Residential Investment
Navigating Residential Real Estate Financing Options
Welcome to your go-to guide for residential real estate financing solutions. From bridging loans to investment purchases and refinancing strategies, we’ll unravel the options that empower your property aspirations. Whether you’re an experienced investor or a first-time buyer, this guide will help you confidently navigate residential real estate financing. Trust Texas American Funding to be your partner!
Residential Bridge Loans
Bridging the gap between loans with short-term solutions. Cover the period between one loan’s end and another’s start, perfect for completing purchases or fulfilling long-term loan requirements. Also known as bridge finance, bridging loans, or gap financing.
Short-term (usually one to three months) loan advanced to cover the period between the termination of one loan and the start of another. It is arranged generally to complete a purchase (such as a new house) before the borrower receives payment from a sale (of the old house), or before a long-term loan is made available upon fulfillment of its requirements (such as commissioning of a facility or a plant). Also called bridge finance, bridging loan, or gap financing.
Residential Investment Purchase
Utilize real estate as collateral for commercial mortgages. Unlike residential mortgages, commercial ones involve business real estate, ideal for businesses, partnerships, or limited companies. Navigate complex credit assessments for businesses, making them distinct from residential options.
A commercial mortgage is a loan made using real estate as collateral to secure repayment.
A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial building or other business real estate, not residential property.
In addition, commercial mortgages are typically taken on by businesses instead of individual borrowers. The borrower may be a partnership, incorporated business, or limited company, so assessment of the creditworthiness of the business can be more complicated than is the case with residential mortgages.
Some commercial mortgages are nonrecourse, that is, that in the event of default in repayment, the creditor can only seize the collateral, but has no further claim against the borrower for any remaining deficiency. The general reason for this is twofold: many laws significantly prevent the creditor from going after the borrower for any deficiency, and mortgages structured for sale as bonds give a higher priority to constantly receiving some sort of income and therefore require a clause which allows the lender to take the property immediately, regardless of bankruptcy proceedings that the borrower might be going through.
Frequently, the mortgage is supplemented by a general obligation of the borrower or a personal guarantee from the owner(s), which makes the debt payable in full even if foreclosure on the mortgaged collateral does not satisfy the outstanding balance.
Residential Investment Refinance
Refinance existing obligations for better terms. Lower interest costs, extend repayment periods, and manage risk. Alter monthly payments by changing interest rates or maturity terms, optimizing cash flow and overall borrowing costs.
Refinancing refers to the replacement of an existing debt obligation with a debt obligation bearing different terms.
Refinancing may be undertaken to reduce interest costs (by refinancing at a lower rate), to extend the repayment time, to pay off other debts, to reduce one’s periodic payment obligations (sometimes by taking a longer-term loan), to reduce or alter risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to raise cash for investment, consumption, or the payment of a dividend.
In essence, refinancing can alter the monthly payments owed on the loan either by changing the loan’s interest rate, or by altering the term to maturity of the loan. More favourable lending conditions may reduce overall borrowing costs. Refinancing is used in most cases to improve overall cash flow. Therefore making your bills/payments lower than before.
Another use of refinancing is to reduce the risk associated with an existing loan. Interest rates on adjustable-rate loans and mortgages shift up and down based on the movements of the various indices used to calculate them. By refinancing an adjustable-rate mortgage into a fixed-rate one, the risk of interest rates increasing dramatically is removed, thus ensuring a steady interest rate over time. This flexibility comes at a price as lenders typically charge a risk premium for fixed rate loans.
Residential Construction Loans
Secure real estate financing for property development. Cover land and building costs with scheduled disbursements. Repay construction loans from permanent financing proceeds structured over 20 to 30 years. Also referred to as building loans, construction mortgages, or development loans.
Short-term (usually 3 years) real estate financing secured by a mortgage on the property being financed. This loan is meant to cover the cost of land development and building construction, and is disbursed (1) as needed, (2) as each stage is completed, (3) according to a prearranged schedule, or (4) when some condition is met. Construction loans are paid off from the proceeds of permanent financing (usually for 20 to 30 years), which in turn is repaid from the cash flow generated by the completed building, and is arranged before the construction loan is disbursed. Also called building loan, construction mortgage, or development loan.
Hard Money Loans
Gain asset-based loan financing secured by real estate value. Expect higher interest rates compared to conventional loans. Typically issued by private investors, hard money loans are ideal for transitional properties or distressed financial scenarios.
A hard money loan is a specific type of asset-based loan financing in which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution. Hard money is similar to a bridge loan which usually has similar criteria for lending as well as cost to the borrowers.
The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.
Many hard money mortgages are made by private investors, generally in their local areas. Usually the credit score of the borrower is not important, as the loan is secured by the value of the collateral property. Typically, the maximum loan to value ratio is 65-70%. That is, if the property is worth $100,000, the lender would advance $65,000-70,000 against it. This low LTV provides added security for the lender, in case the borrower does not pay and they have to foreclose on the property.
Non Recourse Loans
Explore secured loans with collateral-based security. Borrow without personal liability, relying on property value for security. Non-recourse loans provide over-collateralization, often limited to 80-90% loan-to-value ratios. Trust accurate credit assessment and domain expertise for safe lending.
A Non Recourse Loan, or non-recourse debt is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender’s recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply out the difference. Thus, non-recourse debt is typically limited to 80% or 90% loan-to-value ratios, so that the property itself provides “overcollateralization” of the loan.
A lender of non-recourse debt depends crucially on an accurate assessment of the credit of the borrower, and a sound knowledge of the underlying technical domain as well as financial modeling skills.
