Understanding some basic property investing financing language
Novice real estate investors sometimes get caught up and lost over all the property investing jargon – especially when it comes to basic financing options. This article is a brief primer on some of the most often used terminology involved with the concept of the mortgagee vs. mortgagor relationship, as well as the two essential forms of loans investors encounter when investing in real estate…namely, conventional and commercial types of loans.
Welcome to property investing loans 101
Some of the most basic language you’ll need to understand are the difference between a mortgagor and a mortgagee. This is simple enough. A mortgagor is the borrower (and therefore, the buyer) of a piece of investment real estate. The borrower is putting up the property to be purchased as a security for the mortgage loan. And where would the mortgagor be without the mortgagee? The mortgagee is therefore the lender in any mortgage loan deal. So what is a mortgage lender? Lenders are comprised of companies that are licensed by their respective state to make real estate loans that can then be legally sold to investors.
The pledge of real estate as a security for the repayment of a debt is known as the mortgage lien. It can also be the document that creates the mortgage lien. It’s a charge on the property of a borrower (the mortgagor) that is the security instrument for the total debt obligation of the mortgage note. A great deal of mortgage law involves the mortgage title, which is evidence of the ownership of a piece of real estate by the mortgagor. Title companies are hired by prospective purchasers to research the chain of title of a property to ensure the seller is the only current owner of the real estate to be conveyed once it’s mortgaged. The title company then offers insurance to the borrower/buyer to ensure that they will now become the sole owner of the property.
Also known as a mortgage for land, installment contract or contract for deed, a land contract is a contract for the sale of a piece of real estate where the purchase price of the land is paid in installments by the purchaser. The purchaser will retain possession of the real estate, even though the title is kept by the seller until the final payment of the contract is completed, however long the contract stipulates. Mortgage law also defines an equitable mortgage as being the interest that’s held by a contract vendee involved in a land contract. This is comprised of the equitable right to obtain total ownership of the property when the legal title of the property is in another person’s name.
Conventional investment real estate mortgage loans
Most conventional investment property mortgage loans are standard income and asset verified loans. They can be comprised of conventional 30 year terms, or short-term adjustable rate mortgages (ARMs) with balloon payments – much like their counterpart products in the residential home buying mortgage market.
Most of these type of loans need a minimum of 30% down. So you’d be obtaining a loan of 70% of the purchase price. Your loan-to-value ratio (LTV) would therefore be 70%. When buying investment property, you’ll usually want to try to obtain the greatest return on investment (ROI). Leverage is one of the ways you can purchase multiple properties over time, and thereby maximize your ROI. Depending upon your credit rating, as well as the type of property you’re purchasing, the down payment required may be higher, and could go up to 50% – and therefore your LTV would be a low 50% as well. In addition, the points charged on the loan (pre-paid interest) are roughly twice as high as for a conventional home loan.
There are some lenders who still make no income verification, or no income and no asset verification type loans to investors (also known as NINAs). Due to the inherent extra risk of these loans (from the lender’s perspective), you can expect to pay more in the way of higher interest rates, as well as more points on these type mortgages.
Commercial investment property mortgage loans
When considering the purchase of 5-family or above rental buildings, or more typical commercial space (for example, office buildings, retail stores, warehouse buildings), you’ll have to move up to a commercial loan. Lenders have separate divisions which evaluate and then offer mortgages on these type of properties. Since commercial properties are much more specialized, their inherent risk needs to be evaluated as a niche within most banks’ lending divisions.
Banks tend to rely greatly on commercial building appraisers, who are akin to the Jedi knights of the appraisal industry. Unlike conventional residential mortgages, there will be more attention paid to your loan qualifications, as well as the existing income statement of the property you’re considering purchasing. Also expect rates and points to be higher than conventional rental real estate loans.
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