Draw Me Self

In the event that you have to get a mortgage for your first real estate investment property, take your time to look at the different choices available. Of course, it helps to have great credit. The better your credit is, the better chance you have of getting the loan that you want. Here are some choices when it comes to getting a mortgage loan for your property:

Fixed Mortgage

A fixed rate mortgage usually lasts for 30 years and doesn't change, hence the term "fixed rate". This is the mother of mortgage loans. For a long time, real estate investors were only able to get this kind of loan. When they get this fixed mortgage loan, it comes with a fixed rate that remains throughout the duration of the 30 years or less if they pay it off quicker. Upon the end of the e30-year term, the loan will be considered paid in full. In the beginning years, the monthly loan payments are applied toward the interest of the loan. As the years pass, they are eventually applied to the principal balance. This is about the easiest loan for investors to deal with because the terms are simple.

You usually won't find anything unexpected down the road as you continue to pay it off. Real estate investors would probably want to look at paying off the loan early so they won't be saddled down with a lot of debt for a long time. The focus of real estate investing is to create wealth, not to always have financial liabilities. When investors get wealth from real estate investing, they can enjoy it as they continue to invest in more properties.

No-Money Down Loans (Zero Investment)

This is another type of mortgage loan that can be used by real estate investors. They won't have a problem trying to get information about this kind of loan, because they are always advertised somewhere. It can sometimes be touted as one of the best loans since sliced bread. However, it's important that investors know the risks about securing this kind of loan.
Real estate investors can get this kind of loan by securing a mortgage that is 100%, or they can get what is called a "piggyback" mortgage. A piggyback mortgage is when the investor secures two mortgages at the same time and put them together.

With a piggyback mortgage, the investor gets a perk by not needing a downpayment at the closing process. Also, the investor can benefit from getting the largest amount of interest available to include in their taxes as a deduction.

Being an investor, it is not always guaranteed that you will get the entire amount financed for the loan. There are many banks and other lenders that will not provide the entire 100%. If some do decide to provide the entire thing, then they will get their share by including higher interest rates. This way, they can cover themselves because you would not have provided a down payment.

As with anything else that is zero-down, your mortgage payments will be higher than usual. If you don't have a lot of money as a financial backup, this kind of loan could hurt you in the long run. It would take you longer to have a comfortable cash flow because you would be paying a larger amount in mortgage payments. So, you may want to think about this loan option a little harder than you would others.

However, a zero-down loan could still work out for you in terms of securing an investment property. It's up to you as to whether or not you're willing and able to take the risk.

Adjustable Rate Mortgage

Adjustable rate mortgage loans, or ARMs, as they are commonly known as, are almost as popular as fixed rate mortgages. Real estate investors are known for using these as well. If you decide on this loan, you can be assured of having a variable interest rate.

A variable interest rate is the rate that lenders charge and it often fluctuates. The rates change in accordance with the increase or decrease of interest rates in the market during that time.
It would start off with a fixed rate for a few years. Then it would go into a variable period. This means that after the fixed rate period is over, your loan rate (and monthly payment) is subject to adjusting every year.

With that, the majority of ARMs have a stopping point of how much they can change. With this loan, the rate can increase or decrease to a certain amount as long as you have it.
In the beginning, this kind of loan may include a low rate of interest. For some real estate investors, this would work for them because they may not want to hold on to the property for an extended time.

Also, when the interest rates decrease, investors can grab at the chance to get in on them. On the other hand, this loan is very risky. When interest rates increase, the investor will have to go with the flow.

The bad thing about this is, they will not know in advance when the rates will increase. In reality, ARMs can be an unsure thing because you don't know how much money you will continue to pay due to the constant fluctuations.

Interest-Only Loans

Another loan that is good for real estate investors in the interest-only mortgage loan. Investors can use this loan when they are having a hard time with getting positive cash flow. This usually happens when the value of the property. has increased.

Some investors normally get interest-only loans if they don't want negative cash flow, if they want to use the cash for something else, or if they're thinking about getting into property flipping for a future date.

