When buying real estate as an investment, what is the best funding strategy? That depends. Real estate
strategies are like keys to a house. The same one doesn’t unlock every door. The basic buying strategy calls for an
equal balance of each of the following key elements:
1. Cash 2. Credit 3. Income 4. Hard Work
When you have more of one element that will help you offset a deficit in the others. For example;
If you have a lot of cash – you can get by without much credit, income or hard work.
If you have an abundance of credit and income – you can usually manage with less of numbers 1 and 4 (cash
and hard work).
If you want to buy with no cash, no credit and no income – you typically need a much larger amount of
number 4 – Hard Work.
Common types of Loans
A key to success in Real Estate investing is leverage or maximizing the use of OPM (other people’s money). As
an investor, your goal is to keep as much operating cash as possible while obtaining the most OPM at the cheapest
price for the longest amount of time. Since the credit crisis of 2008, the traditional fixed rate mortgage tends to be
the most common type of loan. The actual types of loan products available will depend on the type of property
you are buying and the strength of the economy or the market but here is a list of some common types of loans
that have been offered in the past:
Adjustable Rates. ARMs typically have an initial fixed-rate period after which the mortgage becomes
adjustable. For example, a 3-1 ARM is fixed for 3 years and then the rate can adjust each year. However the
adjustment amount is often capped and based on an index that changes with the market. The most popular ARMs
are 1 year, 3-1, 5-1, 7-1, and 10-1 ARMS. Historically, most mortgages are in place for an average of only 7
years. Based on how long you have your mortgage and depending on how the interest rate adjusts, you can save a
substantial amount of interest. Based on a loan amount of $100,00 the monthly savings between a 30 year fixed
mortgage and a 3-1 ARM is $120.45 a month. Over 3 years the savings amounts to $4336.20.
1st AND 2nd Mortgage Combo Loans. This type of financing actually consists of two loans. The first
is usually for 80 to 90 percent of the purchase price. Then there’s a second ‘piggyback’ loan for the rest of the
purchase price, minus any down payment. For example, an 80-10-10 mortgage has a 10 percent down payment
and a 10 percent piggyback loan; an 80-15-5 has a 5 percent down payment and a 15 percent piggyback loan; and
an 80-20 doesn’t have a down payment at all. The 80/20 loan is essentially 100-percent financing. The buyer only
has the closing costs to worry about. The piggyback loan usually has a higher rate than the primary mortgage for
80 percent of the price. You may have to pay additional closing costs since you are closing on two loans and you
will probably be making two separate mortgage payments each month. However in some circumstances,
piggyback financing may end up costing less than getting a single loan that includes mortgage insurance.
Generally, mortgage insurance is required when the loan amount is for more than 80 percent of the home’s price.
Stated Income and No Doc. No-doc is short for ‘no documentation’. This is a mortgage in which
the applicant provides the lender with a minimum amount of information — name, address, Social Security
number, and contact information for an employer, if there is one. The term “Stated Income or No Income
verification” means the lender verifies the source of the income but not the amount. The underwriter decides on
the loan based on the applicant’s credit history, the appraised value of the house, the size of the down payment or
loan to value.
Bridge or Interim Loans. This loan type is used for a brief period of time until the lender can put
up the permanent financing by selling the current real estate. Therefore, you could say the existing real estate is
used as collateral. The general amortization period is between 6 and 36 months. The key aspect of this loan type
is the swift funding of the required amount — which could come in handy when you spot an unexpected bargain
that you can’t afford to pass up.
Bad Credit Loans. The word ‘sub prime’ is used to describe loans to people who have credit problems
that are serious enough to justify charging higher rates. These loans are considered high risk and many feel they
contributed greatly to the current credit crisis. These days, traditional lenders will not consider offering these
types of loans. However, you may find a private lender willing to consider this type of scenario. In most cases
these private money lenders will demand a much higher rate and stricter terms to compensate for the higher risk.
Pre-Construction / New Home Financing. Pre-construction lending is a little different than
regular mortgage financing. The exact details may vary depending on the lender, but here is a general idea of how
this type of financing is done. The loan is actually structured in two parts:
1 The construction line of credit. First, you obtain a home construction line of credit that will be used to pay
subcontractors and suppliers during the construction phase. The construction line generally carries a higher
interest rate than residential home mortgages. At specific intervals, (usually once each month, or after each stage
of the home construction) your builder will submit a request for payment for subcontracting work and supplies
that were used during the construction phase. The lender will verify that the work has been completed and release
the funds. Lenders normally have a fixed draw schedule tied to each major phase of the construction. If you
request more draws than allowed per project, you may be charged a nominal fee per draw.
