Residential real estate loans come in all shapes and sizes. Whether you’re a first-time homebuyer trying to make sense of the market or a grizzled veteran looking to accumulate your umpteenth investment property, you have more options at your disposal than you may realize.
Let’s take a look at some common types of residential real estate loans in turn — after getting some terms out of the way.
What Counts as Residential Real Estate?
First, let’s define what “residential real estate” means here: single-family and small multifamily properties only.
“Contrary to popular belief, multifamily residential properties comprising five or more units are classified by lenders and rating agencies as commercial real estate,” says Florida real estate investor Ralph Serrano. “Novice investors intrigued by opportunities in multifamily properties need to understand this distinction — from a financing standpoint, investing in a duplex or triplex is a very different proposition than investing in a six- or eight-unit cluster housing development.”
Commercial real estate loans are beyond the scope of this article, but there’s plenty of information out there if you’re interested.
Conventional Mortgage Loans
The most common type of residential real estate loan is the conventional mortgage. These come in two flavors.
- Fixed Rate Mortgages: Rates on fixed rate mortgage loans remain set in place for the life of the loan (term), which most often spans 30 years. Shorter-term loans generally have higher rates.
- Adjustable Rate Mortgages: Adjustable rate mortgage loans fix rates for a set introductory period, often five or seven years, then adjust annually (with prevailing interest rates) for the remainder of the term.
FHA loans are special mortgage products backed by the Federal Housing Administration. They’re geared toward first-time homebuyers with limited liquid resources and impaired credit. Qualified buyers can put down as little as 3.5% of the home’s purchase price, though smaller down payments mean higher lifetime interest costs.
Gap (“Bridge”) Loan
If you need to buy a new home before you sell your current residence, perhaps to accommodate a work-related relocation, you might have need for a short-term gap or “bridge” loan to tide you over until you reap the windfall from your current home’s sale.
If you live in a rural area, your best bet for low-cost financing could be a USDA loan — a mortgage product backed by the full faith and credit of the U.S. Department of Agriculture. The eligibility requirements are strict, but the benefit is clear: the potential for no down payment at all.
Are you or someone in your immediate family an active duty or honorably discharged member of the U.S. Armed Forces? You may qualify for a VA mortgage loan backed by the U.S. Department of Veterans Affairs (VA). Before you apply, review the eligibility requirements and potential costs (which differ from traditional loans) here.
The Right Fit Is Out There
The sheer variety of residential real estate loans threatens to overwhelm the novice buyer, it’s true. Then again, with so many options out there, the chances that you’ll find the right fit for your needs are quite good. Now that you have a basic sense of the major types of residential real estate loans, it’s time to find a trusted partner to help you navigate the application process — and, fingers crossed, find the home you’ve always wanted.