Introduction to House Finance

Everyone dreams of being the owner of a house, people work hard all their lives to save enough money so that they can afford a house. A house is of immense importance to us and so people started regarding house ownership as the ‘dream of the free world’ or the ‘Great American Dream’. However, houses do cost a lot and so not everyone can afford to buy them only by depending on their monthly incomes. Thus, the best alternative is to opt for house finance.

What is House finance?

It is the broad term that can be used to describe various lending and borrowing options, for the purpose of buying or constructing a house, like mortgages, home loans etc. It is a huge industry that generates billions of dollars in revenue per year. Lending option for constructing a house is available in almost all the countries, even in rapidly developing economies like Brazil, India and Russia this concept of borrowing capital has become very popular among the working professionals.

Lending Institutions:

Banks: they are the most traditional lenders of home loans and they still continue this practice. In most countries the public sector banks, in which the government has a stake, offer these loans at a very subsidized rate for the betterment of the people.

Mortgage companies: they specialize in home loans and thus offer a reduced loan processing time. However, they do have strict eligibility criteria and offer a higher interest rate on all loans.

Private Lenders: there are many private institutions who lend money for housing purposes. They mostly do it on a regional level but we also have big players who indulge in this business of lending across the country. They often ask for a substantial collateral security for the loan and offer the highest rate of lending.

Main Eligibility Criteria:

Credit history: it is the most important criteria to get a home loan; with a low credit score it would be impossible for anyone to get a loan, even if a person somehow manages to get it with a low credit score, then the interest rate offered will be too high. The ideal credit score in the US is above 600 to get a loan with a low-interest rate on any house finance.

Monthly Income: it is important that the monthly income of the person who applies for a loan is sufficient to pay off the monthly installments of the loan. So, do keep in mind that your salary will determine the amount of money that can be approved.

Mortgage and Loan Tips For Buying A Home

Buying a home is a significant investment, requiring careful consideration of factors such as property selection and financing. Choice properties are generally priced higher but possess great potential for passive income and capital growth. Not all homes in prime locations generate the same amount of profit for an investor. Ultimately, an investment property’s profits depend on the costs of financing.

Financing your home

Buying a home is often made possible through mortgage loans obtained from banks and mortgage lenders. Home financing is a decision that can have a significant impact on your finances. Thus, it is necessary to choose the right loan product which answers your needs and circumstances.

Parts of a loan

A loan consists of the principal, interest rate, term or loan period and repayment schedule. The principal refers to the amount you borrow from the bank or mortgage lender. Its interest rate is the fee a lender charges for the use of its money. Interest is expressed as a percentage of the principal and can be fixed or variable.

The term or period of a home loan is the time within which the principal and its interest rate must be paid, often between 25 to 30 years. The loan is usually repaid in monthly amounts or fortnightly amounts consisting of a portion of the principal and interest fee.

A home loan is usually secured by a mortgage which creates a lien on the property being financed. The mortgage agreement allows the lender to foreclose or sell the mortgaged property when the borrower fails to pay the loan at the end of the loan period.

Getting a home mortgage

Obtaining a home mortgage approval hinges on a borrower’s capacity to repay the loan. Lenders ordinarily analyze the borrower’s financial statements, pay slips, bank records and other documents for credit worthiness. Comparisons of regular monthly income and monthly debt obligations are also made.

A lender may still grant a loan to a borrower who is considered a credit risk by requiring a larger down payment or imposing a higher interest rate. The down payment is the portion of the home’s purchase price which the borrower pays to the lender as consideration for the loan. It is deducted from the purchase price of the property, resulting in lower loan amount.

Obtaining a loan approval can be a challenge for investors. There are hundreds of loan products to choose from, each having different features suitable for specific types of borrowers and investments. A mortgage broker can help you find the best loan products to reduce your financing costs and provide sound advice to help you gain the bank’s approval.

Multi-Family Apartment Loans

There are a number of different multifamily apartment financing programs available. They are generally divided into small apartment loans for properties costing between $1 million and $5 million, mid-balance loans for transactions between $5million and $25 million, and large financing programs lending for transactions with no specified upper limit, and a bottom limit of $2 million.

Small multifamily apartment financing

The Fannie Mae loan program offers financing for multifamily apartments with more than 5 rental units. The loan amounts are between $750 thousand and $3 million dollars and have terms of between 5 and 30 years. Another option in this category is a multifamily FHA loan, which is administered by HUD. These government loans are attractive because they do not depend on the volatility of the market. The source of financing remains in place because it is government allocated and controlled. Small conduit multifamily apartment mortgages are also available from 1$ million to $5 million and terms of 5 to 20 years.

Mid-balance and large multifamily apartment financing:

The same basic categories apply to mid-balance multifamily apartment financing as noted above. There are the Fannie Mae programs, FHA loans, and small conduit loans for these monetary ranges. There may be other types of loans available in addition to these so ask your loan broker about the programs they recommend.

How to get approved for multi-family apartment financing:

Specific programs have their own criterion for borrower approval. These lenders base their decision both on certain criteria that the borrower must meet and stipulations for the multifamily apartment being purchased. An example will serve to illustrate this.

Let’s say you are trying to take out a small multifamily apartment loan under the Fannie Mae program. They require that your FICO credit score be higher than 680, and that you have a minimum of 2 years’ experience with 2 multifamily properties. They also require that the post closing liquidity (that is, the amount of cash you will have after purchase of the apartment building) is equal to or greater than the loan amount.

As concerns the property itself, it must be able to demonstrate an average 90% occupancy in the 12 months prior to receiving the loan and it must have 5 or more rentable apartments. The properties are also restricted in most cases to 25 year amortization schedules.

Multi-family apartments are a good real estate investment in these troubled times. The demand for multifamily housing remains fairly steady and the existence of multiple players (i.e. the borrower, tenants, lenders, and possibly government sources) in the cash flow patterns of the transaction distinguish it from other lending and borrowing markets. So if you are thinking of getting into real estate investment, this is a potential area to consider.