8 Different Types Of Real Estate Loans - In Order Of Popularity

8 Most Popular Types Of Real Estate Loans

February 27, 2024

Produced by:
Carmel Woodman

With over 8 years of expertise, Carmel brings a wealth of knowledge as the former Content Manager at a prominent online real estate platform. As a seasoned ghostwriter, she has crafted multiple in-depth Property Guides, exploring topics such as real estate acquisition and financing. Her portfolio boasts 200+ articles covering diverse real estate subjects, ranging from blockchain to market trends and investment strategies.

Reviewed by:
Richard Stevens

Richard Stevens is an active real estate investor with over 8 years of industry experience. He specializes in researching topics that appeal to real estate investors and building calculators that can help property investors understand the expected costs and returns when executing real estate deals.

The Short Answer

When it comes to real estate loans, there are a wide range of options to choose from. Each comes with its own unique benefits and drawbacks and is suited to a different purpose. In order of popularity, as determined by monthly search volume, here are the most commonly used types of mortgage loans:

Most Popular Real Estate Loans

We will now delve further into these types of mortgage loans, as we cover how they work, what the typical down payment is, who each loan type is suited to, and what steps you should take when applying.

Loan Type 1: FHA Loans

Monthly Search Volume in the US: 150,000

FHA loans

How FHA Loans Work

FHA loans, or Federal Housing Administration loans, are underwritten and funded by third-party mortgage lenders who are approved by the FHA. However, these loans are insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development (HUD). Which means that if a borrower defaults on an FHA loan, the government will reimburse the lender. FHA loans are geared towards making homeownership more accessible for the likes of first-time buyers and those who have less desirable credit.

FHA loans typically have loan terms of 15 to 30 years, with fixed or adjustable rates (fixed rate mortgage or adjustable rate mortgage). FHA loans, much like other loans, also require closing costs to be paid, which include appraisal fees and origination fees.

Who Are FHA Loans Suited To?

FHA loans are suited to those who have a lower credit score or a less desirable credit history. For these buyers, qualifying for a conventional loan may not be possible, however with FHA loans the credit requirements are less stringent and borrowers have a better chance of getting an FHA loan with the mortgage amount tailored to their credit.  

Typical Down Payment

One of the main benefits to FHA loans is the low down payment that is required. Typically, borrowers can qualify for an FHA loan with a down payment as low as 3.5% of the purchase price. This is a far cry from the 20% down payment requirement from many other loan types and offers those who are buying property for the first time, or those who don’t have a lot of capital to outlay, a great opportunity enter the real estate market. For first-time buyers, this is an effective way to begin the journey of investing in real estate.

What You Need To Apply For FHA Loans

The minimum credit score requirement for FHA loans is 580 in many cases, with a 3.5% down payment requirement. Some lenders may go lower than this, however a higher down payment will need to accompany the application. For example, a credit score of 520 may require a 10% down payment. FHA loans are aimed at primary residences which include 1-4 unit properties. The maximum debt-to-income (DTI) ratio for FHA loans is 43%, and FHA loans require an Upfront Mortgage Insurance Premium (this mortgage insurance is typically 1.75% of the base loan amount) and an Annual Mortgage Insurance Premium.

Loan Type 2: Home Equity Loans

Monthly Search Volume in the US: 107,000

Home equity loan

How Home Equity Loans Work

Home equity loans are essentially second mortgages that allow homeowners who already have a mortgage, to borrow against the equity they have built up. Home equity loans typically have a fixed repayment period which can be anywhere between 5 and 50 years, with fixed interest rates. Home equity loan amounts are approved based on the amount of equity that a borrower has in their home, along with a few other considerations.

The loan is secured by the property, which means that if a borrower can no longer pay back the loan, the lender can foreclose the property. The loan proceeds are paid out as a lump sum, and the new loan terms are given to the borrower to begin repaying. Home equity is the difference between the market value of the home and the outstanding balance on the mortgage secured by the property.

Home equity loans also include Home Equity Line of Credit (HELOC), which is a revolving line of credit that homeowners can tap into by using their home equity. This is paid out as and when the homeowner needs it, for an agreed upon period of time, before it needs to be repaid.

Who Are Home Equity Loans Suited To?

Home equity loans are suited to those who need access to a significant amount of funds and would like to use the equity they have already built up in their current property. In other words, only current homeowners can get access to these loans. The loan amount can be used for any purpose that the borrower requires, such as the purchase of another property, medical bills or other large expenses.

