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Investment Properties - In this type of loan, the borrowing customer is clear that he does not intend to actually live in the property, although it frequently is for a residential property. Instead, the applicant is operating as an investor. Such loans are applied for by people who want to own a second or third home or a rental property. Not typically supported by the government, such loans fall under more scrutiny by banks and tend to have higher interest rates. Much depends on the borrower's income and ability to show he can manage the new mortgage as well as existing liabilities. Such loans will typically finance two-thirds of the cost of a home purchase. A significant down-payment tends to also be required. Home-Equity Loans - Also known as second mortgages, home-equity loans count as a residential loan but are not for the purpose of buying the given property per se. Instead, this financing vehicle lends new money against the person's amount of ownership in the home or property. For instance, after paying the first mortgage for a while a homeowner has now paid down about 40 percent of his original loan. This means he has 40 percent equity in the property, roughly speaking. He can borrow against that ownership with a new loan, ergo the home-equity loan. Many borrowers use such loans for remodeling or fixing up the owned home as well as making big non-property purchases like a new car or a vacation. However, a problem exists with the value of equity. Homes values don't stay flat; they fluctuate. So a home bought for $300,000 eight years ago may be worth $235,000 total in 2011. Ergo, there has been a loss of equity value. If $250,000 is still owed on the loan, then effectively the home is "underwater" or the equity value is below the liability. In such cases, no equity lending can occur because the home is the collateral for the first loan. No equity ownership exists to lend against with a new residential loan. Residential Construction Loans - on the building side of the picture, loans exist for those who want to custom-build a home. This type of residential loan is actually a two- step process with two different loans. The first loan finances the construction effort. It pays for the materials, labor, fees and permits to build the home as well as the property purchase. The second loan pays off the first one and finances the actual payment for the home ownership. While a bit complicated, this process works better for a lender's concern that not too much money goes out the door until there is collateral to collect against (i.e. a built home). Commercial Residential Loans - such loans tend to be for developers who intend to build multiple residential locations or multiple resident-occupied buildings such as apartments. These financing projects are basically approached as business ventures, and lenders pour over significant amounts of data to make sure the project will be able to pay its costs back. Many times developers have to seek the aid of private capital investors with more demanding terms to get the financing needed.
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