Investing in real estate can be fun and profitable.
However, when it comes to financing an investment property there are fewer options available.
Many of the mortgage programs you may have heard of are only available to borrowers looking to purchase a primary residence.
In this article we’re going to discuss some loans best for investment properties and give you some tips to getting the best possible deal.
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Investment Property Loans
There are far fewer options for financing an investment property or rental property. FHA loans and VA loans are for your primary residence and are not available for an investment property.
In order to get financing for an investment property you need to turn to conventional loans or hard money loans.
A conventional loan is home loan that is not backed by the Government and is often times sold to Fannie Mae or Freddie Mac. Conventional mortgages are available for second homes and investment properties. They require a credit score of at least 620-640 and a down payment of 5%-20% in most cases.
Conventional loans come with several different types of mortgage terms. 30 year and 15 year fixed rate mortgage loans are the most popular for investment properties. There are also adjustable rate mortgages, like a 5/1 ARM that come with a really low initial interest rate for the first 5 years of the loan.
Cash-out Refinance and Home Equity Loans
If you have built up equity in a home, you can use that equity as collateral for a new loan. A home equity loan is a second mortgage on a property that allows you borrow up to 80% of the market value of the home. Home equity loans and HELOC have low interest rates, much lower than many other types of loans.
A cash-out refinance is similar to a home equity loan, except, instead of getting a second mortgage you are refinancing the loan balance plus up to 80% LTV of the property into a new loan that requires just a single payment.
Both of these types of equity loans are a way you can borrow more money at a low interest rate to help you fund more investment properties.
Hard Money Loans
A hard money loan is a short term investment property loan that is quicker and easier to qualify for than traditional mortgages. Typically, a hard money lender will lend up to 70% of the after repaired value (APR) of a property. APR is the estimated market value of a home after all repairs have been made.
You can qualify for a hard money loan even if you have credit issues or undocumented income. However, they do have high interest rates, usually between 10-15%, and have to be repaid within a year.
Hard money loans are good for flipping properties, but are not a solution for long-term rentals because of the high interest rates.
A portfolio lender invests in real estate mortgages and doesn’t sell them to Fannie Mae or Freddie Mac. They hold onto the mortgage loans and collect interest. A portfolio loan may come with higher interest rates and less desirable terms but can still be a good way to obtain financing for investment homes.
Using Rental Income
Your debt-to-income ratio (DTI ratio) is the ratio of your monthly income compared to your monthly debt obligations.
Your DTI ratio cannot exceed 43% for most types of mortgages. However, you may be able to count your rental property income.
The monthly rent you collect each month from your rental properties can be used as income for a new loan as long as you have been collecting rent for 6 months on the property.
Tips to Financing Investment Properties
Improve Your Credit
Your credit score is one of the biggest factors in determining not only whether or not you get a mortgage, but the interest rate you receive on that mortgage. Making sure your FICO score is as high as possible will improve your chances of qualifying with the best possible rate.
Increase your credit scores by paying down your credit card debt as much as possible. Try to keep the balances on your cards below 15% of your credit limits.
Have a Large Downpayment
A large downpayment not only improves your chances of getting approved for a home loan, it can help you get better loan terms.
Mortgage insurance is required for loans with a loan-to-value ratio above 80%. By putting 20% or more down, you can avoid PMI, saving yourself thousands of dollars per year.
Using cash to purchase investment properties is a luxury most real estate investors don’t have. But if you have the cash flow then cash is king and you won’t have to worry about juggling mortgage payments and hoping you can get approved for loans.
The Bottom Line…
Investing in real estate is a great way to make significant income whether you are flipping home or buying rental properties.
You sometimes have to be creative when it comes to getting financing for your investment properties. There are several options out there, from conventional loans to hard money loans.
Be careful not to spread yourself too thin, taking on too many mortgages at once can be a problem if your rental properties don’t have tenants.
Are you ready to start investing in real estate?
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