When an investor has this kind of mortgage loan, they can hold off on principal payments for a certain period of time. It is usually no more than ten years, but could be less than that. The investor is only paying the interest and nothing else during this period.

In order to get rid of the principal in the future, the loan is amortized again after the period of only paying the interest has ended. The investor ends up paying a higher mortgage loan payment. There are several ways that the investor can handle this situation: sell their property, stick with the higher payment or try to refinance.

Balloon Mortgage

Having a balloon mortgage is not one of the popular kinds of mortgage loans, but real estate investors have used them. This mortgage increases using a longer time than the actual mortgage term. The investor ends up with a smaller payment.

However, at the term's end, there will be a balance that the investor has to pay in full or refinance the loan. If the investor can't pay the lump sum in full or get refinancing, they will end up selling the property.

Even though there is an advantage for smaller mortgage payments in the beginning, at the end, the investor can come out as the loser if they can't pay off the entire balance or refinance. Plus, with refinancing, the investor will have to deal with an interest rate increase, plus refinancing costs. That's just more money coming out of their pocket than necessary.

Like most people in real estate investing, we aren't made of money. However, we have been extremely fortunate along the way before we got into the real estate market. We have owned a profitable consulting business for 10 years. We have played by the rules. Paid our bills on time. Maintained a very low debt to income ratio (almost nil). Our vehicles are over 2 years old and paid for. And we each maintain a 700+ credit score.

Before the housing meltdown, we purchased a really nice rehab property that we decided to keep for our personal home (and its still a great deal even after housing prices have tanked). However, the words "trashed and destroyed" doesn't quite cut it with describing this house. The previous owners even took the ceiling fan that was in the entry way...which has a 16' ceiling. The ladder needed to reach that high costs more than the ceiling fan is worth!

So conventional financing wasn't an option. Nor was any other kind of financing except hard money. We emptied most of our savings account to purchase the home and we took out a very small hard money loan to cover repairs. After all repairs were made, we went to get a loan on the house to pay off the hard money loan.

Well, we have run into a sticking point in the real estate business because of our income and the fact that our W-2s come from our corporation. No bank would touch us. No lender would talk to us...well, they talked but said they couldn't help. If we had a traditional job making a lot less money for some other company, we would qualify for a loan with no problem. Even our bank that we have all of our business and personal accounts with doesn't want to touch us. Not even for a HELOC. How is that for customer service??

For those of you who don't know how hard money works, repayment is usually a balloon payment with interest. The loan is paid off when you either sell the house in a flip situation, or when you refinance. Well, we have been working on getting the refinance to go through since October 2008. As of the time of this writing, it is mid-May 2009. Our hard money loan comes due in mid-June. Nothing quite like having an executioner standing behind you with a smile on his face. Yes, it is very stressful to say the least.

Fortunately, we have found someone through our local real estate investment club that knows who we are and knows we are a very good financial risk. He is willing to finance this home for us so we can record a loan and get some "traditional seasoning" on a mortgage. The "signing party" will be the standard mortgage and promissory note - checks transferred. Mortgage filed in the city-county building, then it is off to lunch. Then more searching for the next housing deal....But, with some big lessons learned...

What we recommend to other new investors...

• Keep a real job. This has really hurt our progress. Lenders are really looking for 3rd party income, even though you could be fired at a moment's notice.
• Go to your local REI club. We have learned a great deal from those who have gone before us (we would really like to thank Randy and 'Charlie' France...Google them if you don't know who they are. They are the best people ever and they live just down the street from us. Some people say Charlie is a 'real estate guru', but how many gurus do you know that fix chocolate chip cookies for you when she knows you are stopping by?)
• Find a mortgage broker who is NOT an investor. A person who has a part time job as a mortgage broker isn't always in the trenches and up to date on the latest happenings in the market. Use a professional, full time mortgage person. You will be much happier with their results.
• Never, ever quit. It doesn't matter if it is investing in real estate or whatever you choose. Yes, it gets frustrating at times, unnerving sometimes, seemingly impossible even. But if we were deterred by these things, we wouldn't have survived more than a year with our own company (let alone 10). We thrive on challenges, but it seems like we have more than our fair share. But the more challenges we face and overcome, the luckier we seem to get.

