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You’ve been searching for months, and you finally find the perfect house. The only problem is that it is a little bit outside of your price range. That’s where real estate loan options come into play.
Deciding to take out a loan for any reason is scary because it’s generally for a very large amount of money that might seem intimidating. However, it’s important to realize that loans are given to people all the time, so as long as you’re in a good state to receive one, it could be a great idea for your financial future.
Are you interested in taking out a real estate loan? If so, you need to understand some of the key things that lenders look for, but also what you’re getting yourself into.
Keep reading to get our top 3 real estate loan tips for future borrowers.
1. Commercial and Residential Are Different
Commercial real estate loans are designed for business entities specifically, which residential loans (or mortgages) are meant for individual borrowers.
A commercial loan is usually going to be between 5 to 20 years, and it will have an amortization period that is longer than the length of the loan itself. A residential mortgage is an amortized loan that involves the debt being paid over time, with the most popular option being a 30-year fixed-rate loan.
Residential loans in real estate also have a higher loan-to-value ratio than commercial loans. Places like Your FundingTree can give you more information on these significant differences.
2. Your Background Is Reviewed
Lenders want to be sure that anyone interested in taking out a real estate loan will actually be able to pay it back. For that reason, they are going to look at whether or not you look like a “qualified borrower,” by reviewing your credit score, income, and other factors.
Some banks are quick to deny someone based on their credit score alone, so having a higher score going into the process is extremely helpful. If you don’t have your down payment ready to go, this is also a bad sign for a lender, so it’s best to make sure that you have that money saved up before you start the loan application process.
3. Finances Need Preparing
Before you start to take action in investing in real estate, you need to be sure that your finances are in order. It’s a good idea to make a plan in case the investment goes sideways, or you end up losing more money than you had planned. This way, even if things don’t work out, you’re not staking your entire financial future on the investment.
Figure out how much you need to have saved before you invest and make sure that you’re able to survive on other sources of income before you fill out the loan application.
Be Smart When Requesting a Real Estate Loan
Taking the time to take a real estate loan out for a business or a residence is a big step, so you have to go about it the right way. Plan ahead of time, make sure that you look like a qualified borrower, and understand the differences between a mortgage and a commercial loan for real estate.
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