Real Estate Loans
A real estate loan is a targeted bank loan for the purchase or construction of real estate. According to Premier Lending, Inc. a first mortgage bank based in California, USA, most of the loans for real estate are used to purchase housing, so the terms “real estate lending” and “housing lending” are often used as synonyms.
Here we consider only housing loans, as loans for commercial real estate are inherently more suitable to the category of “business loans”.
Loans for the construction and purchase of housing
Such loans have their own differences. Their main features are:
- A significant principal loan amount is a general rule, as any housing remains one of the most expensive acquisitions for most families;
- A long loan repayment term is also an almost inevitable circumstance, because the cost of housing is not comparable with the average monthly income of citizens;
- Strict requirements for securing a loan repayment – the reason for this is a significant amount and period of repayment, during which the material situation of the borrower can change many times. For an additional guarantee, almost all housing loans are secured by a collateral or guarantee;
- The cost of a home loan may differ from other bank loans. This is due to the special social significance of these loans. Usually there is a state regulation aimed at limiting the cost of loans and increasing their accessibility.
The payment security is particularly important for home loans. There are 2 common options for such security:
- Mortgage – purchased or built housing becomes a collateral for the loan. In case of payment termination, real estate may be confiscated in favor of the creditor (bank);
- Surety – here the faithful fulfillment of the payment terms provides guarantees for additional participants in the credit transaction – guarantors. In case of insufficient payments, the borrower’s obligations are assumed by the guarantors. This does not require special procedures, the surety assumes unfulfilled obligations under the terms of the contract.
Other ways of securing housing loans are also used but less often.
The main importance for approving a loan is usually the financial well-being of the borrower and his or her solvency in the long run.
The next item is the value of the object of lending, i.e. housing.
There should not be any fundamental differences between a loan for construction and a loan for the purchase of an apartment or house. If such a difference is observed, then this is due to additional factors: state programs to stimulate the construction industry, special relations between the bank and the developer, etc.
Choosing the right mortgage loan program
Today, dozens of banks operate in the mortgage market. In this part of the article, we will analyze how to choose a real estate lending program. Each bank provides its own conditions, but the first thing you should pay attention to is the interest for using this type of lending. Each bank calculates the formula by taking the amount of money needed to purchase a particular property, multiplying by the percentage charged for the services of the bank. The size of this interest will be the main important element for you.
During loan processing, the bank calculates a debt repayment schedule. It will discuss the amount that you undertake to pay on a monthly basis and the period during which you are required to repay the loan. Having looked at the provided schedule, you can “estimate” the amount of overpayment to the bank for using a mortgage loan. Without an accurate calculation, it will be difficult for you to determine it just looking at the interest. In addition to interest, the bank may charge various commissions, however, all this is discussed in the contract.
Since the cost of real estate is quite high, the real estate loan term is calculated on average from 10 to 30 years. Therefore, you need to clearly compare these costs with your capabilities, in this case a real estate loan will not become burdensome.
Check out mortgage repayment systems. There are several types of them, you can get acquainted with them in more detail at the bank branch. What should you look for when communicating with a banking agent?
- whether expenses related to loan processing will be included in the loan amount;
- whether it is possible for you to repay the loan ahead of schedule, what are the nuances in this case;
- methods and rules for calculating interest on a mortgage loan;
- mortgage repayment options;
- whether you have the opportunity to choose an agent for home insurance or this is done by the bank;
- whether payments on schedule are evenly distributed over the entire loan repayment period, if not, then according to which system it is distributed.
These are only basic issues that should be discussed when drafting a contract.
Category: Online Loans
Tags: financial, loans, mortgage