You can purchase a home to rent for additional income, or flip it and make a profit. These loans have higher entry requirements than traditional mortgages and offer higher interest rates. Consider shopping around for the best rental property loan lender.
What is an investment property?
A property that you can rent out or flip for profit is considered an investment property.
A house, condo, apartment, manufactured property, or condo can be considered a rental property even if you only live there for part of the year. Investment properties are usually residential properties of one to four units, rather than commercial properties such as shopping centers and apartment complexes.
What is an investment property mortgage?
Higher mortgage rates for investment property loans are available. They also have stricter lending criteria than standard mortgages. This generally includes a higher down payment amount and higher down payments.
A down payment of 15%-20% is required to qualify for investment property finance on a single-family house. Depending on the lender, you might be eligible for the 15% lower down payment if you have excellent credit. Multifamily rental property loans require a 25% downpayment.
A loan for investment property varies from a mortgage to purchase a vacation home. Vacation homes have a lower loan requirement than investment property loans. A vacation home might require a 10% down payment.
A vacation home may only require a cash reserve of two months. An investment property will need at least six months.
A vacation home mortgage is also influenced by the location. The lender might view the purchase of a property as an investment property if it is located too close to your current residence, such as within 50 miles or the next town. In this case, stricter lending criteria would apply.
Renting properties can be funded
Conventional financing for investment properties. If you are looking to purchase a real investment property, a conventional loan is the only way to go. This is a property that you intend to rent out or sell but not live in.
In addition, conventional loans require 15%-25% down depending on the property, and credit scores minimums will be lower than government programs. You’ll still be able to purchase the property with no residency requirements.
Multiunit FHA financing. Loans backed Federal Housing Administration (FHA). These loans are appealing if you don’t have the funds or your credit score is below 620.
An FHA loan to invest in property is less expensive than traditional loans. You can also use rental income as collateral. However, there is one catch. You must live at the property for at least 12 months.
VA multiunit financing. The U.S. Department of Veterans Affairs (VA), does not require a minimum credit score nor a down payment for loans.
A VA loan can be used by eligible spouses, veterans, active-duty military personnel, and eligible spouses to purchase a property that has up to seven units. This includes one for business. The borrower must reside in one of the property’s units.
Other financing. You might have a large down payment and great credit but don’t want to go through the lengthy income documentation required by institutions lenders. A banker or Beverly Hills mortgage broker may be able to offer you a loan with a debt service ratio.
This alternative loan will carry a higher interest than other financing but may have a lower monthly cost and a simpler loan process. You will need to have a good credit score, a downpayment of 25%-30%, and proof that your monthly rental income meets or exceeds your monthly loan payment.
Where can I find investment property loans
There are a handful of options available when searching for an investment property mortgage. There are many investment property lenders:
- Banks
- Credit unions
- Online lenders
- Hard money lenders
Traditional lenders for rental properties — credit unions, banks and online mortgage lenders — will review your credit and assess your finances to determine if you are able to repay an investment loan.
Hard money lenders, on the other hand are private investors who specialize only in real estate lending. Although they may be willing to finance property without a credit check or a mortgage application, you will pay a higher interest rate for their leniency. Additionally, you’ll have a shorter repayment term than traditional investors property lenders.
Moreover, hard money lenders may also charge prepayment penalties and other fees. They typically require a larger down payment, sometimes as high as 30%.
A hard money lender may be able to finance a house flip in some cases. Burgess stated that they are able to work with shorter deadlines and give you a small margin of error in completing a fix-and flip sale. Failure to pay the loan on the due date will result in default and the property being put up for foreclosure.
Requirements for investment property loans
An investment loan is similar in structure to a mortgage, but with more stringent requirements. Let’s take a closer look at the lending guidelines for rental property loans.
Deposit payment
You will need a 15%-20% downpayment to purchase a single-family investment property. This depends on your credit rating. You will need to deposit 25% to purchase multifamily property.
If you intend to live in the property, the down payments required for a mortgage on a rental home are lower.
Let’s suppose you buy a townhouse that has two units. You will live in one unit and rent the other. Because you will be living on the property, it may be possible to pay only 15%.
Think about an FHA loan, VA loan for multifamily property if you are looking for a lower down payment for your investment property. Let’s suppose you are looking for investment property loans that require 10% down, but you don’t have the funds to pay a downpayment.
Your down payment on a rental property can be as low at 3.5% for FHA loans and as low as 0% for VA loans, provided you are willing to live there.
Qualifying rental income
Potential rental income may be used to help you qualify for a loan. Lenders will credit $0.75 per dollar using the current rate, taking into account rental income.
If the market rate for a rental comparable to the one you will own is $1,000 per month, the lender will add $750 per month to your income information.
Credit score
A lender will be more flexible in granting you down payment requirements or interest rates if your financial profile is stronger. For investment property financing approval, you need to have a high credit score and six months of cash reserves.
Conventional loans for investment properties are best if you have a credit score of 680 to 700.
If you intend to deposit 15%-20%, you will need at least 680. You can deposit 25 or more, but the reserve requirements might be higher.
Cash reserves
It is essential to have a six-month cash reserve in case of emergencies and repairs. You are responsible for maintaining, repairing and holding the property.
There will be times when you don’t have a tenant, so it’s important to be able and able to handle this time without any problems.
The type of investment property loan you take, the number of investments properties that you have and your financial history will affect how much reserve you need.