Whether you are a property owner, first time buyer, developer, or investor, you are probably considering your options for real estate financing here in Pittsburgh. Leveraging existing or new real property is a great way to stretch your budget, allowing you to increase your purchasing power and providing you with the financing you need to improve or develop your real estate. However, you need to know your options and the key factors for each before you begin the process. An experienced Pennsylvania real estate attorney can help guide you through the process, making sure you maximize the benefits of the type of financing you choose while managing your risks.
What Types of Real Estate Financing Are There?
In general, there are three types of real estate financing. For homeowners, your options are a conventional loan from a bank or other private lending institution or an FHA loan issued by lenders approved by the Federal Housing Administration (FHA). If you are in the process of developing an income producing property like an office building, shopping mall or apartment complex, then you will be looking at a commercial loan. There are specific requirements for each of these, as well as certain aspects that need to be understood before you proceed.
What are the Requirements for a Conventional Loan?
Conventional loans are the most common for single family residents, as well as for second homes and investment properties, especially where the landlord will be occupying one of the units. These are offered by private lending institutions such as banks and credit unions, but are not guaranteed or insured by the government. As we shall see, this is a key difference from an FHA loan. In order to qualify, the homeowner must have a good credit score, typically around a 620 on either Equifax, Experian, or TransUnion. This will show that the homeowner is a good credit risk. In addition, many lending institutions will require that the purchaser or homeowner demonstrate proof of stable employment and income, including a copy of the most recent income tax return. A clean credit history with no recent bankruptcies will also help the purchaser secure a loan.
Lenders offering a conventional loan will typically require at least a 3% down payment on the property. However, some may require a minimum of 5% down. Keep in mind that the greater the down payment, the lower the amount of mortgage you will need to buy the property in question. The debt-to-income ratio on a conventional loan will usually be less than 43%. In addition, if your down payment is less than 20%, the lender may require you to place a Private Mortgage Insurance policy. The loan limit for a conventional loan is set by the FHA and depends on the county where the real estate is located. The current loan limit for a single family residence here in Allegheny County is $806,500.
What are the Requirements for an FHA Loan?
Loans that are insured by the FHA and issued by FHA approved lenders tend to have more flexible requirements. For one thing, you can get one even if your credit score would not qualify you for a conventional loan. In fact, if you have a credit score of 500, you may be able to get an FHA loan if you make a down payment of at least 10% of the purchase price. For those looking to buy a home who have credit scores of at least 580, you may qualify for an FHA loan with as little as a 3.5% down payment. While the FHA loan has more flexible credit options than a conventional one, you will still need to show steady employment in order to qualify, and will have to obtain Private Mortgage Insurance coverage.
FHA loans have limitations, though. For one thing, they can only be used to buy a primary residence. So you cannot use an FHA loan to buy that vacation home you have always dreamed of. In general, the FHA loan is designed for low to moderate income families with an emphasis on first-time homebuyers.
While the debt-to-income ratio on an FHA loan is below 43% like a conventional loan, the current FHA loan limit for a single family residence in Allegheny County is just $524,225. That number increases if you are buying a multiple dwelling unit as your primary home. For example, a duplex will qualify for a $671,200 FHA loan, while a triplex can get up to $811,275 loan limit and one that has four or more units can qualify for up to $1,008,300.
What are the Requirements for a Commercial Loan?
Commercial loans tend to have more burdensome requirements than either a conventional or FHA loan. This is because the funds will be used for a commercial purpose, such as constructing a retail store or an apartment complex. Since these are usually undertaken by business entities like corporations, limited partnerships and limited liability companies, commercial lenders will require that the business demonstrate a strong credit history. This can be done by providing financial statements that show that the entity will be able to repay the loan. In some cases, the lender may require that the financial statements be audited by an independent auditor licensed in Pennsylvania.
The borrower will have to put a larger down payment than for residential loans. Typically, a commercial lender will require at least a 25% down payment on the property. However, if the loan is obtained through the Small Business Administration (SBA), the borrower may be able to make a down payment that is as little as 10% of the purchase price.
Typically, a commercial loan will require an appraisal of the property to demonstrate its valuation. Depending on the prior use of the land, the borrower may be required to have an environmental inspection performed to ensure there is no hazardous waste present. This is usually done if the chain of title shows that the land was once used as a gas station. The borrower may also need to provide the lender with a detailed business plan, and in some cases, the commercial lender may require mortgage insurance depending on the loan terms and the risk profile of the borrowing entity.
How are Interest Rates Determined?
There are a number of factors that will affect the mortgage interest rate for a real estate loan. If the borrower is a person, his or her credit score will help determine the rate. In general, a higher credit score will qualify you for a lower rate. For business entities, it will often depend upon a demonstration of credit worthiness and repayment history.
There are other factors that will affect the interest rate. A fixed-rate mortgage will have a different interest rate than an adjustable-rate one. The debt-to-income ratio can also affect the rate, with a lower percentage showing a greater ability to repay the loan. The property type, length and amount of the mortgage, and location of the property will also affect the interest rate.
While the foregoing factors tend to be within the control of the borrower, other things are beyond your ability to control with respect to the interest rate of your real estate financing. Market conditions and inflation can impact the interest rate, as will the rate set by the Federal Reserve Bank. In general, if interest rates are low when you are financing your project, then you might consider locking in the rate by agreeing to a fixed-rate mortgage. This is the same regardless of whether you are getting a conventional, FHA, or commercial loan.
Our Real Estate Attorneys Can Help You with Your Financing Needs
As you can see, real estate financing is a complex matter. Whether you are getting a loan to buy a personal residence or looking to finance a commercial project, the experienced real estate attorneys at Jones Gregg Creehan & Gerace will help guide you through the process to help you get the best terms and conditions for your real estate loan.