Real estate investing offers lucrative potential, yet the initial steps can be daunting, especially from a financial standpoint. This is particularly true as many mortgage solutions may restrict the purchase of investment properties or homes where the buyer does not plan to reside. Additionally, leveraging anticipated rental revenue for loan qualification can pose further complications as many traditional lenders might not permit this. Luckily, there are specific investment property loan options available to assist.
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The term “investment property loan” encompasses various mortgage options intended to finance the acquisition of rental properties, properties for flipping, or other real estate intended to generate income.
While some standard mortgage options permit the purchase of income-generating properties, not all do, and there may be additional stipulations.
When you decide to finance an investment property, there are numerous choices. The best option will be influenced by your lender, your financial status, and your investment objectives. The following are some alternatives:
You can consider standard mortgages to finance the acquisition of investment properties, whether they be single-family homes or multi-unit housing. Typically, a debt-to-income ratio (DTI) of no more than 45% is required to qualify, and buyers must not have any ties to the builder, developer, or seller, especially for new constructions.
Renovation Loans
Renovation loans cater specifically to those looking to buy, refurbish, and sell a property for profit. These loans cover both the acquisition costs and the renovation expenses in one package. They generally have short-term durations, necessitating repayment within a few years, typically after the property is sold.
Alternative mortgage options—or non-QM loans—are a category of mortgages that do not need to comply with the typical loan requirements set forth by the Consumer Financial Protection Bureau. This grants lenders additional flexibility in determining who qualifies and the amounts they may lend.
Diverse variations of non-QM loans that investors might find appealing include:
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Loans based on bank statements: These enable qualification based on banking trends instead of conventional income documentation like pay stubs or tax returns.
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Debt Service Coverage Ratio (DSCR) loans: These allow qualification based on the expected cash flow of the property, eliminating the need for income or employment details.
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Asset-based loans: These assess your total liquid assets for loan consideration, disregarding your employment, income, or DTI ratio.
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Profit and loss loans: These eligibility amounts are determined by your business profit and loss statements over a defined period, which can benefit seasoned real estate investors or small business owners.
Depending on your financial condition, various other non-QM loan types may also suit your needs. Consulting with a mortgage adviser can be an invaluable step in identifying the most fitting product.
A temporary loan serves as a short-term finance tool, typically structured over several months to a year. Such loans can be ideal for those transitioning between properties, providing necessary funding until the proceeds from one sale are secured for a subsequent down payment.
Cumbersome loans share similarities with temporary loans but often hinge less on your credit standing. If a temporary loan is unattainable due to your credit history, a cumbersome loan may serve as an appealing alternative. While they can be hard to find through typical financial institutions, many private lenders offer them as viable options when other mortgage paths are obstructed.
Equity Loans and HELOCs
<pIf you possess additional properties, equity financing options can be an excellent way to fund new investments. These options enable you to tap into the equity from your current property to finance your upcoming acquisition.
You can even pair these with various mortgage choices—using the equity option for a down payment while applying another loan for the rest of the purchase price.
An alternative is a credit facility against equity (HELOC), which resembles a home equity loan yet allows for staggered withdrawals like a credit card as opposed to a lump-sum payment.
Learn more: Comparing home equity loan and HELOC
Acquiring an investment property through an FHA loan option is theoretically feasible, though restricted to certain situations. For instance, you can rent out your first residence while relocating for work if you’ve resided there for at least twelve months. Alternatively, purchasing a multi-unit residence where you live in one of the units is another qualifying scenario.
Should you possess or plan to use an FHA loan for a property you wish to convert into income generation, consult with your FHA mortgage specialist regarding potential options.
Investment loans come with their unique challenges, as lenders exhibit heightened caution. Investors depend on the property’s income stream to cover mortgage obligations, which can lead to difficulties should there be vacancies or unpaid rents.
Additionally, investors often invest less ‘skin in the game.’ Unlike buyers needing a primary residence, investors may lack a personal attachment to properties, potentially increasing the likelihood of default during financial hardships.
This reality means that investment property financing may entail stricter criteria:
Expect to pay a higher interest rate to help offset lender risks associated with investment loans. Individually, you might find investment mortgage rates ranging from 0.25% to 0.75% higher compared to standard mortgages. This differential can lead to increased monthly payments and a significant impact over the life of the loan.
Discover strategies for securing the best mortgage rates.
Furthermore, lenders may demand larger down payments for investment properties. Such a requirement ensures that borrowers commit more capital to the deal, which lessens the lender’s exposure in the event of a default.
Be prepared for down payments of at least 15% to 25% of the property’s purchase price, compared to a much lower 3% to 3.5% down payment usually expected with standard loans.
Lastly, anticipate needing a more substantial cash reserve to secure your investment loan. Such funds act as a financial cushion for months where mortgage obligations may be challenging to meet (for instance, in the event of tenant payment delays). As reported by U.S. Bank, you might require a reserve equivalent to up to 12 months’ worth of mortgage payments.
A wide variety of banks and mortgage lenders provide investment loans. You can read Yahoo Finance reviews for guidance on popular lenders that offer specialized loans for real estate investments:
Seeking out specialized lenders for investment properties is another option. Companies such as Angel Oak Mortgage Solutions extend a variety of non-QM loans tailored for purchasing investment properties, including options like bank statement loans and DSCR products. Other options include Griffin Funding, Visio Lending, and Kiavi, which also specialize in investor-favorable loan programs.
The application procedure for securing an investment property loan parallels that of a conventional mortgage. You’ll need to complete the lender’s application, submit relevant documentation, and arrange for a property appraisal.
In certain situations, lenders might require supplementary financial records or clarify aspects of your background as a landlord or investor during the application process. If you already manage rental properties, you may also be asked to provide copies of existing lease agreements and demonstrate the history of rental income from your tenants.
Learn about rental property refinancing.
Securing a loan for investment real estate generally entails higher down payments and more liquidity reserves compared to traditional mortgages. Furthermore, a higher interest rate is commonplace, though precise requirements and terms hinge on the mortgage lender you select.
While down payments below 20% may be possible, it often greatly depends on individual lender policies. In the realm of investment property financing, expect to present a more substantial down payment relative to financing a primary home.
Your credit score’s requirements vary, but typically range in the mid-600 to 700s for most investment-oriented loan products.
Many types of loans are available, yet the best one will be dictated by the specific real estate you’re acquiring, your property investment objectives, and your overall financial landscape. A mortgage expert can assist you in identifying the ideal loan type tailored to your specific situation.
Laura Grace Tarpley has reviewed this content.
