What is a Real Estate Loan?
A real estate loan is a loan for the purchase of any type of real estate. While technically still a type of real estate loan, loans used to on the primary residence of the borrower are typically called home loans. Just as there many types and uses of land, there are many different kinds of real estate loans. We've put together some information about real estate loans in general below, but if you want to learn more about some of the different options, in particular, click one of the links below.
Commercial Real Estate Loans
Real Estate Investor Loans
Secured Real Estate Loan
The annual percentage rate (APR) for real estate loans vary widely from 4.88% to 18% depending mostly on the type of real estate loan. SBA 7(a) loans typically have APRs between 7% and 9.5%. SBA 504 loans have the lowest APRs because they have high qualification standards, and their rates tend to be between 4.88% and 5.15%. Most conventional loans have APRs of 5% to 7%. Online marketplace loans tend to have APRs which fall between 8% and 12%. Hard money loans have the highest rates, with APRs between 10% and 18%.
The range of APRs within the loan is determined in part by changes within the market and in part by the individual circumstances surrounding the borrower and the loan. The stronger the credit rating of the borrower the more likely they are to qualify for a loan with a lower APR. Larger loans sometimes have lower APRs because the underwriting cost is roughly the same for a large loan as it is for a smaller loan, and so it represents a smaller percentage of the cost of a larger loan. Shorter term loans typically have lower APRs.
Like rates, the credit requirements for real estate loans depends primarily on the type of real estate loan. To qualify for an SBA 7(a) loan or a CDC/SBA 504 loan, you’ll typically have to have a credit score of 680 or better. For a conventional loan or a bridge loan the standards are somewhat higher, typically requiring a credit score of at least 700. Whereas a hard money loan is more relaxed in its qualifications, asking for only a credit score of 600 (this is part of why the interest rates are so much higher for hard money loans).
These minimum credit scores act more as guidelines than as hardline rules. Sometimes, exceptions are made for borrowers who have bad credit ratings due to mistakes made in the distant past, if they have sufficient justification for those errors and evidence that the behavior has changed (you may want to see our credit rebuilding guide). Exceptions are also made if the property has a high debt-service to coverage ratio. The same is true for the opposite, sometimes borrowers with high credit scores will be turned down because of other considerations..( Exceptions are also made if the property has a high debt-service to coverage ratio. The same is true for the opposite, sometimes borrowers with high credit scores will be turned down because of other considerations.
Many lenders offer interest-only real estate loans. Interest-only loans ask that the borrower only make payments on the interest, leaving the principal (the amount owed to the lender) unchanged. The borrower can make payments on the principal but is not obligated to. Of course, almost all interest-only loans are structured in a way that they eventually convert into regular loans with payments on the principal. An example of this would be a 30-year loan, which is interest only for the first ten years and then converts into a conventional 20-year loan.
Typically interest-only loans are more costly in the long term. However, they can be useful for first-time homeowners or those with growing businesses as it gives the borrower some time to adapt to mortgage payments as their income grows.
Unlike some conventional loans, some real estate loans do not require a down payment, but typically only those available for primary residences. The USDA’s rural development loan is available within what it has deemed as rural regions. While the rules about the use of USDA loans are not strict, there are additional restrictions regarding household income and these loans are typically reserved for first-time buyers, so most borrowers use it on farmland or rural housing.
The most commonly used option is the VA home loan. To qualify for a VA home loan, one must have VA entitlement, which requires that you or your deceased spouse has served in the military. VA loans are also restricted to use on primary residences. The Navy Federal Credit Union also offers a home loan with no down payment, but it has similar restrictions as VA home loans.
How to Get a Real Estate Loan
To get a real estate loan you must first decide on what piece of real estate you are buying and what you intend to do with the land. Then you should do a review of your circumstances, find out what your current credit rating and debt to income ratio are, get a sense of how much you can afford to make as a down payment, etc. Once you’ve sorted out these things, you will have to decide what type of real estate loan best suits your needs and qualifications. Make sure to do some comparisons so you can find the ideal match for your needs. Finally, you apply for the loan that works for you. If you're purchasing land for business purposes, be sure to have a business plan ready.
Whether you're buying a home, or need a commercial property to start or expand your business, a real estate loan can be a great investment. If you've got more questions you'd like to ask about real estate loans, it's always a good idea to talk to an expert. not to mention doing your research and comparing as many lenders as you can to find the right borrowing option for your needs.