Typical Down Payment

Down payments are not required on home equity loans, because the equity already built up in the home is being used. Instead of a down payment, homeowners are borrowing the amount they have paid into their home loan already.

What You Need To Apply For Home Equity Loans

To qualify for a home equity loan, you’ll need to have enough equity in your home loan to begin with. Lenders typically allow homeowners to borrow up to a certain percentage of their home’s equity, often ranging from 70% to 85%, depending on factors such as creditworthiness, income, and the lender’s policies. You’ll need a credit score of around 600 or higher, and proof of employment for at least 2 years.  A debt-to-income ratio of no more than 43% is accepted.

Loan Type 3: Conventional Mortgage Loans

Monthly Search Volume in the US: 48,000

Conventional mortgage loans

How Conventional Mortgage Loans Work

Conventional mortgage loans are one of the most commonly used long-term real estate loans. These are typically used by people who are purchasing a single home however they can also be used for real estate investing, albeit with some restrictions. Conventional mortgage loans are provided by traditional lending institutions like banks, credit unions and mortgage brokers.

Conventional mortgage loans are subject to stringent underwriting guidelines and as such they can be harder to qualify for. Properties need to be appraised, to determine their value, as part of the underwriting process. However, the main drawcard is that the interest rates on these loans are usually very competitive.

Conventional mortgage loans may offer fixed or adjustable interest rates (fixed rate mortgage or adjustable rate mortgage). Fixed rate mortgages maintain the same interest rate throughout the loan term, providing predictability and stability in monthly payments. Adjustable rate mortgages (ARMs) start with a lower initial interest rate that adjusts periodically based on market conditions, which can lead to fluctuations in monthly payments.

Who Are Conventional Mortgage Loans Suited To?

Conventional mortgage loans are suited to those who have stable employment, as a regular income is factored into the loan approval process. Debt-to-income is also a factor, so it’s important for borrowers to have a cash flow that is not ruled by debt, where the income they generate would comfortably cover the loan repayments.

Conventional loans are suited to borrowers who are purchasing single-family homes, multi-unit properties (such as duplexes, triplexes, or fourplexes), condominiums, and townhouses. It’s also suited to borrowers with a stable employment history, and those who are looking for a long-term loan of 15 to 30 years. For those who are seeking fixed rate mortgages, conventional mortgages are likely to be a good fit.

Typical Down Payment

Opting for conventional conforming loans means that you’ll likely be looking at a 20% down payment. If you’re using the loan for an investment property, this may be even higher, as the risk increases for the lender.

What You Need To Apply For A Conventional Mortgage Loan

To qualify for conventional conforming loans, borrowers usually need a credit score of around 620 or higher. Proof of income and employment history is usually necessary, as well as a low debt-to-income ratio of 43% or less. Borrowers need to provide a down payment of around 20% and verification of their assets to qualify for conventional mortgage loans.

Loans provided by the likes of Fannie Mae and Freddie Mac are regulated by the Federal Housing Finance Agency. The Federal Housing Finance Agency or FHFA makes sure that these entities operate in accordance with their rules and set the loan limits on conventional conforming loans.

Loan Type 4: Crowdfunding

Monthly Search Volume in the US: 47,000

Real estate crowdfunding

How Crowdfunding Works

Real estate crowdfunding works in a different way to most other lending options, whereby investors pool their funds on a crowdfunding platform, in order to provide financing for real estate projects. Borrowers will create their project on the crowdfunding platform, and then investors can begin adding funds to the project, if they see it as a viable opportunity.

The minimum investment often begins with as little as a few hundred dollars. The funds are usually held in a REIT (Real Estate Investment Trust) or something similar, which acts as a holding company where the funds can accumulate. There are various real estate purposes that people can use crowdfunding to raise funds for, which simply involve pitching their idea to the group of investors on a crowdfunding website.

Who Is Crowdfunding Suited To?

Crowdfunding offers real estate entrepreneurs a platform to showcase their projects to a broad audience to raise funds. For those who need to purchase an investment property, renovate a property or make significant upgrades, finance a development project, those who wish to passively invest in real estate projects and more.

Typical Down Payment

The concept of traditional down payments doesn’t apply for those who are using crowdfunding to source funds for their real estate deal. Each project is different, and some investors may require the applicant to provide their own capital, as a sign of belief in the project, while others may not. This depends entirely on the deal at hand, and the investors who are funding the project.

