Understanding The Different Types of Real Estate Loans

Traditional Bank Purchase Real Estate Loans

Traditional bank financing is the mortgage that most people think of getting when they take a deal down. Bank debt is usually cheap and offers healthy leverage. However, it comes with some significant challenges. 

While they offer attractive loan-to-value ratios, bank real estate loans are usually made on the basis of a property's appraised value, which can be very low for rehab properties. They also require the borrower to go through extensive underwriting that includes not only reviewing a borrower's credit score, but also looking at their global debt and cash flow. Sometimes, banks refuse to lend to a qualified borrower simply because they have too much debt. Banks can also take months to close deals, making it hard for you to move quickly.

Construction Real Estate Loans

Construction loans solve one of the biggest problems with bank financing by focusing on the as-improved value of the property. They usually offer fair rates and good terms, as well. The problem with these loans is that they can be extremely hard to get. In fact, after the Great Recession, many banks completely pulled out of the construction financing market.

Lines of Credit

If you have ample credit and equity, lines of credit can be an excellent way to use your existing properties to finance buying more real estate. They are fast and flexible. The problem with lines of credit is that when you are tapped out, you cannot get more. Also, many lenders have a nasty habit of pulling access to your line of credit when you need it most.

Hard Money Loans

Hard money loans are loans made by private lenders to real estate investors. While they usually require larger down payments and can carry higher interest rates, they are extremely flexible. The odds are that if you are a well-qualified buyer taking down a lucrative investment, you can get approved and close quickly.