2 The residential mortgage. Next, you will obtain a residential mortgage to pay off the construction line when
you finish the construction project. In most cases, you will be required to be approved for this mortgage prior to
obtaining the construction line. The residential mortgage is like any other single-family home mortgage loan.
These include conventional and non-conventional loans, fixed, adjustable rates, etc.
Construction/Perm Loans. Some lenders offer both the construction line and residential mortgage
as one loan and this is referred to as a Construction/Perm loan. It is a combined loan made directly by the lender
to the borrower. It functions as a construction line for financing the construction of the home, and then it serves as
a permanent mortgage by paying off the construction line after you complete the construction project. The
Construction/Perm loan has some advantages, namely:
The borrower can save money by paying for only one set of closing costs, attorney's fees, appraisal and taxes.
The borrower only has to deal with one loan and one lender.
Because the loan is made directly to the homeowner, the borrower can take full tax advantage of the interest
The Construction/Perm loan may also carry some disadvantages:
Some Construction/Perm loans carry higher than prevailing market rates.
Even though you may be working with one lender, usually the loan is managed by two separate
departments.so you may need to provide duplicate documentation.
40 Year Mortgages. Forty-year mortgages have lower monthly payments than their 30-year cousins,
although they cost more over the life of the loan because the borrower pays interest for 10 years longer. With the
lower monthly payments, they are seen as a tool to allow people to buy homes that are unaffordable with 30-year
Mortgages with longer terms have been rare in the past because lenders couldn’t sell the loans to investors
through the government-sponsored enterprises Fannie Mae and Freddie Mac. However, effective June 1, 2005,
Fannie Mae began purchasing the 40 year mortgages. Borrowers will have a choice of a fixed-rate loan or a
variety of adjustable-rate mortgages (ARMs). Whether or not the loans will gain widespread popularity is still to
be seen, the drawbacks include the following:
Interest rates are slightly higher — usually an eighth to a quarter of a percentage point
Adding 10 years to the payback term doesn’t significant lower the monthly payments.
Interest-only mortgages have exploded in popularity in the last two years, and they offer even lower
initial monthly payments than 40-year loans.
Reverse Mortgages. A reverse mortgage is exactly what its name states. It is a mortgage in reverse.
With a “regular” mortgage, you make monthly payments to the lender. With a reverse mortgage, the lender sends
you the money. The lender bases the amount of money they will send you on the value (equity) of your home,
your age, and current interest rates. Since interest rates have been so low and house values have been increasing at
an alarming rate, the environment is perfect for seniors to cash in on their home equity. Some benefits include:
Tax-free cash which can be used for any
You retain title to the property
You can sell your home at any time
Social Security and Medicare are not
There are no income, credit or health
You can receive the money through monthly payments, a lump sum, a line of credit or even a combination. To
qualify for a reverse mortgage you must be at least 62 years old and have paid off all or most of your home
mortgage. You retain title to the property until you permanently move, sell the home or die. Generally, for a move
to be considered “permanent”, the homeowner must not have lived in the home for 12 consecutive months. For
example a person could live in a nursing home or other medical facility for up to 12 months before the reverse
mortgage would be due. When you meet one of the reasons that the reverse mortgage becomes due (e.g. death),
the house is sold and the lender is paid back with the remaining equity going to the heirs or estate or the heirs can
refinance and payoff the reverse mortgage if they want the home to stay within the family. Here are some other
key points to consider:
Annual percentage rate (APR), which is the yearly cost of credit
Type of interest rate (fixed, adjustable)
Number of points and other closing costs
The total loan cost (TALC) rates, which shows what the all-inclusive interest rate would be if the lender
could charge only interest and not fees or other costs.
Payment terms, including acceleration clauses Reverse mortgages tend to be more costly than traditional
loans because they are “debt-rising” loans, which means, the mortgage against your property grows with
every payment. Also, lenders generally charge origination fees and closing costs and some charge
servicing fees. The interest is also non-deductible, but the money is tax-free because it is considered a
There are different sources of reverse mortgages, and the costs can vary widely so look at each loan
Pre Qualify for a Mortgage. Prior to shopping for a home, as an investor or a homeowner, it is important
to find out how much and what type of mortgage is available to you. When you place an offer on a property, the
seller will expect you to be pre-qualified or pre-approved for a loan.
To get pre-qualified or pre-approved contact:
Contact the Mortgage Hotline at 1-407-767-9331 for assistance determining how much credit is available to you
through mortgages or other types of loans. For a Mortgage Quote or Pre-qualification Letter, fill in the
following information on the Mortgage Pre-Qualification Worksheet and fax to the Mortgage Hotline at: