The A-Z of Financing Your First Real Estate Transaction

So you’ve found a property owner who’s willing to sell, and now you’re wondering where you’re going to get the money to finance the deal. You’re not alone, that’s a problem most first-timers in the world of real estate face. The exact type of financing you’ll qualify for will depend on the deal you’re pursuing and the fundamentals of the deal. Generally speaking, most people will need to put down money of their own, but that’s not always the case. In some instances, you can get funding for all aspects of the deal: escrow, closing costs, deposit…etc. In this guide, we’ve broken down the common forms of financing, what they cost, and their ideal use case so you know exactly what type of financing to pursue. Let’s dive in!

Breaking down the deal — the stages of a deal when funding needed

Depending on the type of real estate transaction you’re pursuing, different amounts of funding will be required at different stages of the deal. Generally speaking, the moment a purchase agreement is signed, an earnest money deposit is required. If you’re wholesaling the property, this is typically the only funding you’ll require (note: if you are unable to assign the contract in the allotted time, you’ll either need to come up with the rest of the funding for the down payment or forfeit the earnest money deposit.)

If you haven’t already applied for financing (which you should have done weeks ago), you’ll want to kick that off. When applying for loans you may or may not get hit with a loan application fee which can range from a few dollars to several hundred dollars so plan accordingly. Assuming you’re not wholesaling the property, the next biggest expense you’ll encounter is the cost of inspections ($2-3k) and appraisals ($500-1000). Do not avoid these, as you’ll want to know exactly what condition the property is in so you know what you’re signing up for.

The next financial hit you’ll take is the down payment, which ranges from 3-20% of the purchase price. This is typically collected about a week before you close on the property, followed by the collection of the closing costs. The closing costs are the fees associated with the transfer of ownership, such as title insurance, attorney fees, recording fees, and transfer taxes. During the closing process, you’ll also need to sign the loan and transfer documents which require a notarized signature (another fee). In total, if you plan to purchase a property, you will need somewhere between 4.5% and 22% of the purchase price.

ents for property taxes, homeowners insurance, and mortgage insurance (if required).

So where do you find that funding and what kinds of funding are available? That’s what we break down in the next section.

An overview of the most common types/sources of funding

1. Cash-out Refi: Cash-out refinancing involves refinancing a property to extract equity and use it for other purposes. Cash-out refinancing can be found through traditional lenders, such as banks or credit unions, or online platforms such as SoFi or Rocket Mortgage, and come with interest rates of 4-8%.
2. Conventional Loan: Conventional loans conform to Fannie Mae and Freddie Mac standards, they offer better interest rates and lower fees for borrowers with good credit.
3. Construction Loan: Construction loans are used to finance the construction of a new property (or remodel of existing property), often with a variable interest rate and interest-only payments during construction. Construction loans can be found through banks or credit unions, and online platforms such as BuildFund or Fund That Flip.
4. DSCR Loans: DSCR (Debt Service Coverage Ratio) loans are designed for real estate investors, using the property's cash flow to determine loan eligibility. The interest rates on these loans range from 5-12%, in addition to upfront fees of 1-2% of the loan amount. DSCR loans can be found through commercial lenders, such as banks or credit unions, or online platforms such as Visio Financial Services or CoreVest Finance.
5. EMD Funding: An earnest money deposit (EMD) is a sum of money provided by a buyer to a seller as a show of good faith during a real estate transaction. Typically buyers are required to provide the EMD funding on their own, though there are lenders who specialize in EMD funding. It's typically priced at 1.75-2% of the funding received. So if a home sells for $1M, and the EMD required is 5%, the buyer would need to come up with $50k, which if borrowed would cost $875.
6. FHA Purchase: FHA (Federal Housing Administration) loans are intended to be used for the purchase of a primary residence. It’s designed for low-to-moderate-income borrowers, with lower down payment requirements and more lenient credit score standards.
7. Hard Money: Hard money loans are short-term, high-interest loans for real estate investors, often used for fix-and-flip projects. The interest rates for these loans range from 10-18%, in addition to upfront fees of 2-5% of the loan amount.
8. HELOC: A HELOC (Home Equity Line of Credit) is a revolving line of credit using the borrower's home as collateral. HELOCs are typically accessed from the lender that issued the original mortgage, but can also be accessed through through online platforms such as Figure or SoFi. HELOCs typically come with interest rates ranging from 5-10%.
9. Joint Venture Funding: Joint venture funding involves partnering with an investor or developer to finance a project, typically sharing profits and losses. Depending on the terms of the partnership, this can also include an upfront fee.
10. Land Loan: Land loans are used to purchase or develop land for various purposes, such as agriculture, conservation, or development. The interest rates on land loans range from 5-10%, in addition to an upfront fee of 1-2% of the loan amount. Land loans can be found through agricultural lenders, such as Farm Credit or AgriBank, or through local banks and credit unions.
11. Line of Credit: A line of credit allows the borrower to draw funds as needed, often with a variable interest rate and a revolving balance. The interest rates on a line of credit range from 6-12% and they can be accessed from most banks as well as online platforms such as Fundbox or BlueVine.
12. Private Lenders: Private lenders provide loans for real estate investments, often with fewer requirements and faster funding than traditional banks. They come with interest rates ranging from 8-18% and additional fees of 2-5% of the loan amount.
13. Seller Financing: Seller financing involves the seller providing a loan to the buyer to purchase the property, often with more flexible terms than traditional lenders. Interest rates typically range from 6-12%.
14. VA Loan: VA (Veterans Affairs) loans are designed for military veterans and their spouses, offering lower interest rates and no down payment requirements. VA loans can be found through VA-approved lenders, such as banks or credit unions, or through online platforms such as Veterans United Home Loans or Fairway Independent Mortgage.
15. 1031 Exchange: A 1031 exchange allows investors to defer capital gains taxes by exchanging one property for another, similar property. To facilitate a 1031 exchange, typically an intermediary (such as ExchangeRight or IPX1031) is required, which charges 1-2% of the exchange amount.

