, Freddie Mac have long enjoyed popularity, but borrowers have other choices, too.
Not every borrower fits into the nice, neat profile that many lenders must use to meet government regulations. Lucky for you, there are other real estate financing options out there.
Traditional banks have a limited amount of money budgeted for making loans. To make room in their budget so that they can service new mortgage customers, they sell existing loans to a secondary market lender who takes over the day-to-day service of your loan while honoring your original loan terms.
Secondary markets include buyers like Fannie Mae and Freddie Mac, but to sell loans to them, the loan financing must meet strict standards put in place to protect bank shareholders and investors from loss from default. These procedures include credit and employment checks, and this prevents many potential borrowers from qualifying for a mortgage.
One loan option for folks who don’t qualify for a traditional mortgage is a portfolio loan. A portfolio loan is a loan that the original bank keeps for the life of the loan. The bank holds the loan in their financial portfolio until it has been paid in full. This means they take on 100% of the risk associated with making the loan. Since the bank holds the loan, their lending requirements are not as limited. For instance, if a borrower’s credit score is low because of a medical bill or unemployment, but there is no other history of poor repayment, the bank might consider this borrower a candidate for a mortgage and offer a loan.
The obvious pro of a portfolio loan is its flexibility, offering real estate financing that might not otherwise be available to many borrowers. There can be drawbacks as well. Some lenders may charge a penalty for early payoff and interest rates could be higher.
Non-banks are financial institutions that can lend money but can’t offer depositing services, too. Traditional banks focus on low-risk projects that include stringent credit approval and working with established borrowers with solid credit histories. Because of this, non-bank banking has greatly expanded in recent years. Examples of non-bank lenders include a department store that offers a store credit card or an auto dealer with a buy here, pay here offer. It also includes specialty mortgage lenders.
Also known as private lenders, non-bank lenders are willing to provide funding for riskier transactions. This includes real estate financing for borrowers who may not qualify for a traditional mortgage. Present-day banking regulations and licensing standards make today’s non-banks as safe as a traditional banks. Licensing regulations for loan officers working at non-banks require them to hold a license in every state where they originate loans.
A non-bank mortgage lender is a specialist in real estate financing. Their only focus is mortgages and they understand the industry and its customers. They create processes and technologies that help consumers get the financing they need when other lenders can’t or won’t help them.
Hard Money Loans
Another option for real estate financing for borrowers who don’t fit into the traditional lending box is a hard money loan. An investor or group of investors normally fund a hard money loan and rather than securing the loan by credit worthiness, they base the loan on collateral, or equity.
Hard money loans are typically short-term loans. The terms are usually one to five years. There can also be hefty processing fees and higher interest rates. Despite those cons, a hard money loan might be just what you need depending on your circumstances.
Hard money loans take just a few days to process, rather than the weeks it takes for a conventional loan. If you need money fast, this may be a great option. Others who may benefit from a hard money loan are property flippers and homeowners with substantial equity who are facing foreclosure.
The Bottom Line
Whether you’re a first-time home buyer or a seasoned house flipper, you’ll likely need real estate financing. Real estate professionals reside locally in your neighborhood and they will be happy to assist you in finding the right mortgage. You can also find more information online about the options out-lined above.
Relax! There’s lots of options for you, no matter your financial situation!