Where and Where Not to Borrow Money for Real Estate

If you are going to get into the world of real estate investing, you need to learn a little about your financing options. There are varieties of lenders out there. Here are just a few.

The Banker

Banks make loans on cars, computers, and people and on real estate. Unless you are dealing with a bank that has a mortgage department or subsidiary you will find mortgages are done a little differently by the retail, or commercial, end of banking.

Retail banks use their own money to make loans, which they do not sell. They also set their own guidelines and rates. Their guidelines and rates. Their guidelines can be less demanding than those you would find in the secondary market, but their rates are sometimes higher. They are also less interested than other lending institutions in making long-term loans. Most bank mortgage loans will balloon or not go beyond a 10 or 15-year amortization. An amortization is the continuous payment of a set amount on a loan, which will reduce and pay it off in a given period.

The terms of the loan and whether the bank will approve or not, often depends on the relationship the borrowers have with the bank. If you keep large debt with the bank, they may not be interested. The advantages of dealing with retail, or commercial, banker is that the banking may request less documentation and can be more flexible. The disadvantages are the rate will often be higher by the loan term being shorter.

The Mortgage Banker

The mortgage banker is primarily dedicated to the secondary market. A mortgage banker can be freestanding company that is unaffiliated with any other entity, or it can be part of a bank. To be accepted by investors in the secondary market it needs to have substantial enough to sell, buy and service loans. Due to this, there is usually some connection with another capitol rich source. They may be banks, insurance companies, credit unions, or any large company like General Motors or Sears.

Mortgage bankers work closely with the secondary market. They use its guidelines and selling the resulting loans or securities backed by the loans. They can fund and close their own loans, and keep them if they need to until the loans are sold.

The Mortgage Broker (Independent Loan Source)

They broker loans for other lenders directly to the borrower. Brokers will normally have access to many different wholesale lenders. The broker gives the borrower the wholesaler's price in which they have added their fees in the form of the origination fee, additional discount points, and other miscellaneous fees. Due to the wholesaler does not have the broker's office, it can discount the price to the broker so they can be competitive and still add a fee.

Check out the broker you select carefully before making an application. Most of the good ones now have access to computer underwriting. This helps to remove many past problems.

The Thrift

The majority of mortgage loans used to be done by the thrift industry. They were the Savings and Loans (S&L) or savings bank. Originally, they made loans with their money and then kept them as commercial bankers do. They were savings institutions that were established to make mortgage loans. Many of the thrifts have now changed into savings banks or just plain banks.

They function much the same as a mortgage banker; they price, process, find the closings, and then sell the loans to the secondary market. During a time in the 1980's, changes in federal regulations called thrifts to stray from their main business of making home loans into the domain of commercial banking. Too many thrifts made loans on high-risk ventures and other projects for which they had little background or capitol. The resultant massive failure of many thrifts caused a taxpayer bail out costing hundreds of billions of dollars.

Credit Union

These are similar to commercial banks, except they are nonprofit. Credit unions have checking and savings accounts, make consumer and auto loans, and mortgage loans. They usually can offer lower rates than other mortgage lenders because they have a lower cost of doing business. Access to the secondary market offers the credit union member a wider selection of mortgages.

Insurance Companies

Life insurance companies have made mortgage loans for a long time, either as investment instrument instruments for their cash or as loans against a person's policy's cash value. Due to their huge amounts of available premium deposits, life insurance companies can be one of the prime sources of mortgage money often at low rates. They can also get guidelines that may not be found in the standard Fannie or Freddie Mae loan. Some insurance companies such as Prudential have opened their own lending subsidiaries, others loan through mortgage bankers or brokers.

Mortgage Lenders

Some lenders prey on people who cannot qualify for a normal mortgage. People who do not have good credit or enough income. The predatory lender will make a loan with little or no cash down, or refinance the borrower's house and finance the cost of the loan into a mortgage account. The cost often is equal to a large number of points. One ploy seen with these is to require a high application fee which is non refundable, even when they know the client cannot make the loan. Then when they are turned down the company has already picked up some quick cash. Only use these as a very last resort.