A more in-depth look at hard money lenders vs private lenders

"Institutional" lenders, commonly referred to as "hard money" lenders, are large-scale lenders that operate nationwide and have institutional backing from sources like funds, credit lines, or large businesses. They sell their loans on the secondary market to finance new deals, focusing on consistent deal flow and adhering to underwriting criteria and documentation requirements demanded by the secondary market. These lenders are ideal for standard deals, good credit, ample experience, and those requiring quick funding for luxury or medium-sized multifamily properties. Some offer short-term bridge debt that transitions into permanent financing, reducing refinancing costs.

Private lenders on the other hand are individuals or their business entities who lend their own money (from personal savings or self-directed IRAs) for real estate loans, retaining control over the funds throughout the loan term. Unlike institutional lenders, private lenders do not sell their loans on the secondary market, giving them flexibility in underwriting and loan terms. Their primary goal is to generate income through interest payments. Private lenders typically require a lien on the property as collateral, either in the form of a mortgage or a deed of trust. Smaller private lenders might offer second-lien products, but these are subject to lower combined loan-to-value ratios (usually below 75%).

A more in-depth look at DSCR loans

DSCR lenders provide long-term, permanent debt financing for real estate investors, with a focus on the property's income-generating potential. The underwriting process may include a credit check on the primary borrower, and sometimes a personal guarantee from the business entity borrower. The terms of these loans can vary, with differences in annual interest rates, prepayment penalties, income calculation, DSCR ratio, maximum loan-to-value ratio, minimum and maximum loan sizes, amortization period, and requirements for escrowing taxes and insurance. If the property is habitable at the time of purchase and has a sufficient income stream to support the purchase price, DSCR loans can be a suitable option for many investors seeking long-term financing.

Because DSCR loans are based on down payments, credit score, and either actual or market rents, they can help supercharge an investor's real estate goals. Here's a bit more about how rates are calculated for DSCR loans:

• Credit score - the higher the better. 760+ generally gets the best price for investment property loans with most lenders
• Loan-to-value ratio - The higher the loan-to-value ratio (LTV) is, the higher the price and vice versa. So, the price for a 90% LTV Loan is higher than for a 60% LTV loan.
• Current cashflow - Many lenders will not do a DSCR loan unless a property is cash flowing. If they do a loan with less than 1, the price goes up.

A more in-depth look at recourse vs non-recourse loans

Recourse and non-recourse loans are two types of financing options available to real estate investors. We’ve outlined their similarities and differences below, so you know which is a better fit for the type of deal that you are pursuing.

Similarities:

• Both recourse and non-recourse loans are used to finance real estate investments.
• Both types of loans require collateral, which is typically the property being purchased.
• Both loans have interest rates, loan terms, and repayment schedules.
• Both loans are typically secured by a mortgage or deed of trust.

Differences:

The primary difference between recourse and non-recourse loans lies in the lender's ability to pursue the borrower's assets in case of default. In a recourse loan, the lender has the right to pursue their assets beyond the collateral to recover any unpaid debt. In a non-recourse loan, the lender's remedy is limited to the collateral, and they cannot pursue the borrower's assets. We’ve outlined some of the other key differences below.

• Loan-to-Value (LTV) Ratio: Recourse loans typically have a lower LTV ratio compared to non-recourse loans. This means that the borrower must provide a larger down payment for a recourse loan.
• Interest Rates: Non-recourse loans typically have higher interest rates compared to recourse loans. This is because the lender has more risk in a non-recourse loan, as they cannot pursue the borrower's other assets in case of default.
• Due Diligence: Non-recourse lenders typically require more extensive due diligence on the property being financed, as they are relying solely on the property as collateral. Recourse lenders may have less stringent due diligence requirements, as they have recourse to the borrower's other assets.
• Flexibility: Non-recourse loans are generally less flexible than recourse loans. Once the terms of a non-recourse loan are set, they cannot be changed without significant costs. Recourse loans, on the other hand, may offer more flexibility in terms of loan terms and repayment schedules.
• Prepayment Penalties: Non-recourse loans often have prepayment penalties, which can make it difficult for the borrower to refinance or sell the property without incurring significant costs. Recourse loans may not have prepayment penalties, allowing the borrower more flexibility.
• Tax Implications: Non-recourse loans may have different tax implications compared to recourse loans. Interest paid on non-recourse loans may be deductible as a business expense, while interest paid on recourse loans may be deductible as mortgage interest.