Such is life. And we dare to be different.

Home mortgage refinance loans are loans that are obtained by exchanging the existing loan for another. This is ideal when the interest rates on current mortgages are lower. Home mortgage refinance loans are an effective way to decrease the debt on existing home mortgages. They are ideal if the rate on the previous mortgage is higher than the rate on the refinanced mortgage. Refinancing when the interest rates are lower would help to decrease any kind of debt burden, whether it is a credit card debt or a debt on the same house. It is the best way to convert from a high-interest loan to a low-interest loan. With increasing real estate prices, home mortgage loans and home refinance mortgage loans are being increasingly considered by professionals as well as people who have been planning to buy a house.

There are several advantages from refinancing: it can lower monthly payments; it can convert an adjustable-rate mortgage into a fixed-rate mortgage or a long-term mortgage in to a short-term mortgage; it can help to consolidate the debt; and it can generate some extra cash, which can be used for home improvement that can increase the value of the home.

There are certain aspects to be considered about refinancing home mortgages: the price of the home may actually come down, instead of going up, thus making repayment difficult; there could be additional costs of refinancing; you may have to move out of the house sooner than expected, etc. Refinance costs include application costs, appraisal costs and legal fees. But with increasing competition, most lenders are offering low-cost and no-cost refinance options for home mortgages. However, the waiver of these costs may mean accepting a slightly higher rate.

The best source for knowing about home mortgage refinance is the Internet. Most mortgage loan companies provide information through their websites, also. These sites are updated daily with the latest mortgage rates. Their sites also have easy-to-use home refinance mortgage calculators that give all information, including payments to be made each month and the tax advantages, with the single click of a button. Most of them also have financial advisors who would provide advice online, or over the phone.

There are several potential issues that can delay or "kill" your commercial mortgage refinance. Some of which will just tack on a few days or weeks to the process while others will completely eliminate the lenders interest in funding your loan. A prime example of this is value and environmental issues.

1. Title Problems. A forgotten lien on title can have a major impact on closing. Perhaps the dollar amount of the lien is substantial and cannot be rolled into the loan amount. Or the borrower may challenge the lien and will have to get it removed/resolved before the lender will fund the transaction.

2. Value. When the borrower and lender negotiate a loan term sheet, one of the most important components is the loan to value ratio. For example, on a refinance virtually all banks will not go beyond 80% loan to value. In other words, if your property is worth $1,000,000, your potential loan cannot exceed $800,000. If after your appraisal has been complete and the value comes out at say $900,000, you have a problem and a dead loan.

Besides the obvious frustration due to the canceled loan, there can be much disagreement with exactly how the value was determined. Appraisal reports are not perfect and have a subjective component to them. Deciding which comparable recent sales to use and how exactly to add/remove value from these comps is up to the discretion of the appraisal company.

3. Sudden Change in Business. Lenders sometimes call this "Adverse Change". Basically what it means is that there has been some type of borrower change from the time of initial loan approval to the closing. With some commercial mortgage refinances taking as long as 90 - 120 days to complete, much can go wrong in that time.

For example, we had a transaction where the borrower had to purchase a small fleet of trucks for his business. The truck loan was personally guaranteed and was reported on his personal credit report. The additional debt dragged his score to the minimum acceptable levels for the funding bank. In addition, the cash flow was tight to begin with and this additional debt also affected the numbers. It created some tense moments for all involved, but was resolved.

4. Environmental Issues. The liability for the lender having to take back a property with environmental issues is huge. No one wants to be stuck with the bill and cumbersome process to clean up a property. Not to mention the possibility of being sued by neighboring owners. It is not unheard of for these costs to exceed the value of the real estate itself.

