When you buy a home, you’re likely to run into a number of real estate terms. Let’s look at one – down payment. A down payment is made by the buyer at the beginning of a home purchase to show commitment to the transaction. It’s usually a percentage of the total price of the home and paid through a wire transfer. This payment is immediately applied to the buyer’s equity position in the property.
To learn some good sources of a down payment, contact me today at 954-439-4851.
How to finance your residential real estate investments through banks
Many people want to invest in real estate, and some even already know what they want to buy, but the real problem is – how can they get financing for the purchase? Majority of the population do not have enough savings to purchase a property in cash.
So basically, the main hurdles are how one can buy through a smaller down payment with the remaining balance payable for several years, at affordable monthly payments. Let’s analyze how these can be done so you can finally take that first step in real estate investing.
Down Payment
For the down payment, developers of pre-selling projects have provided several easy down payment schemes like 10% over 36 months or even 5% over many months. This is a win-win situation for both buyers and sellers, as the buyers are able to pay little by little while the construction is ongoing, and the sellers need not pay interest to banks when they use the buyers’ money for construction costs and others. The downside to pre-selling projects, though, is that you can’t use the property until it is turned over to you. So technically, your money is sleeping during the construction period.
In the case of bank-foreclosed properties, since the properties are ready for occupancy (although some need major repairs), once the buyer pays the down payment, he can already take control of the property – either use it, rent it out, or sell it. The percentage of down payment, though, depends on each bank.
Normally, the down payment or the equity portion of the purchase is the amount that is not included in the loanable amount from the bank. For example, a property with a selling price of $2 million needs a downpayment of 10%. The buyer is able to give the 10% down payment which amounts to $200,000. That leaves $1.8 million to be loaned. However, based on his capacity to pay, appraised value of the property, and other factors, his approved loan only amounts to $1.2 million. Thus, the buyer needs to produce another $600,000 in addition to the $200,000 he already paid, for a total of $800,000, as his equity in the property. The $1.2 million will be paid over a certain number of years at a certain interest rate via monthly amortizations.
If you need a loan for the down payment, you may avail of bridge financing (usually from private lenders and subject to a high interest rate), or you should seriously reconsider and think long and hard on whether or not you are ready to buy a property at this point.
Balance to be loaned
For the balance, these can be loaned from banks. The downside to paying a low down payment, is having a bigger balance to be loaned, which in turn translates to more interest expense. For example, if the downpayment you paid is only 5% or 10%, you need to loan 95% or 90% respectively. If loaned at an interest rate of 5% for 20-30 years, for example, the total interest expense can be very significant, and may even be equivalent to, or even more than the principal loan amount.
With a higher down payment, the balance to be loaned will be lower, and thus the amortization payments would also be lower, and thus, it is more likely that the buyer would be able to pay monthly, until the amount is fully paid. As a lender, the bank’s main business is to earn interest income from loans. It is in its best interest to lend an amount that borrowers would be able to pay.
This is why one of the main factors being considered by lenders is the borrower’s capacity to pay, which is based on a percentage of his net disposable income. Usually, the monthly amortization should be at a maximum of around 35% to 40% of the borrower’s net take-home pay. Of course, this is because they took into consideration the other bills that people need to pay such as food, clothing, water, electricity, etc. The lenders are in effect protecting the borrower from biting more than he can chew.
Should the buyer be unable to pay the amortizations in the future due to unforeseen circumstances, it is probable that either the buyer or the bank can sell the property for the principal loan amount (which is much lower than the property’s original selling price). This is why usually the loan to appraised value ratio is not 100%.
Let’s say a property you like is being sold for $2 million. Based on the bank’s appraisal, it is only worth $1.8 million, and it is willing to lend you only 70% of the appraised value, or $1,260,000.00. Assuming you, as the buyer, have the capacity to pay the $1.26 million loan, you still need to produce $740,000.00 or 37% of the selling price. Assuming you are unable to pay the loan, it is probable that you can sell the property for $1.26 million if it’s really worth $1.8 million (based on the appraised value). Or, if the bank forecloses the property, it is probable that it can sell it for $1.26 million plus foreclosure and other holding expenses, so that it can get back its money, which it can then lend again to others with interest, in accordance with its main business model.
Before buying a property, check the computations first, including all payments up to the very end of the period when the property is fully paid, and analyze if you can afford it.
Note too that this discussion is on residential real estate purchases. Financing a commercial real estate investment deserves a separate article.
Interest rate
For the interest rate on the loan, we can see a lot of advertisements saying that the interest rate is only 5.75% or so during the first year. This can give some people false confidence that the interest rate will remain low throughout the 30-year payment period (for example). Read the fine print to check how much the interest rate for the succeeding years will be.
Adjustable rates are ok for now. Negotiate for a cap on the interest rate so that should it rise in the future, you are protected. At the end of the day, investing always has risks. And in finance, it’s good to remember: high risk = high return, low risk = low return. How you manage your risk is your personal lookout. Enough cash reserves could cushion the negative impact of an unforeseen circumstance, as well as good personal money management.
When you hire Irene Medina and The Medina Real Estate Group, you hire a team of professionals that will “Stand by YOU Every Step of the Way” from start to finish. We pride ourselves in making sure that we keep your goals top of mind at all times and keep you informed at all times. Please read our reviews from happy clients on this site, as well as our blog.
We are in a sellers market again and you need a team that is very savvy when it comes to marketing your home. It is not a matter of just putting a sign on your home and putting in on our Multiple Listing Service. Our marketing is very internet intensive driven and we implement The Ballen Method on every property. 90% of all buyers find their home on the internet before they call a realtor. We make sure that your house is FOUND. Some of our marketing techniques are the following: We take a professional virtual tour of your home to put on the internet, along with various websites, individual property websites, social media sites and all the other popular sites. We also advertise to the international market. We market to all realtors in your area and to the surrounding neighborhood. We make sure you get the highest and best offer for your home. Their reputation of being a top notch real estate group is well known in the real estate industry. Your chances of getting your house sold quickly and/or your offer being accepted is greatly increased when you use The Medina Real Estate Group.
Go to: www.SellingYourSFLHomeGuide.com website and download your free e-Book = 14 Costly Mistakes and How to Avoid them.
If you need to short sale your home, please go to:www.FLShortSaleServices.com for information on short sales and to calculate if you have equity in your home now or still need to short sale. We have a proven track record of approved short sales and deficiency waivers.
If you are a buyer looking to buy a home, we pride ourselves in making sure we listen to what your dream home consists of. It is all about you and your future home. We put YOU first! Go to: www.IreneMedina.net
Irene Medina has been in the business of selling and buying real estate for more than 10 years. She became a short sale specialist and helped many homeowners avoid foreclosure and have their deficiencies waved when the market dropped. Market has shifted again and she continues to excel as a Listing and Marketing Specialist to help you get the most for your home in the quickest amount of time, with the least amount of stress! Irene and her team are an award winning team. When you choose Irene Medina and The Medina Group, you choose a team that will always put YOU first.
If you are a buyer looking to buy a home go to www.TheMedinaRealEstateGroup.com.
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Irene Medina / Realtor The Medina Real Estate Group
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