What You Need To Apply For Crowdfunding

Selecting a real estate crowdfunding platform is the first step, and from there you’ll need to create a detailed project profile or offering memorandum that outlines key aspects of your real estate project. You’ll also need to follow the application process for the platform, which will include due diligence on the project that you need funding for. As part of this process, it’s a good idea to gather any financial documents that may be needed, visuals of the project, property appraisals, market analyses and more.

Loan Type 5: Seller Financing

Monthly Search Volume in the US: 12,000

Seller financing

How Seller Financing Works

Seller financing is a form of real estate loan where the property seller acts as the lender, by providing the financing for the buyer to purchase the property. In this scenario, once the buyer and seller have negotiated the terms of the sale, the seller will provide the terms to the buyer, which will include how much time they have to pay off the house, what the installments will be, and what the interest will be.

A purchase agreement or promissory note is used to outline the details of the deal and this will inform both parties’ obligations. This note serves as evidence of the debt owed by the buyer to the seller. The closing process is similar to other real estate loans, where the buyer will obtain a title search, appraisal, and other due diligence to ensure clear title and property value.  

Who Is Seller Financing Suited To?

Seller financing is suited to buyers who are struggling to qualify for traditional financing, due to factors such as poor credit or self-employment. This type of real estate loan is also suited to real estate investors who are involved in fix and flip projects and rental property acquisitions. Sellers who are motivated to sell their property quickly can use seller financing to speed up the deal and attract a larger group of buyers. Seller financing also provides a solution for buyers and sellers who are partnering or doing a joint venture.  

Typical Down Payment

Due to the flexible nature of seller financing, the down payment will vary according to the arrangement that the buyer and seller have come to. Some sellers may not require a down payment, while others may require some sort of down payment to show good faith.

What You Need To Apply For Seller Financing

Sellers are at liberty to lend to anyone they choose, which means they make the rules about who they will lend to. The best way to prepare to apply for seller financing is to assess your financial situation and make sure that you can afford to repay a loan with the seller. Next, gather all the relevant documents you may need, to prove your income, assets, credit score and more.

Make sure that you can build a strong case as to why you’re a strong candidate for loan repayment, and that your income will cover the loan repayments. It’s also a good idea to specify how much you’ll need from the seller (particularly if you don’t require the entire purchase amount) and how much you can contribute upfront.

Loan Type 6: Hard Money Loans

Monthly Search Volume in the US: 6,500

Hard money loans

How Hard Money Loans Work

Hard money loans are short-term, asset-based loans in which the property acts as collateral for the funds that are borrowed. These collateralized loans are granted by hard money lenders, who commonly fund fix and flip investors, landlords, and even commercial project developers.

Hard money loans can have higher interest rates and origination fees however this is due to the fact that these loans are provided quickly (sometimes within a few days) and lending criteria are more flexible. Hard money loans are usually originated by private investors that have to offset the risk of the loan, using higher interest rates and origination fees.

One of the key differences between traditional mortgages and hard money loans is that banks base the loan value they are willing to grant on current property values, while hard money lenders take the future value of the property into consideration, using the after-repair value (ARV).

Who Are Hard Money Loans Suited To?

Hard money loans are best suited to real estate investors who are doing fix and flip projects because loan terms are short, and often include interest-only payments upfront and then a balloon payment at the end which investors can use the sale of the property to cover. Hard money loans are a useful solution for borrowers who may not qualify for a loan from a traditional lender thanks to their lenient lending criteria and flexibility.

Investors who have a great real estate deal, are essentially good candidates for a hard money loan because hard money lenders are more concerned with the value of the property than they are in the borrower’s financial history. Hard money loans are also suited to those doing ground up construction projects, commercial projects and more.

Typical Down Payment

Hard money lenders typically want borrowers to have some skin in the game, to minimize the risk of the loan, and this is a down payment requirement of around 20% usually. The down payment requirement varies according to each lender, but 20% is a common requirement.

What You Need To Apply For Hard Money Loans

Applying for a hard money loan requires assessing your real estate project to determine it’s potential profitability, and then preparing a detailed business plan or investment proposal outlining your project’s objectives, timeline, and financial projections. With this, you’ll need to right documents to support your loan application which includes your credit history, property information, renovation plans, contractor details, credit history and more.

Make sure that you’ve understand the lender’s terms and requirements, and that you are aligned with these, before you begin your application. This includes the Loan-To-Value (LTV) ratio, down payment requirement, interest rates, loan fees and so on. The more information you can provide, the faster the application process will go.

