Investors in real estate investment properties use other people’s money to acquire and own new assets. They buy new properties using money they loaned from the banks or credit unions. They then use the rents paid by their tenants or lessees to pay for the monthly payments on their loans. It’s a very sound business and investment strategy.
It’s often more difficult to get a loan for a commercial building or apartment complex than it is to get approved for a loan to finance a rental residence. Banks and lenders think investment property loans are riskier. Investors are more likely to walk away and give the keys to the banks if they don’t earn anything from their investment. You can read on to know more information about choosing the right investment property loan. Here are the different types:
- Conventional Loans
The kind of loan for an investment property that most people are familiar with is the conventional loan. They’re one of the most common and popular products of traditional banks, credit unions, and other traditional lending institutions. If you know a mortgage broker, they can also help you find the lenders with the best rates since they’ve dealt with numerous banks and lending institutions.
The federal government does not support a conventional lending mortgage. The typical conventional mortgage conforms with the guidelines of Fannie Mae or Freddie Mac. For an investment property, lenders usually require a down payment of 30%. Fannie Mae and Freddie Mac allow every lender up to 10 mortgages, but banks won’t give you more than four loans.
In a conventional loan, lenders will factor in your credit score and credit history to decide whether they should give you a loan or not. To a large extent, they also determine the interest rate they’re going to give your mortgage.
When they do the math, they won’t include yet any future or potential income that you’d be expecting from the rents of your investment property. They’ll compute for your debt-to-income ratio and your numbers should show that you have enough cash for about six months to pay for both mortgage and investment property loan.
- FHA Loans
If you’re looking for lower credit score thresholds and lesser down payment requirements, you can try getting a loan from the Federal Housing Administration (FHA). If you already have rental incomes from an existing investment property, you can tell them about it to improve your chances of getting approved.
Typically, investors in multifamily residential buildings use FHA loans. They frequently utilize the funds to purchase a new property, fund the building of a new investment property project, or transform an existing property into a rental property. But the investor has to show or at least make it appear that they’re going to stay in one of the units as their primary residence for one year. This is a requirement to qualify for the FHA multifamily loan.
- VA Loans
Another option for investors is to get a multifamily loan from Veterans Affairs (VA). This is a loan product offered by banks, credit unions, as well as mortgage brokers. If you’re a veteran, a service member still in active duty, or an eligible spouse of either category, you can get a VA mortgage guaranteed by the U.S. Department of Veterans Affairs.
Getting a VA loan to buy a property for investment properties has very unique advantages. With a VA loan, you won’t be asked for a minimum downpayment. They won’t ask you to meet a minimum credit score either. You can also get approvals to buy up to seven units of investment properties. But like the FHA loan, you have to use one as your primary residence.
- Fix And Flip Loan
Fix-and-Flip Loans are another alternative for people who would prefer to make money from selling their investment property than from rental revenue. This investment is more appealing to some investors. Instead of waiting for monthly rents, they may benefit right immediately from the lump sum cash when the property is sold. However, the interest rates for flip loans are often substantial, ranging from 18% to 30%. Flip loan origination and closing expenses are often greater than those for traditional loans. At the end of the day, you make less money.
It’s typically easier to get approved for a house flip loan than for a conventional loan. Lenders will still look into your credit score and credit history, but they’ll be more focused on determining whether it’s likely for you to clear some profits from the repair you’re planning to do. They compute for the after-repair value (ARV) of your proposed flip to evaluate whether or not you’ll be able to pay back the loan. A flip loan also takes just a few days to get approval compared to a conventional mortgage loan which could take weeks or months.
- Portfolio Loans
A portfolio loan is given by a single lender to a single borrower who invests in many single-family or multifamily residences. Each property is given a separate loan approval. But the same lender can give a ‘group discount’ to the borrower for getting loans from the same borrower for all the separate properties included in their loan portfolio. Lenders can arrange the down payment required, interest rate, credit score, and loan term, in such a way as to meet the capacity and needs of the borrower.
Borrowing To Buy And Own
Investing in real estate investment properties may be highly profitable, especially if the investor understands how to get the most out of the bank, credit union, and other lender loans. They can use investment property loans to borrow money to purchase a property that they will someday own. All of the rental property’s revenues become their income after the loan is paid off.
