Types of Real Estate Loans to Know for Intro to Real Estate Finance

Understanding the different types of real estate loans is crucial for navigating the finance landscape. Each loan type serves unique borrower needs, from conventional options to government-backed programs, impacting affordability and access to homeownership.

1. Conventional Loans

   • Typically not insured or guaranteed by the government.
   • Require a higher credit score and a larger down payment compared to government-backed loans.
   • Can be conforming (meeting Fannie Mae and Freddie Mac guidelines) or non-conforming.

2. FHA Loans

   • Insured by the Federal Housing Administration, making them accessible for lower-income borrowers.
   • Require a lower down payment (as low as 3.5%) and more flexible credit score requirements.
   • Mortgage insurance is required for the life of the loan.

3. VA Loans

   • Available to eligible veterans, active-duty service members, and certain members of the National Guard and Reserves.
   • No down payment is required, and there is no private mortgage insurance (PMI).
   • Often have competitive interest rates and favorable loan terms.

4. USDA Loans

   • Designed for low-to-moderate-income borrowers in rural areas.
   • Offer 100% financing with no down payment required.
   • Income limits and property location eligibility apply.

5. Jumbo Loans

   • Non-conforming loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac.
   • Typically require a higher credit score and larger down payment.
   • Often come with higher interest rates due to increased risk.

6. Fixed-Rate Mortgages

   • Interest rate remains constant throughout the life of the loan.
   • Provides predictable monthly payments, making budgeting easier.
   • Common terms are 15, 20, or 30 years.

7. Adjustable-Rate Mortgages (ARMs)

   • Initial fixed-rate period followed by adjustments based on market conditions.
   • Typically offer lower initial rates compared to fixed-rate mortgages.
   • Rate adjustments can lead to increased monthly payments over time.

8. Bridge Loans

   • Short-term loans used to bridge the gap between buying a new property and selling an existing one.
   • Typically have higher interest rates and fees.
   • Useful for homeowners needing quick access to funds.

9. Construction Loans

   • Short-term financing for building a new home or making significant renovations.
   • Funds are disbursed in stages as construction progresses.
   • Often require a detailed construction plan and timeline.

10. Home Equity Loans

    • Allow homeowners to borrow against the equity in their home.
    • Typically have fixed interest rates and fixed monthly payments.
    • Funds can be used for various purposes, such as home improvements or debt consolidation.

11. Home Equity Lines of Credit (HELOCs)

    • A revolving line of credit secured by the equity in a home.
    • Borrowers can draw funds as needed, up to a certain limit.
    • Interest rates are usually variable, and payments can fluctuate.

12. Commercial Real Estate Loans

    • Designed for purchasing or refinancing commercial properties.
    • Terms and conditions vary widely based on the type of property and borrower.
    • Often require a larger down payment and have shorter terms than residential loans.

13. Hard Money Loans

    • Short-term loans secured by real estate, typically offered by private lenders.
    • Focus on the value of the property rather than the borrower's creditworthiness.
    • Higher interest rates and fees due to increased risk.

14. Balloon Mortgages

    • Feature lower initial payments followed by a large final payment (the "balloon") at the end of the term.
    • Often used for short-term financing needs.
    • Can be risky if the borrower is unable to refinance or sell the property before the balloon payment is due.

15. Interest-Only Mortgages

    • Allow borrowers to pay only the interest for a set period, typically 5-10 years.
    • After the interest-only period, payments increase significantly as principal repayment begins.
    • Can be beneficial for cash flow but may lead to negative amortization if not managed properly.