What is an investment property loan?
A mortgage for the acquisition of an income-producing properties is known as an investment property loan. This includes purchasing properties for rental income or to remodel and resell for a profit (also known as home flipping). There are also temporary hard money investment loans, which allow you to purchase properties that you intend to fix and resell soon.
Investment property loans are debts that you can use to purchase a property from which you intend to earn income. You would accomplish this by renting it to one or more renters who pay you rent on a monthly basis. In general, you can use an investment property loan to purchase a property with one to four units. You may be eligible to purchase the following categories of properties:
- Single-family dwellings
- Duplexes and triplexes are examples of multi-family dwellings.
- Townhomes or condominiums
- Manufactured housing
There are also property acquisition loans available for real estate investors who want to flip houses. Rather than earning a consistent stream of passive revenue, flippers seek to purchase an asset at a low price, repair it, and then resell it at an increased cost to profit.
Requirements for investment property loans
Lenders view investment property loans as riskier than primary residence lending. As a result, the necessary conditions demand that you demonstrate greater financial stability. Specific requirements for investment property loans involve:
- Increased down payments: If you plan to live in one of the units, you can purchase a multiple house with an FHA or VA loan for only 3.5%. Although conventional rules allow for rental housing down payments as low as 15%, most lenders demand at least 20%. And the funds must be entirely yours – gifts are not permitted when purchasing a rental home under traditional criteria. Down payment donations are permitted, however, for VA and FHA multiple property acquisitions.
- Reserves: These monthly payments, sometimes known as “mortgage reserves,” are what the lender wishes to see in the bank. Depending on how many homes you own, the amount is normally equal to two to six months’ worth of mortgage payments.
- Proof of rental revenue: The lender may need copies of present leases, a rent roll history, and rental income tax returns. In most circumstances, the evaluation will also involve an analysis to validate what comparable houses in the neighbourhood rent for.
- Using rental income to qualify: To qualify, lenders may enable you to include the actual or expected rental revenue from the home you’re buying. For example, FHA and VA multiple loan standards will include rent payments from units you do not live in as part of your qualifying income.
- Property management expertise: Some lending programmes ask you to document or justify your experience renting out properties. Others may want tax returns demonstrating that you have previously handled rental properties.
- Higher credit score requirements: A minimum credit score of 640 is required for an investment property mortgage, with the need increasing to 700 or higher if you’re purchasing a multifamily residence.
Types of Investment Property Loans
If you want to secure a loan to buy a home for investment, you have several options. Investment property loans are available from banks, credit unions, and online lenders. The type of loan you can get depends on the lender, and the loan conditions you can get are mostly determined by your credit score, income, and the characteristics of the property. The following are the most common types of investment property loans:
Conventional Loans
If you want to buy a single-family house as an investment property, a conventional loan may be your best option. Conventional loans can provide stable rates and lengthier loan terms, but the lowest rates will usually require a higher credit score.
FHA Loans
The Federal Housing Administration, also known as the FHA, allows you to use FHA loans to purchase investment properties with up to four units. There is one requirement: you must have lived in one of the units for a minimum of twelve months to be eligible.
VA Loans
Veterans and military personnel can use the VA financing programme to buy investment properties with up to seven units with no money down. Homeowners must live in one of the apartments to qualify, like with FHA loans.
Owner Financing
Owner financing is a less common method of purchasing an investment property. In this form of transaction, you borrow money from the seller and repay it on a defined schedule. You may be required to make a big balloon repayment at the end of the term under this sort of loan agreement.
Home Equity Loans
If you possess a home with sufficient equity, you may borrow against it to purchase an investment property. A home equity loan gives you a lump sum of money that you can use to purchase a second house to rent out. Home equity loans, like first mortgage loans, can have fixed rates and long durations.
Hard Money Loans
To purchase fix and flip houses, hard money loans or bridge loans are more typically used. You can acquire the funds you need to buy and repair a home using these loans, but you must normally repay it within a period of twelve to eighteen months.
When looking for an investment property loan, it’s critical to first examine the minimal qualification standards. This might assist you in eliminating loan possibilities that aren’t a good fit. Once you’ve narrowed it down, you may compare interest rates, down payment demands, fees, and loan conditions.
Pros & Cons of investment property loan
Pros
Income Potential
While it may take some time to enjoy the benefits of acquiring an investment property, those who are willing to wait for excellent returns have the opportunity to produce significant income flow. Many people prefer to invest in real estate for the income potential.
Appreciation
While it may take some time to enjoy the benefits of acquiring a property for investment, those who are willing to wait for excellent returns have the opportunity to produce significant income flow. Many people prefer to invest in real estate for the income potential.
Tax Breaks
Buying an investment property has tax advantages. Many expenses related to owning an investment property can be deducted, including mortgage interest, taxes on property, insurance, and the cost of periodic maintenance/repairs.
Cons
Initial Capital Required
To get a rental property up and running, you’ll need a substantial sum of money. For investment homes, the minimum down payment is 15%, and you must have six months of “reserve” funds on hand to pay for the mortgage in the event of a financial emergency. After buying the home, repairs or improvements may be required to make it appealing to potential tenants.
Time
Managing a property for investment can take a lot of time. You must select reliable tenants, ensure that rent is paid on time, and execute any necessary maintenance or repairs. You might employ a property manager to handle things for you, but this will often cost you 8-12% of the monthly rental income.
Liquidity
Because property is not a liquid asset, you’ll have to sell it if you need money. It can take many months to list and sell a house, so you won’t have instant access to your funds.
How to get an investment property loan
Obtaining an investment loan necessitates a few more steps in the loan agreement procedure.
Look for an investment property mortgage lender by doing the following:
Most lenders provide some form of investment property loan, however the prices vary greatly amongst organisations. Because not all lenders provide non-QM loans, you may need to make additional calls if you require one. Hard money lenders are typically private people or partnerships; seek referrals from your property agent or other real estate investors.
Complete a loan application:
The application process for an ordinary financing programme, such as a conventional, FHA, or VA loan, is comparable to that of any other type of loan. Non-QM borrowers and hard money lenders, on the other hand, may have their own method or application system.
Provide more asset documentation:
Bring at least two months’ worth of bank statements, as well as any current leases or rental information for the property you’re buying. Lenders often allow you to apply an amount of your pension or 401(k) vesting to your reserve demand, so keep a recent statement on hand.
Pay for an investment evaluation:
A report showing the mean rent collected on similar properties in the region is required as part of the home appraisal procedure. The rental revenue from this report may be used to assist you apply for the loan in some situations.
Examine your final disclosure:
After your loan conditions have been met and the appraisal has been completed, the lender will send you a closing disclosure three working days before the close. Examine it to ensure that all of the figures are as expected. Make sure you comprehend any prepayment fees or “guaranteed interest” terms if you take out a hard money loan. Hard money lenders typically aim to make a certain amount of interest regardless of the speed at which you repay the loan.
Collect your funds and close:
For your closing monies, you’ll wire or provide a cashier’s cheque. After you sign the mortgage closing paperwork, your loan funds are received and the real estate is recorded in your own name.
