Purchasing real estate property is a significant investment, and many people don’t have enough money to buy or build their own homes. In such cases, getting a loan is the best option as it allows you to finance your real estate purchase.

Getting a loan is your first step to buying the property of your dreams. With this financial instrument, you can borrow money from a bank to meet your expenses for buying or building a property. This post explains the definition of a loan in real estate and the types of loans available as financing options for you.

What Is a Loan?

A loan in real estate is the amount needed to buy or build a property. You can get a real estate loan from a bank or financial institution and repay the amount in monthly payments according to a loan schedule. A bank or a financial institution will evaluate your credit history and offer a loan.

What Is a Loan Term?

Loan term refers to the terms and conditions involved in the lending and borrowing process. These terms and conditions include various aspects of the loan: monthly payments, repayment period, interest rates, and costs. All loans have certain conditions or guidelines that both the lender and the borrower must follow.

What Is a Loan Officer?

A loan officer is a representative of the financial institution, credit union, or bank who helps the borrower throughout the loan application and approval process. Loan officers are also called mortgage loan officers as they have deep knowledge regarding mortgage loans and how they work. A loan officer knows banking and lending rules and regulations, documentation for obtaining a loan, and various lending products and tools.

Interest Rates and Annual Percentage Rate

The interest rate is the percentage of the annual cost that the lender takes from the borrower for providing the loan. The APR or annual percentage rate is the total cost of borrowing expressed as a percentage and is higher than the interest rate.

Credit History

Credit history or credit score records your ability to repay the loans. Your credit history includes several details, such as your credit usage, whether you pay your bills on time, the amount of debt you have, and the number of credit cards you have. To get the best loan terms and conditions, you must have a good credit score; a bad credit score decreases the chances of getting a loan. A fair credit score is between 670 to 739, and a good credit score is a score between 740 to 799. A good credit score or excellent credit gives you better loan terms.

Types of Real Estate Loans

There are different types of loans available for purchasing a property, and each type comes with varying requirements of approval, terms and conditions, and interest rates. Following are the types of loans available that you can choose for purchasing a property:

Conventional Loans: Conventional loans are not insured or guaranteed by the government. These loans are suitable for borrowers who have good credit scores. Such loans are also easy to qualify for, even with a fair credit score. However, with a good credit score, there are chances that you will get a loan with the best interest rate according to your requirements. The lender will evaluate your credit score, assets, income, and debt before offering you such a loan.
Mortgage: A mortgage is a loan required to purchase a home, land, or other real estate property. A mortgage is a type of loan, but not all loans are mortgages. With this type of loan, the borrower agrees to pay the loan amount to the lender in regular monthly payments. These payments consist of interest rate and principal amount.
Mortgages are generally two types: fixed-rate mortgage loans and adjustable-rate mortgage loans. For fixed-rate mortgage loans, you will pay a fixed interest rate during the entire repayment term, and it doesn’t change during the entire loan term. On the other hand, with an adjustable rate mortgage loan, the interest rate changes at specific intervals according to the changing market interest rates.

Government Insured Loans: Three government agencies help borrowers with mortgages. These agencies include the Federal Housing Administration (FHA), the U.S Department of Agriculture (USDA), and the U.S. Department of Veteran Affairs (VA Loans). The loans provided by these institutions are insured and protect the lender if the borrower defaults on the loan. On the other hand, these loans are suitable for the buyer because they offer smaller down payments.
Commercial Vs Residential Loans: Loans are also available according to the types of real estate properties. For instance, there are residential and commercial properties, and there are different loans for buying both. Commercial loans allow you to obtain huge amounts, but the interest rate on these loans is also high. On the other hand, residential loans are for buying properties for personal or family use.
Hard Money Loans: Hard money loans are different from conventional loans. These loans are primarily used in real estate transactions to obtain money at a higher cost. These loans rely on collateral such as property and not on the borrower’s financial position. Thus, the funding frame is shorter.
Personal Loans: Personal loans are not commonly used in real estate because they are short-term loans used for meeting emergency expenses and short-term financial goals. With a personal loan, you can use the amount for home improvement, but it is not a preferred method for a major purchase like buying a home. However, if you buy a small house in a low-cost living area, you can consider getting a personal loan. Personal loans vary between $1000 and $50,000, and the interest rate can be around 3% to 36%.

Real Estate Loan Example

Let’s say two people are trying to buy a home, and both have different requirements. One of them wants a mortgage loan with a loan term of 30 years because it is easier for him to repay the amount gradually. On the other hand, the other person will prefer a 15-year mortgage loan as the short period will help the debt to retire faster.

In another example, let’s consider a person who’s about to buy a home and has to choose between USDA loans and VA loans. He has to apply for a loan of $200,000 and wants to find the best deal. He qualifies for a USDA loan at a 30-year, 4% fixed interest rate and 4.515% APR which would cost him $202,020. On the other hand, he qualifies for a 30-year VA loan, with a 4.750% fixed interest rate and 5.119% APR which will cost $206,600. In this case, choosing the USDA loan will be a better option as it costs less than the VA loan.

Real Estate Loan Frequently Asked Questions

How to Qualify for a Real Estate Loan?

To qualify for a real estate loan, a few requirements must be met before applying. First, you must have a bank account where the lender will transfer the loan amount. Other requirements include proof of identity, proof of home address, credit history and score, income, and your debt-to-income ratio. To qualify for most loans, you must have a minimum credit score of 670. When you apply for a loan, the lender performs a soft credit inquiry or hard credit inquiry, depending on the type and amount of loan. A soft or hard pull temporarily decreases your credit score, which you can improve later by making payments on time.

What Is an Equal Housing Lender?

An Equal Housing Lender is an organization that ensures fair access and equal rights to all borrowers. According to the Federal Fair Housing Act, it is illegal for lenders to deny a loan based on race, religion, color, origin, sex, or status. An equal housing lender is a financial institution that practices fair policies for providing loans to borrowers without discrimination.

What Is a Down Payment?

A down payment is a portion of the total amount the buyer has to pay to buy an expensive item, such as a car or house. This is an upfront cost that the buyer pays the seller for acquiring the property and then pays the total amount later. Usually, buyers take loans to pay off the remaining amount.

What to Know for the Real Estate Exam

Loans and mortgages are used mainly by borrowers to finance real estate. When these loans are approved, the borrower and lender sign a mortgage note, and the borrower promises to repay the loan in the set repayment schedule. It is crucial to understand the process of applying for a loan as it can be complex depending on the type of real estate property one is considering buying. Either way, as a real estate professional, you need to be familiar with the process. If you’re preparing for a real estate exam, or need help with more real estate related terms, check out our real estate exam flashcard app.