29 Jan What are Your Mortgage Options When Buying an Investment Property?
Getting investment property financing is never easy. If you are planning on buying a property for investment, you may be wondering how and where to get financing.
Clearly, if getting capital was easy, everyone would own an investment property. So, what do successful investors in the real estate industry do? How do they amass properties and make a profit? Or better yet, how do they get real estate investment financing?
The long and short answer would be mortgaging.
But before deciding on which mortgage type to use, you must first acquaint yourself with all possible options.
This post offers you an in-depth look at what you need to do to get financing for your investment and all the available investment property loans.
Tips on how to find the best investment property mortgage
When it comes to finding great mortgage deals, there’s no specific way to go about it. Different investors have different views, needs, and requirements. Fortunately, there are a few shared tips and tricks you can use. Here are some of them.
- Do your research first.
To find the best mortgage deals, you have to compare your offers. Do your legwork. This means shopping around for reasonable investment property mortgage rates from multiple mortgage providers. This not only helps you to find the best rates but also helps to learn more about the lender that you are going to dealing with.
- Make a larger down payment.
Yes, in some cases, the bigger the down payment for the investment property, the smaller your mortgage interest rate will be.
- Make sure you have at least six months’ cash reserves saved up.
That’s because this is sometimes a requirement when applying for an investment property mortgage. Lenders need to know that you have a backup reserve should anything happen.
- Determine the amount and type of loan you are looking for.
Know what property you are buying and how much you will need to spend. Being prepared for any outcome is always the best way to ensure you don’t get caught off-guard. Make provisions for events that may increase your budget to avoid running out of cash.
- Read and understand the terms of the loan.
Many first time investors often fall prey to hidden/additional fees and insane interest rates. All because they didn’t take the time to read through their contract’s fine print. Understand the terms of your contract, and if unsure, always ask.
- Stick to what you can afford.
In real estate, failing to stay within your budget can be a risky move. That’s because cost overruns can easily derail your investment plan. And that’s something you do not want to happen.
That being said, what are your mortgage options when it comes to investment properties? Read on to find out.
Five best types of mortgage options for investment properties
There are a number of rental property loans you can apply for to help you purchase a property. Unfortunately, some of them are tailored to benefit the lender more than the applicant.
That’s why you need to know how each loan works in order to find the best one for you.
Here’s a list of five investment property mortgages for you to consider.
1. Investment Property Mortgages
Aside from being expensive, investment property loans are not often easy to come by. That’s because they come with tons of limitations disguised as requirements.
For instance, lenders often prioritize applicants with:
- Higher credit ratings
- Sufficient and compelling documentation including tax returns, pay stubs, and W2s
- Impressive debt-to-income ratios
- A +20% down payment
- At least six months’ worth of cash or asset reserves
Generally, very few people will be able to meet these investment property loan requirements. If you do meet them, then count yourself lucky.
Also, for investors with at least four mortgages, getting another mortgage can be an uphill battle. Most lenders shy away from people with more than four ongoing mortgages; even if a government agency like the Federal Housing Administration (FHA) insures the loans.
2. Conventional Mortgages
Conventional loans are offered by private lenders including banks and private mortgage companies. Moreover, they are relatively cheaper than investment property mortgages and hard money loans.
In many ways, conventional loans are tailored to conform to most Fannie Mae and Freddie Mac guidelines.
Unlike investment property mortgages, conventional loans accepts high-risk applicants. But, the riskier the application, the higher the interest rates, fees, and the down payment requirements.
That means that applicants with poor credit scores, bad debt-repayment histories, and low loan-to-value (LTV) can still get loans, but it would cost them more.
3. Hard Money Loans
Hard money loans are great for people who have no issues with paying high-interest rates. Just like payday or bad credit loans, hard money mortgages are offered by private entities.
These investment loans are often short-term and have fewer requirements to meet. Additionally, approval and disbursement are processed swiftly.
Generally, anyone qualifies for these types of loans, regardless of how many mortgages they have. The only disadvantage to this type of mortgage is the high costs associated with it.
4. FHA Loans
This is often the best mortgage option for new investors trying to finance their rental property. An FHA loan is ideal for first-timers because it has very generous terms and rates.
The catch is that FHA loans are given to investors who plan to reside in the rental property – in other words, the investment property should be owner-occupied.
Also, FHA loans employ a different approach than other kinds of loans. Basically, the FHA doesn’t issue loans directly. Instead, they insure loans issued by private lenders against losses.
This gives lenders more incentives to issue high-risk applicants with a loan. Also, the requirements are more lenient and accommodating.
The best part is that the down payment on properties with less than four units can be as low as 3.5%.
5. Veterans Authority (VA) Loans
If you are a veteran or currently serving, then a VA mortgage would be your best option. That’s because this loan doesn’t have a down payment requirement. Moreover, their mortgage rates are quite generous.
But just like an FHA loan, the owner should reside in one of the rental units (for at least a year).
The only disadvantage worth mentioning is that the VA expects the property to be ready for occupancy and has to be inspected by a VA home appraiser for a loan application to be approved.
In conclusion, there are other ways of getting funds to finance the purchase of an investment property; including Home Equity Line of Credit (HELOC) loans and in rare occasions, seller financing.
All you need to do is to carefully analyze your options together with the pros, and cons that come with each type of rental property loan. That way, it will be easier to find the right mortgage for your investment property purchase.