Loan Type 7: Blanket Loans

Monthly Search Volume in the US: 1,600

Blanket loans

How Blanket Loans Work

Blanket loans, alternatively referred to as portfolio loans or blanket mortgages, encompass multiple properties or parcels of real estate within a single loan agreement. Various types of properties can be covered by blanket loans, including residential, commercial, or mixed-use properties. Borrowers enter into a single loan agreement with a lender, to finance all the properties that they need funding for.

The properties that fall under the blanket loan serve as collateral for these loans. The consolidation of properties under one loan means that the loan process can be streamlined by reducing paperwork and lower the costs of the loan.  

Who Are Blanket Loans Suited To?

For borrowers who are looking to finance multiple properties under a single loan agreement, blanket loans offer flexibility, efficiency, and potential cost savings. This means blanket loans are well suited to borrowers who own multiple properties and have a diverse portfolio or are trying to expand their portfolio, property developers or builders who are working on several projects, landlords or property managers who are managing several properties, investment groups, joint ventures or partnerships.

Typical Down Payment

The down payment for blanket loans can be higher than traditional loans, due to the number of properties that are encompassed in the loan. As such, the down payment on a blanket loan can be as much as 50%, depending on the lender and the properties that are included.

What You Need To Apply For Blanket Loans

Once you’ve found a lender that has a track record of working with investors with similar property types or in the same market, you’ll need to create a detailed investment property proposal. Make sure to include information about each property, including its market value, financial projections such as potential cash flow and ROI. Include the necessary documents to support this and be prepared to answer questions and supply more information if need be.

Loan Type 8: Private Money Loans

Monthly Search Volume in the US: 1,100

Private money loans

How Private Money Loans Work

A private money lender is any individual or company that has funds and is willing to lend these funds to a borrower. Private money lenders can be individuals, wealthy investors, family members, friends, or private lending firms, with access to capital. Private money lenders are typically focused on the yield that they will receive, and less on the borrower’s creditworthiness or other details that traditional lenders place importance on.

Private money lenders usually won’t have strict lending criteria, instead they tailor their terms to each person’s specific needs and real estate deal. As such, borrowers and lenders will need to negotiate the details of a private money loan. Which includes the loan terms, interest rate, repayment schedule and other conditions. Private money loans are asset-based, which means that they are secured by the property itself as collateral.

Who Are Private Money Loans Suited To?

Private money loans are suited to real estate investors who don’t qualify for traditional loans, or investors who have found a good real estate deal, but their credit isn’t good. These loans can be used for various types of real estate projects, provided that the investor can offer the lender a good yield and returns from the deal.

Typical Down Payment

Down payment requirements vary depending on the private money lender. While some lenders may require a down payment to ensure the borrower’s commitment to the investment, others may not require a down payment at all, however most are willing to negotiate this.

What You Need To Apply For Private Money Loans

Applying for private money loans starts with creating a comprehensive investment proposal that outlines the property details, purchase price, ARV, exit strategy and potential ROI. Provide information about the property’s market, location, condition, and any other relevant factors that may influence the investment.

You’ll also need to provide documents that support the application, such as financial statements and purchase contract. The requirements for each private money loan will vary, so it’s important to be clear on what the lender requires, before submitting your application.

What To Do If Your Loan Application Is Rejected

Step 1: Find out why your application was rejected, such as a high Debt-To-Income (DTI) ratio. Then get to work on resolving these issues, so that they don’t affect any other loan applications you may make.

Step 2: Figure out if another loan would be better suited to your investing needs. You may be eligible for another loan type, with the same lender. Apply to this loan type, if you find one that works well for you.  

Step 3: Examine your credit, and make sure that your cash flow is such that your debts would be covered. In other words, make sure to reduce your DTI ratio as much as possible.

Step 4: Consider a different lender. You may find another lender, with different lending criteria who will approve your loan. If need be, you can also consider having someone co-sign with you, which minimizes the risk for lenders.

Final Tips For Securing Financing To Purchase A Property

Shop around for lenders: There are a wide variety of lenders offering different types of mortgage loans. Find a lender that understands your objectives and that you feel comfortable working with.

Negotiate terms: Don’t be afraid to negotiate with lenders to secure better loan terms. From interest rates to closing costs, there may be room for negotiation that could save you money in the long run.

Get pre-approved: Consider getting pre-approved for a loan before house hunting. This involves submitting a loan application and providing financial documentation to a lender, who then assesses your creditworthiness and determines the maximum loan amount you qualify for. Having a pre-approval letter in hand shows sellers you’re serious and financially capable.

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