Real Estate Loans

A real estate loan is a type of loan that is secured by mortgage, meaning that the real estate property is used as a security or guarantee for the money that is borrowed. If the borrower defaults or refuses to pay the amount of money he owes, the lender has the right to sell his property as to regain the sum that was loaned.

The Purpose of Real Estate Loans

Borrowers obtain this type of funding from mortgage companies, banking institutions, credit unions, or other financial entities as means to finance the purchase of some property. Loans have different features including loan size, maturity, interest rate, payment methods, down payment, and other features.

Banks normally grant real estate loans as to help customers purchase a real estate property – residential or commercial. As most customers do not dispose of enough cash at hand for their planned purchases, banks and other financial institutions feature mortgage offers.

Basic Components

Although real estate loans vary from one country to another, they have some common basic components. These include property, mortgage, borrower, lender, principal, interest rate, and foreclosure.

A property is a physical or tangible asset that banks or financial institutions finance. Upon the payment of a property, the borrower gets ownership rights over the property but is limited by the mortgage. The latter has to be paid in full and in due time in order to avoid foreclosure. If the borrower defaults on his or her financial obligations, the lender may take possession of the property.

A borrower can be any person who plans to purchase a property. It can be an individual who is looking forward to buying a new home or estate but does not have sufficient financial resources to proceed with the purchase immediately. It may be a business entity in the process of expansion that plans to purchase a commercial property.

A lender can be any financial entity offering real estate loans. The most common example of a crediting institution is the bank. Other lenders include mortgage companies, credit unions, and other financial entities.

A principal is the amount of money that borrowers originally obtain from lenders in the form of a loan. This principal is subject to a previously agreed interest rate: a certain percentage the lender charges for the amount of money owed. The borrower and lender sign an agreement establishing the way in which the loan will be repaid. In terms of real estate policy, the bank establishes regulations determining the maximum amount to be loaned on a certain loan, the maximum aggregate amount loaned in every category, the maximum aggregate amount to be loaned on real estate loans, and the annual amount of amortization that is required. The contract usually requires that borrowers pay off their financial obligations in monthly installments over a certain period of time.


If the borrower fails to pay off the loan in accordance with the agreement, the lender has the right to initiate foreclosure proceedings. This means that the financial institution repossesses the real estate property and sells it to interested buyers as to obtain the amount granted to the borrower. In order to avoid foreclosure, the borrower has to make payments in a timely manner and ensure that he doesn’t default on his financial obligations.