In regards to a commercial refinances, most environmental issues are not on the scale of Chernobyl. What typically happens is that the results of the Phase One come in with concerns and a recommendation for a Phase 2 report, which typically requires borings and soil samples. The cost on the Phase One is around $1,800 while a Phase 2 is much more expensive. It is not unheard of for that report to be approximately $10,000.

The borrower will have to pay for this report upfront and in cash. He could be reimbursed this cost at closing, but will have to get there - if the results of the Phase 2 shows more issues the borrower could be in a very bad position and may have dead loan and be out the $10,000.

5. A Disaster. It goes without saying that if there is some type of damage to the subject property or perhaps a death to one of the partners, that this will have a substantial delay in the least, to the refinance.

6. Insurance. The subject property has to be insured. To some this may seem painfully obvious but we have seen many refinances get delayed because of this. This problem is especially relevant on refinancing out of private mortgages and or seller financing. Many private lenders don't confirm that proper insurance is in place or simply do not care. Also, on cash out refinances the borrower may have to increase the insured amount as the loan increases which can create issues in and of itself.

'Take over payments' refers to a financing strategy where buyers assume loan payments owed on a mortgage note. This strategy has been popular amongst real estate investors for years, but is now becoming a preferred option for buyers who cannot qualify for financing through traditional means.

Lenders can prohibit take over payments purchase contracts if the sale violates mortgage terms. Most real estate notes include a 'Due on Sale' clause that grants banks permission to request payment in full when property is sold. Therefore, it is wise to consult with a real estate attorney prior to entering into a purchase contract.

The majority of mortgage lenders do not issue demand for payment unless payments become delinquent. However, buyers should be aware that by entering into a take over payments contract they could potentially lose the property if they are unable to qualify for mortgage refinance. When buyers can refinance the loan they normally must provide a down payment and are responsible for closing costs.

In most cases, sellers use Subject-To contracts to transfer property rights of real estate secured by mortgage notes. This type of contract does not provide buyers will full ownership rights until the loan is paid in full. Subject-To contracts typically extend for a few years while buyers engage in credit repair or sell the property to pay off the mortgage.

Take over payments have become increasingly popular amongst borrowers who can no longer afford to stay in their home and want to prevent foreclosure. When sellers can locate a buyer willing to cure mortgage arrears and assume future payments they can eliminate future financial risk and avoid having the blemish of foreclosure on their credit report. Assuming loan payments on property that is in preforeclosure can be highly risky; especially when mortgagors owe more than the property is worth.

The only way to take over payments and avoid risks of receiving a demand payment notice is when loans are categorized as an assumable mortgage. These loans can be taken over with lender approval.

Both FHA and VA loans allow buyers to assume payments without meeting lending criteria. However, there is one catch. To take over payments of FHA loans, the note must have originated on or before December 14, 1989, while VA loans must have an origination date of no later than March 1, 1988.

Buyers can take over assumable mortgages that do not meet the above criteria. However, lenders might alter loan terms based on the buyer's credit score. Banks may require buyers to provide a down payment or they might increase the interest rate.

When buyers take over an assumable mortgage they sometimes require funds to cover the purchase price. For example, if the loan balance is $125,000 and the purchase price is $150,000, buyers will require an additional $25,000. Unless buyers have this amount in personal savings, they will need to apply for a second mortgage to cover the difference.

Assumable mortgages are a better option than entering into Subject-To agreements because sellers are released from financial liability should buyers default on the loan. Sellers should ask their lender to provide a written release of liability statement.

Both buyers and sellers should engage in due diligence before entering into take over payments agreements. At minimum, sellers should conduct credit and background checks and employment verification.

Buyers should conduct a property records search to ensure sellers are authorized to sell the real estate. Buyers should also obtain proof the loan is current and the property has not entered into foreclosure.

Always obtain legal counsel or consult with mortgage loan officers to ensure take over payments under assumable mortgages adhere to state laws.