Real Estate Investing Real Estate Financing Strategies 3 β Questions and Answers
Question 1: What is seller financing (also called owner financing)?
- The seller acts as the lender and the buyer makes payments directly to the seller (Correct answer)
- A bank finances the sale on behalf of the seller
- The seller pays the buyer's closing costs to facilitate the deal
- A government program where sellers receive subsidized interest rates
Correct answer: The seller acts as the lender and the buyer makes payments directly to the seller
In seller financing, the seller extends credit to the buyer, who repays in installments, bypassing the need for a traditional bank mortgage.
Question 2: What is a balloon payment in real estate financing?
- A large lump-sum payment due at the end of a loan term (Correct answer)
- An extra monthly payment made to reduce principal faster
- A penalty fee charged when a loan is paid off early
- An adjustable rate increase triggered by market conditions
Correct answer: A large lump-sum payment due at the end of a loan term
A balloon payment is a large final payment that comes due at the end of the loan term, common in short-term or seller-financed deals.
Question 3: Which government-backed loan program is specifically designed for purchasing and rehabilitating a fixer-upper?
- FHA 203(k) loan (Correct answer)
- VA IRRRL loan
- USDA Rural Development loan
- Fannie Mae HomeReady loan
Correct answer: FHA 203(k) loan
The FHA 203(k) loan allows buyers to finance both the purchase price and renovation costs into a single mortgage backed by the FHA.
Question 4: What is a hard money loan's most defining characteristic compared to a conventional mortgage?
- It is asset-based, with terms and approval driven primarily by the property's value (Correct answer)
- It requires a higher credit score than any conventional loan product
- It offers the lowest interest rates available in the market
- It is issued exclusively by the federal government
Correct answer: It is asset-based, with terms and approval driven primarily by the property's value
Hard money loans are collateral-based, meaning approval depends on the property's value (especially ARV), not the borrower's creditworthiness.
Question 5: In real estate, what does 'ARV' stand for and why is it critical for investors?
- After Repair Value β the estimated value of a property after renovations are complete (Correct answer)
- Annual Rental Value β the yearly rent a property can generate
- Adjusted Rate Value β the rate on an ARM after the first adjustment
- Asset Reserve Value β minimum cash reserves required by a lender
Correct answer: After Repair Value β the estimated value of a property after renovations are complete
ARV (After Repair Value) is used by investors and hard money lenders to determine how much to lend and what profit margins are achievable after renovating a property.
Question 6: What is a bridge loan used for in real estate investing?
- Short-term financing that bridges the gap between purchasing a new property and selling or refinancing an existing one (Correct answer)
- A permanent loan that bridges the gap between construction and stabilization
- A government program bridging the affordability gap for first-time buyers
- A type of loan that bridges two different lenders on the same property
Correct answer: Short-term financing that bridges the gap between purchasing a new property and selling or refinancing an existing one
Bridge loans are short-term, interest-only loans that provide quick capital while an investor arranges longer-term financing or completes a sale.
Question 7: What is the typical loan-to-cost (LTC) ceiling most hard money lenders apply on fix-and-flip projects?
- Around 90% of total project costs (purchase + rehab) (Correct answer)
- Up to 110% of purchase price only
- Exactly 100% of the after repair value
- No ceiling β hard money lenders lend unlimited amounts
Correct answer: Around 90% of total project costs (purchase + rehab)
Most hard money lenders cap at roughly 90% LTC or 70β75% of ARV, whichever is lower, to ensure adequate equity cushion.
Real Estate Investing Real Estate Financing Strategies 3
What is seller financing (also called owner financing)?