Harbaugh Real Estate

7 Financing Options For Real Estate

By Meghan Thrasher

When it comes to buying real estate, most people have to take out a loan. Because there are so many loan options, selecting the right option can seem daunting. In this post, I will break down the seven types of real estate loans available to most people and explain a little bit about each one.

stacks of coins with a toy house

1. Conventional Loan / Fixed Rate Mortgage

Conventional loans do not receive a guarantee or insurance from the government. These are typically fixed in terms (10, 15, 20, 30 & 40 year) and rate. There are two types of conventional loans known as, conforming and non-conforming. Conforming conventional loans fall within the maximum limits set forth by the government which is less than about $700,000. Anything over that limit is considered to be a "Jumbo Loan" and thus, non-conforming with government-dictated lending limits. Non-conforming conventional loans typically have higher rates and require the borrower to jump through more hoops in order to qualify.

Conventional loans are ideal for people with good credit history, stable income, and at least 3% of the downpayment. This is why conventional loans are the most commonly used loan type in residential real estate. Keep in mind, you will likely need to pay mortgage insurance with this loan if your down payment is less than 20%.

2. Government Insured Loans

Three government agencies lend money to homebuyers: The Federal House Administration (FHA Loans), the U.S. Department of Agriculture (USDA Loans), and the U.S. Department of Veterans Affairs (VA Loans)

FHA Loans can require as little as 3.5% down depending on your credit report. FHA Loans require two mortgage premiums, one paid up front and the other annually with under 10% down payment. Private Mortgage Insurance (PMI) is required until you have paid at least 20% equity in your home. These types of loans are commonly marketed to first-time home buyers. It is ideal for individuals with more cash on hand and less-than-perfect credit history. There are fewer hoops to jump through in order to be qualified for an FHA loan.

USDA loans are ideal for farmers and other agricultural workers. These loans are not available to anyone who does not meet the requirements of qualification standards for USDA loan holders.

VA loans are ideal for present and past military workers or spouses of a military worker or veteran military individual. These loans are only available to military workers, veterans, and their spouses.

3. Adjustable Rate Mortgages (ARMs)

An adjustable-rate mortgage has a fluctuating interest rate that is dependent upon market conditions and lender terms. Many ARM products have a fixed rate for the first few years and then reset to variable rates, sometimes with a cap. If you don’t plan to stay in your home for more than a few years, this could save you money on interest rate payments.

4. Interest Only Mortgage

In some cases, a lender can give you an interest-only mortgage in which you only pay for the interest for the first 5 or 10 years. After that period, it reverts to a conventional mortgage with fixed rates. This will take longer to pay off but can be useful if you are having trouble with the monthly payments.

5. Seller Financing

In a buyer’s market, sellers can often entice buyers with special concessions to get a deal done. One of which is seller financing. In this case, the seller acts as the bank or lender and obtains a second mortgage on the property in addition to the buyer’s initial mortgage. Each month, the buyer pays off both mortgages. This may also be referred to as owner financing or seller carryback financing.

6. Owner-Occupied Loan

If the property in question is a duplex or multifamily home, the buyer can obtain an owner-occupied loan. In this case, buyers can use the rental income from the property to underwrite the loan with higher loan limits. The property must have signed rental lease agreements so that payments can be verified. These are considered investment properties so private lenders may require higher down payments, typically between 25-30 percent down. The VA and FHA will also work with buyers on owner-occupied loans.

7. Agricultural Loans

Ag loans are available for properties with 10 or more acres and have no restrictions for owner vs. non-owner occupied. These include properties with orchards, farms, vineyards, and more.