Property Financing

Real estate properties cost quite a bit, and very few can really afford to pay such amounts for the property they covet without taking any mortgage loans. Even business enterprises purchase properties. They may, at times, have enough funds on hand to purchase the property outright. Still they choose to leverage rather than pay upfront. Leveraging is a financial management method. For example, a business is able to get finance from bank lends at the rate of 8 percent for purchasing real estate property, whereas the same business may be availing working capital limits carrying interest at the rate of 12 percent or more. Under such circumstances, using cheaper finance makes more sense, as other cash available on hand can be utilized towards working capital, thereby ensuring that there is lesser interest burden. This same principal works in personal finance as well.

Properties can be residential, commercial, rural, or vacation properties. Financing properties in residential category is the most common form of property finance. There are several lenders who offer home loans, 2nd mortgage loans on homes, or refinance any home mortgage. In general, the policies of successive governments have supported these types of loans, which help people to buy homes and meet any exigencies. In the United States, there are government agencies, i.e., Freddie Mac, and Fannie Mae, which help people who have difficulty in purchasing homes for the first time, get mortgage loans. The terms are such that the borrower finds it easy to repay the amount loaned through equated monthly installments payable over a long period extending almost to 30 years.

In order to be eligible for such loans, the borrower should have adequate monthly income that leaves some surplus, which would cover the monthly loan installment. Credit score of the borrower, as well as the employment record are the other factors that influence the lender's decision on how much finance can be given to the borrower for purchase of property. The value of the property also puts a cap on how much amount of loan the borrower can eventually get. Generally, lenders keep a margin of 20 percent between the value of the house and the amount loaned (Loan to value or LTV). This, of course, can change if the interest rates are down, and the bank is aggressively looking out for customers.

Banks also lend to business enterprises for purchase of commercial or investment properties. Similarly, banks offer finance for second property to the individuals as well. These loans are, however, for shorter duration, and carry higher interest rates than other mortgages. Here the margin money that the lender fixes for down payment by the borrower is also higher. Effectively, the borrower may have to generate about 30 to 40 percent of the cost of the property from some other source, such as personal savings, friends and relatives, second mortgage on existing property, etc.

A property buyer can consider availing finance directly from the person who is selling the property. Therefore, on the day of closing such sellers become the lenders, and the buyers the borrowers. This is referred to as simultaneous closing. Builders offer such seller financing properties. Sell and buy back is another way of creatively financing properties. In this, the homeowner can sell the property already in his name, to a lender, who will loan some monies, and the homeowner continues to stay in the house, paying an amount that is now the monthly rent for an agreed period, with some escalation clauses, of course. At the end of the term, the homeowner would still have choice to repay the loan and take back the possession of the house. This works similar to interest only loans.

Private lenders also offer mortgages structured in the same way as the regular mortgages offered by banks and other institutions. The difference is these lenders offer only short-term mortgages, i.e., the term may be anywhere between six months and 3 years, or a couple of years more. Interest charged by private lenders is definitely quite high, and may almost be double the rate at which the borrower can get finance from the regular banks. Private lenders are more interested in the value of the property that forms the security for their monies, and therefore, they are not particular about the credit score of the borrower. Hard money loans are also a type of creative finance for purchasing real estate properties. These are more expensive when compared to private mortgages. Subject to sales is also a commonly used method for property finance. In this, the buyer of the property purchases a property that is already under a mortgage. The sale is therefore, subject to the amount being cleared by the seller. The seller, however, does not inform the lender that he is going ahead with the sale, and instead of him the buyer takes charge and clears the dues to the lender as per initial mortgage contract. Effectively, the buyer of the property avoids loan-processing charges as well as saves on time. As this would be against the clauses in the agreement between the lender and the seller, the execution of conveyance document is delayed. Instead, the buyer collects all the documents relevant to the property from the seller, and gets the seller to execute an irrevocable power of attorney in his favor, allowing him to execute any conveyance documents at a future date. The buyer then uses this power of attorney to execute any conveyance deed in his own favor.

Home owners can also consider a home improvement loan if they are looking to do upgrades or remodels on their existing property. Lenders usually like the fact that you are improving something that they are also invested in, so getting a home improvement loan can be easier. You will want to get approval on an amount to borrow before you have a Kansas City Home Improvement company, or any other contractor give you an estimate on your upgrades.