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Real Estate

THE BASICS OF YOUR MORTGAGE: Institutional vs Private Lending

Basically, buying a home is one of the best investments to deposit hard-earned money. This prospect comes along with various types of payment plans and financing options.

One important factor to consider in purchasing a property is to know how much you can afford while thinking rationally, before hunting for a property. Being rational really comes down to considering and knowing the amortization schedule that fits your financial capacity, in order to land your perfect mortgage plan.

Purchasing real estate can be greatly extrapolated by getting a lucrative or conventional mortgage loan depending on how sophisticated you are. A mortgage loan will most likely be your largest financial commitment.

There are quite a few terms in the mortgage industry necessary to comprehend in order to be able to determine the best mortgage for your financial capacity as an individual, family unit or corporation. These terms are designed purposely to educate the borrowers and help them come up with a decision. The terms or acronyms such as FICO score, DTI and LTV ratios, and much more are important to understand so that you can be familiar with the language used in the mortgage application process.

FICO scoring is a credit score provided to potential lenders who would decide the credit rating of a borrower in determining the low or high interest rate that would be granted. A better score means you are more worthy of being granted credit. The Debt-To-Income ratio (DTI) tells of the financial status or financial well-being of a borrower. A low DTI shows a good balance between debt and income. This translates into your ability to service/pay the debt more easily and consistently; hence you are more attractive as a borrower. The Loan-To-Value ratio (LTV), is the amount of money or loan/mortgage you need as a percentage of the lesser of the purchase price (typically the market value) or the appraised value of your property. The lower this ratio the more at ease the lender will be knowing that the property itself can provide for any recovery of the debt through it’s sale, should you not be able to pay it back personally.

Having this information and knowing what typical lenders are willing to accept as values for these ratios or scores can help you in shopping and negotiating for the best mortgage lending rates and conditions.

There are also several aspects that could help you in choosing a structured loan program. These must meet the needs and capacity of your personal financial situation and status, in order to lead you to a successful choice of the right financing. The right financing would mean that you would have the lowest possible burden from committing to the mortgage as you continually pay in accordance with its amortization schedule. The mortgage loan program for you should be the best type of loan at the very best interest rate and terms. A unique tailor-made mortgage program should be taken into consideration to save time and money.

Thus, knowing the basics of a mortgage and the financing commitment you will be obligated too, is a good start in achieving a sound investment while enjoying the life of being a home owner.

There are various ways to acquire a loan to finance or fund real estate investments. This could be attained from any institutional or private lender in the real estate collateralizing/securitizing of loans, such as mortgages.

The banks’ mortgage programs are still the most common method to secure funds for financing real estate investments. Conventionally, the lenders require a minimum of 20% of the purchase price as a down payment, and a debt-to income (DTI) ratio of 42% or lower for the borrower/purchaser of the real estate property. However, very few mortgage programs do not have prepayment penalties for closed term loans. The local private lenders or specialty bank loans also offer the same qualifying criteria but with higher interest rates, and are more willing to burden riskier situations. These private lenders or specialty banks are suitable to provide more flexible programs such as short-term and open loans, as well as construction financing. Although the major banks will lend for residential construction, they usually have stricter programs such as on a Loan-to-Cost (LTC) basis. Wherein you can borrow all or a large portion of the funds for construction/renovation of the property as you incur the actual cost.

A private lender usually considers itself as an investor more concerned with the availability of equity in the property, and thus, has less concern for the quality of the borrower/guarantor as compared to the major banks. Nevertheless, these lenders on average usually require there to be at least 35% of equity in the property. This makes it more expensive than the major banks’ mortgage programs, for a borrower to purchase the property from his or her own funds. Some hard money lenders will loan up to 100% of the acquisition price as well as the cost for renovation with a short-term loan and, therefore, are more appropriate for refinance projects. Overall, finding the perfect real estate property is only half the battle, procuring the right mortgage could be the difference between living comfortably or poorly in your new home. The lawyers at Levy Zavet PC are not just here to help you close the deal but more so to make sure you understand every aspect of your purchase and mortgage; advising you on whats best to protect your investment, down payment, livelihood and family.