Want to get a loan to buy real estate but not sure where to start?

I remember last year, when Ben (my real estate partner and a co-organizer of this meetup) and I were looking for a bank to loan us money for our investment house, I had no idea what I was doing. I just started calling up banks in Florida and pretended to know what I was talking about. I wish I had read this article beforehand:

Seven questions to help you select a lender

It's a nice overview of questions that you can ask to choose the right bank. Also, articles like this are great because people will leave comments and sometimes I learn more from the comments than the article!

To ensure you are updated when new people comment, you'll have to enter a comment yourself. But it can be something as simple as, "Thanks for the info!"

Although this article was prepared for US banks, I'm sure a lot of the questions will also apply to Korean banks, if indeed you're looking to invest here.

Let me know if you found it helpful. If you have any questions, feel free to email.

A few banking terms

Amortization - This refers to the length of time it takes to fully pay back a loan. So, if you get a loan that's amortized over 30 years, that means, if you make all the payments, in 30 years, your loan will be paid off.

Term - This refers to how long the bank loan will be good for. For example, if you get a 10-year term, then your loan will be paid back over in 10 years.

Amortization vs Term - Keep in mind that your amortization schedule and term can be different. Here's an example.

  • Case 1: A 30-year fully-amortized loan (i.e., a loan that will be paid off in 30 years if you make payments). In this case, the loan is amortized over 30 years and the term is also 30 years. After 30 years, you owe the bank nothing.
  • Case 2: A 30-year amortized loan with a 10-year term. In this case, your payments will be the same as in Case 1. However, after 10 years, you will still owe whatever the remaining balance on the loan is (since you'll only have paid off about one-third of the loan because it was amortized over 30 years, not 10). Your balance will be due. At this time, most investors will attempt to get a "new loan" (also known as refinancing), to pay off whatever is still owed.

Why do banks offer an amortization schedule that is longer than the term?

The banks do this so that in 10 years, when you refinance your loan, they can charge you a higher interest rate.

However, since the amortization is longer, your monthly payments end up being less.

Think about in this way: If you had to pay back $30 in 30 days, you could pay back $1 a day and be done at the end of 30 days. But if you had to pay back $30 in 10 days, you'd owe $3 a day.

So, the banks are basically saying, "You can pay the $1 a day rate (amortization), but after 10 days (term), you'll still owe me $20," at which point, the bank might offer you another loan with a different interest rate.

As investors, we'll often be dealing with the "commercial" side of the bank, not the residential side. The commercial side of the bank will rarely give a 30-year fully-amortized loan to an investor. Most likely, the bank might offer a product like this:

20-year amortized loan with a 7-year term

So, the loans that most investors want to get are 30-year fully-amortized loans at low interest rates (about 4%).

If it's your primary residence, then those types of loans are easier to get, and in some cases, you might be able to put down less than 10% as a down payment.

If it's an investment property, you might be able to get a loan like that but likely you'd have to:

  • Put the house in your own name (not under an LLC)
  • Put down a 20% down payment

(Note: If you work with a home builder, a manufactured home provider, or a turnkey specialist, they might have their own in-house financial services, in which case you won't have to deal with an outside bank.)

Adjustable rate mortgage (ARM) vs Fixed rate - an ARM stands for adjustable rate mortgage and it means that the interest rate you pay can go up or down on a periodic basis (e.g., every 2 years, 5 years, or 7 years) based on the prime interest rate at the time (basically, it's related to the rate that the Federal Reserve charges other banks to borrow money).

Fixed rate mortgage - the rate stays constant throughout the term of the loan (doesn't change).

Fannie Mae / Freddie Mac - When a bank makes a loan to a home buyer, they don't keep the loan on their books. Instead, they sell the loan to a big institutional bank like Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are quasi-governmental agencies.

The reason this is done is to encourage banks to give loans by basically "guaranteeing the loans." Banks know that the home loan they made to the homebuyer will be the responsibility of Fannie / Freddie, and therefore, they feel more comfortable giving out the loans.

But to get a "conforming" loan (i.e., one that Fannie / Freddie will accept), you often have to follow some strict guidelines (e.g., a house appraisal, a "live-in" ready house, etc.).

I hope you find this helpful!