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Different Types of Property Loans and What They Are Used For

by Eric

When it comes to loans in the real estate industry, there are many different types and it can get very confusing. It all comes down to what you need the loan for. There are different types of loans available for those buying a home, rental properties, and land; In the same facet, there are loans for businesses, hotels, warehouses, etc. Whatever funding you need, there is a loan for it more than likely.

Depending on your specific needs, you may need to buy land in order to build a home, rental property, or business. Then again, maybe you just need one type of loan in order to purchase a property to expand your real estate portfolio or to generate a form of passive income. Nonetheless, there are many loan options out there for you to meet your needs. Here are four very general categories of property loans.

Conventional Loans:

If you are buying a house, brand new, or simply one that doesn’t need repairs, then this is the type of loan that is right for you. There are actually two types of conventional loans, but basically, this type of loan requires a 5-25% down payment. They usually have strict guidelines, such as a credit score of at least 660, and income, debt, and assets are taken into consideration.

This isn’t a government loan, meaning that it is not insured by federal agencies. Instead, they are backed by private lenders, such as banks or credit unions. They are also more flexible than government loans, as they do not have limitations on where they can be used location-wise. Conventional loans are also the most popular type of home loan in the U.S.

Rental Loans:

These kinds of loans are similar to conventional loans, but they are specifically for rental properties or vacation rentals, such as a beachfront home or a cabin in the mountains. A rental property is a great way to diversify your real estate investment portfolio and can earn you a stream of passive income.

Some of the things that make a rental loan different from a conventional loan are interest rates and qualifications. Down payments typically have to be more than that of conventional loans, and usually, a credit score of 720 or higher is required to qualify. This is because rental loans tend to be riskier than other types of loans.

Commercial Loans:

Commercial loans are used for commercial properties, which include office buildings, malls, and other shopping centers, and hotels. Apartment complexes are sometimes included as commercial properties as well. These types of loans are mainly used by business entities, but a single individual looking to build their real estate portfolio can get a commercial loan to invest in a commercial property. There are also five different types of commercial loans, including SBA loans, hard money loans, permanent loans, bridge loans, and owner financing.

These loans are also not supported by the government, and down payments usually need to be 20-25% of the total cost of the property. The LTV (loan to value) ratio is also lower (at 75-80%) than conventional loans (up to 97%). On the bright side, commercial loans do qualify for more tax breaks.

Land Loans:

People buy land for many reasons, whether it’s to build a house, business, garage, or even just to sit and appreciate in value. There aren’t as many options out there for land loans as there are for dwellings and businesses. Because of this, it’s likely that interest rates and down payments will be higher. However, there may be government programs that can help you get lower rates and lower down payments. Though the requirements of receiving a land loan differ from other types of loans, the process is pretty much the same.

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