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Understanding Purchase Loans: Your Comprehensive Guide

Understanding Purchase Loans: Your Comprehensive Guide

The world of real estate investing can be overwhelming. Not only do you have to stay on top of the latest developments, trends, and market fluctuations, but you need to always keep your eyes peeled for the underdeveloped property that is a diamond in the rough.

All of which is saying nothing of learning the ropes. Remember, you need a strong foundation to set yourself up for successful investments, especially after the 2008 financial crisis. Part of this is mastering the art of purchase loans.

Keep reading to learn what a purchase loan is, when to take one out, and more. Contact us today at 855.505.LEND if you’re an experienced investor who needs a private money purchase loan.

What Is A Purchase Loan?

Like the name suggests, a purchase loan is any loan that is taken out to purchase a specific piece of property. Conventional mortgages fall into this category, though those are traditional loans rather than private money purchase loans.

Private money purchase loans – also known as commercial bridge loans and hard money loans – are similar to traditional purchase loans, but are offered by private lenders rather than banks or mortgage brokers. With these types of loans, more weight is given to the property itself during the underwriting process than the borrower’s financial history.

The terms of hard money purchase loans vary depending on the lender, but generally have a 10% or higher interest rates, typically have a one to two-year term, and offer a max loan-to-value (LTV) of around 65%.

Lionshare is proud to offer some of the most attractive terms in the private purchase loan industry, with interest between 7% and 12%, terms as short as one year, and an LTV of 65%.

Fixed Vs. Variable Rate APR

Traditional purchase loans fall into two broad categories – fixed and variable rate.
fixed vs variable rate APR

  • Fixed purchase loans – These are the simplest to understand. A bank lends a buyer a specific amount of money, at a fixed interest rate, for a fixed loan term. A common example would be a home buyer getting a mortgage for $300,000 at a 4% interest rate for 30 years. The rate cannot change for these loans, so the payments each month will always remain the same.
  • Variable rate purchase loans – Variable rate loans are issued at a specific interest rate, but adjust depending on market conditions, typically once a year. The lender may offer a low introductory rate for a fixed period of time, but after this initial time frame the rate will adjust based on an index and margin established at the loan’s inception. This means that monthly payments could vary quite a bit – and even rise significantly.

Private money purchase loans are almost always fixed rate loans. This is due to the length of the loan, which is typically one year.

The 4 Most Common Types of Real Estate Purchase Loans

 

While there are many different types of purchase loans in the commercial real estate industry, there are four in particular you should know.

  • Conventional Purchase Money Loans – this is what comes to mind when most people think of a mortgage. In a conventional loan, a buyer makes a down payment – usually between 10% and 20% – and the lender funds the balance of the purchase price as a long-term, fixed, or variable-rate purchase loan.
  • FHA Purchase Money Loans – FHA loans are similar to conventional money loans, but usually have much lower down payment requirements, around 3.5% of the sales price. These loans are typically popular with lower-income homebuyers and are insured by the Federal Housing Administration (FHA).
  • VA Purchase Money Loans – VA (Veterans Affairs) loans are available to active and non-active military members and veterans. Typically, they require no down payment, though a borrower may still choose to put one down in order to reduce their monthly mortgage payment.
  • Private Money Purchase Loans – these are loans issued by a private lender to purchase rental, investment, or any other type of commercial property. As mentioned above, these loans are based more on the asset itself, and are an excellent option if a credit score or financial history disqualifies a borrower from qualifying for a traditional commercial real estate purchase loan.

Understanding Purchase Loans & Lenders

It’s important to understand the basics about lending – whether you’re thinking about buying a piece of property with a traditional long-term purchase loan, or you are interested in alternative funding options like hard money purchase lending from Lionshare.

Regardless of the type of financing you need, you don’t want to pick just any lender. You want a lender with a proven track record of successful loans and a customer-centric approach. We’re proud to have both at Lionshare.

Our executive team has a combined 40+ years of experience in the private money industry. They’ve built a reputation for themselves as premier lenders through their client’s continued success in all parts of the commercial real estate business. Call Lionshare Lending now at 855.505.LEND to get your private money purchase loan started.

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