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Real Estate Loans – Make Sure You Can Pay Them Off
Generally, the lending industry divides real estate loans into two main categories: commercial real estate loans and residential real estate loans. A residential loan covers houses, units and apartments while a commercial real estate loan covers offices, industrial property, resorts, hotels and other types of real estate that are not residential. Even if you wish to carry out a construction it will depend on the use of the property as to whether it will be classified as a commercial real estate loan or a residential real estate loan.
Security with Your Real Estate Loans
No matter what type of mortgages loan you seek, you will be required to provide security and the amount of the LVR will vary depending on the use to which you will put the property. The LVR means the loan-to-value ratio. This varies from one mortgage lender to another and also varies according to whether you are applying for a 'full-doc.' or 'low-doc.' loan. Full doc. loans are those where the borrower provides all details of their financial position, copies of bank and credit card statements for six months, pay slips and two years of tax returns. A low doc. loan is used mainly by self-employed people who do not have a regular income. These borrowers cannot provide pay slips and are not required to provide income tax returns. However, they do have to provide copies of their bank and credit card statements for the last six months and sign a declaration that their income is of a certain amount. The LVR for low doc. loans is substantially less than that for full doc. loans. No matter what type of loan you apply for, however, it is most important you ensure that you can meet the repayments of the mortgages loan.
Failure to Pay Off the Real Estate Loan
There are many consequences for failing to meet your repayments or to pay off your mortgages loan. The most serious consequence is that the lender carries out a foreclosure. In this case the lender takes authority under the mortgages loan agreement and puts the property on the market for sale. Where this authority is exercised you have no control over the manner in which the property is sold. So long as the lender can prove it has exercised its rights to sell the property under the mortgages loan agreement and it has obtained a 'market' price for the property you cannot stop the sale. The lender then deducts the outstanding loan amount, plus all costs from the sale price and you are paid any amount left over, if there is any. In most cases the lender will sell the property at public auction because it is much easier for them to prove they have sold at a market price by using this method of sale. They are not acting for you, the borrower, when they sell under a foreclosure and they are not required to make any extra effort to obtain the best price.
Another consequence for failing to pay off your mortgages loan is that you will obtain a bad credit rating and it will be very difficult to obtain finance from another lending institution.
Can You Borrow After Defaulting on a Real Estate Loan?
In Australia there have been a number of companies that were willing to provide what are called 'non-conforming loans'. Some people might now call these subprime loans. In any event, these are loans where the borrower may have one or more defaults on loans that are still outstanding or that occurred during the past 2 years. Most banks would not lend to these people although a few select lending institutions would. In fact some specialized in these types of loans. In all these cases, because the risk is higher the lender would charge a higher interest rate. Notwithstanding that, the lender would still insist that the borrower be able to meet their criteria for making the repayments.
Since the financial crises last year, there are fewer of these types of lending institutions and so it would be very difficult, indeed, in today's climate to obtain finance if you have a history of defaults.
