Most of us who has experience getting a mortgage when you purchase our primary residence should know that you can get a loan from the bank when you need to finance your property, but as you step into the real estate investment spectrum, what you may not be aware of is there are other types of loans out there to help you with your creative financing needs!

Bank Loan

Before we get into the other types, we should level-set by talking about a bank loan first. This is the type of loan that is more traditional, it typically requires you to go through an application process, and then underwrite, and then fund. You need to follow their process, and provide all the documentations that they ask for. In exchange, bank loans are more transparent, you usually know what kind of rates you are looking for, and they are usually the lowest comparing to the other types of loans. The main thing is your property and yourself will need to be able to qualify first.

Private Money Loan

If the traditional bank loan route does not fit your needs, the next avenue you may look into is something called the “private money loan.” These are usually investors, or sometimes your relatives, who have money that they are willing to lend out, essentially they want to become a lender in your deal. Because these are private lenders, their process is usually less strict, and has more room for negotiation whenever a situation arises.

On the flip side, private money lender can be deemed as less reliable, because their money can run out any time as soon as they lend the money all out. They may lend based on their personal feelings (e.g. whether they like you or not), and not so much based on underwriting of the deal. And last but not least, private money loan usually carries a slightly higher interest rate than a traditional bank loan.

Hard Money Loan

If you cannot obtain a bank loan or a private money loan, the next avenue you may want to explore is the hard money loan. You should only consider a hard money loan at an extreme situation. Be aware that, hard money loan usually carries a very high interest, pays high points (fees) up front, and has a relatively much shorter loan term. Most hard money loans are being used a “gap loans” – like you just need a chunk of money for a few months to close a deal, and then be able to refi to pay off the hard money loan.

You should never use hard money loan for long term financing!

Seller Financing Loan

A lot of real estate investors like the seller financing loan because it usually combines the flexibility of getting it “approved” (the seller just has to say “yes”, not much underwriting to be honest), and it usually comes with a more reasonable (aka “lower”) rate than a private money or hard money loan.

It is not always easy to come across a seller financing loan, because most sellers actually want to get cash at the time of selling the property, and not to carry a note for the buyer. Though, there can be cases or little signs where you can spot out and at least start a discussion with the seller on this possibility. We shall go into how to spot and how to negotiate with the seller in a future blog post.

Interested to discover more ways to get loans? Click here to find private money lenders for your real estate deals.