A breakdown of which types of financing apply to which real estate strategies

• Cash-out Refi - House Hacking, BRRRR, Rehabbing & House Flipping, Short-Term & Vacation Rental Discussions
• Conventional Loan - House Hacking, Commercial Real Estate Investing, BRRRR, Multi-Family and Apartment Investing, Medium-Term Rentals
• Construction Loan - Land & New Construction
• DSCR Loans - Commercial Real Estate Investing, Multi-Family and Apartment Investing
• EMD Funding - House Hacking, Commercial Real Estate Investing, BRRRR, Mobile Home Park Investing, Land & New Construction, Wholesaling
• Double Close - Wholesaling
• Federal Housing Administration Loan - House Hacking, Commercial Real Estate Investing, BRRRR, Multi-Family and Apartment Investing
• Hard Money Loan - House Hacking, Commercial Real Estate Investing, BRRRR, Rehabbing & House Flipping, Short-Term & Vacation Rental Discussions
• HELOC - House Hacking, Commercial Real Estate Investing, BRRRR, Multi-Family and Apartment Investing
• Joint Venture Funding - Commercial Real Estate Investing, Multi-Family and Apartment Investing, Land & New Construction
• Land Loan - Land & New Construction
• Line of Credit - House Hacking, Commercial Real Estate Investing, BRRRR, Multi-Family and Apartment Investing
• Private Lenders - House Hacking, Commercial Real Estate Investing, BRRRR, Rehabbing & House Flipping, Short-Term & Vacation Rental Discussions
• Seller Financing - House Hacking, Commercial Real Estate Investing, BRRRR, Multi-Family and Apartment Investing
• Veterans Affairs Loan - House Hacking, Commercial Real Estate Investing, BRRRR, Multi-Family and Apartment Investing
• 1031 Exchange - Commercial Real Estate Investing, Multi-Family and Apartment Investing

Bonus - the top providers of real estate financing

• DSCR Loans:
  • Blackstone Real Estate - Provides DSCR loans with competitive rates and flexible terms. (www.blackstone.com)
  • Colony American Finance - Offers DSCR loans with a variety of loan options and a focus on customer service. (www.colonyamericanfinance.com)
  • CoreVest Finance - Provides DSCR loans with a variety of loan options and a focus on flexibility. (www.corevestfinance.com)
  • Arbor Realty Trust - A real estate investment trust (REIT) specializing in DSCR loans for commercial properties. (www.arbor.com)
  • LendingOne - A private lender offering DSCR loans for real estate investors. (www.lendingone.com/)
• EMD Funding:
  • EMD Financial - Provides EMD funding for real estate development and construction projects. (www.emdfinancial.com)
  • Capital Concepts - Offers EMD funding for a variety of real estate projects, including residential and commercial developments. (www.capitalconcepts.com)
  • CIVIC Financial Services - Provides EMD funding for real estate development and construction projects, with a focus on customer service. (www.civicfs.com)
• Hard Money Loan:
  • Hard Money Loans - Provides hard money loans for real estate investors and developers. (www.hardmoneylenders.com)
  • LendingHome - Offers hard money loans with competitive rates and a variety of loan options. (www.lendinghome.com)
  • CIVIC Financial Services - Provides hard money loans for real estate investors and developers, with a focus on customer service. (www.civicfs.com)
• Joint Venture Funding:
  • JV Equity - Provides joint venture funding for real estate development and construction projects. (www.jvequity.com)
  • RealCap - Offers joint venture funding for a variety of real estate projects, including residential and commercial developments. (www.realcap.com)
  • SteelBridge Capital - Provides joint venture funding for real estate development and construction projects, with a focus on flexibility. (www.steelbridgecapital.com)
  • RealCrowd - Offers joint venture funding (www.realcrowd.com/financing)
  • CrowdStreet - Offers joint venture funding (www.crowdstreet.com/financing)
  • RealtyMogul: Offers joint venture funding (www.realtymogul.com/financing)
• Land Loan:
  • AgAmerica Lending - Provides land loans for agricultural and rural properties. (www.agamericalending.com)
  • Farm Credit - Offers land loans for farmers and ranchers. (www.farmcredit.com)
  • USDA - Provides land loans for rural development and agricultural projects. (www.usda.gov)
• 1031 Exchange:
  • 1031 Exchange - Provides 1031 exchange services for real estate investors, with a variety of exchange options. (www.1031exchange.com)
  • IPX1031 - Offers 1031 exchange services for real estate investors, with a focus on customer service. (www.ipx1031.com)
  • Asset Preservation - Provides 1031 exchange services for real estate investors, with a variety of exchange options and a focus on flexibility. (www.apiexchange.com)

If you offer one or more of these forms of financing and would like to get added to the list to connect with more wholesalers, flippers…etc., get in touch with us.