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Your Guide to Investment Property Loans


Jul 26, 2020 by Tara Mastroeni

If you're just getting started with real estate investing, odds are that you don't have enough funds on hand to buy an investment property outright. Fortunately, however, there are plenty of investment property loan options available to help you start building your portfolio. Below is a guide to the different types of investment property loans that are available to investors today. Keep reading to learn which one might be the best fit for you.

The four types of loans for investment properties

Luckily, there are plenty of different financing options available for property investors. While some investors will lean toward more creative methods like owner financing or real estate crowdfunding, below is an overview of the more traditional loan options that are available:

Conventional bank loan

Getting a conventional loan for the property is probably the most common method used by investors. If you own your own home, chances are that you might already be familiar with these loans. A conventional mortgage is simply another term for any bank loan that conforms to the guidelines set forth by Frannie Mae and Freddie Mac and is not backed by the government.

Keep in mind that, while the process of qualifying for a conventional loan is much the same as applying for a loan on your primary residence, you should expect that the qualifying standards will be a bit more stringent this time around. Since you'll likely be carrying an investment property mortgage in addition to a loan on your primary residence, your lender is likely going to want to feel confident that you're financially solid enough to carry both properties.

Hard money loan

There are companies that offer loans specifically geared toward real estate investment. These are known as hard money loans, and, on the plus side, they are often easier and faster to secure than a bank loan. Typically, a hard money lender bases approval for the loan more off of the value of the investment property rather than the investor's income or credit score.

However, it's important to note that this type of investment loan is much better suited for investors who are planning on flipping the property rather than collecting ongoing rental income. Put simply, a hard money loan is a short-term loan. Often, the terms on these loans are around three years. Additionally, be aware that these loans usually come with a much higher mortgage rate than what a conventional lender might be able to offer.

Private money loan

Unlike a hard money lender, someone who is willing to provide an investor with a private money loan is not an industry professional. Rather, this person is just a private individual looking to make a good return on investment. You may be able to find a private lender through your personal network of family and friends or you may connect with someone who travels in the same real estate investment circles.

Typically, these loans are ideal for investors who are unable to qualify for a bank loan. Due to the familiar relationship between the lender and the borrower, the qualifying standards for these loans are often very flexible and the interest rate will likely be favorable. That said, these loans are often secured by a promissory note, which means if you choose not to keep up with the mortgage payment, your lender will likely have the right to foreclose on the home.

Home equity loan

Finally, if you already own your own home, you may be able to access investment property financing in the form of a home equity loan. As the name suggests, taking out a home equity loan allows you to borrow against any existing equity that you have built up in the home. In most cases, homeowners are able to borrow up to 80% of their home's value.

For the most part, all that's required to be approved for a home equity loan is a verification of your home's appraised value as well as your income and credit score. In addition to the streamlined application requirements, the other benefit to this type of mortgage loan is that the interest rate you're given will likely be fairly competitive. However, the downside is that if you stop making payments the lender will have reason to foreclose on your primary residence.

What to consider before taking out a loan for an investment property

Now that you know more about the investment property loan options that are available to you, the next step in the process is to take a closer look at a few different considerations that you'll want to keep in mind before you start the application process.

Optimize your financial profile

Particularly if you have your sights set on getting conventional financing, you're going to want to put some effort into ensuring that your financial profile is in the best possible shape. This means making sure that you have a high credit score, sufficient funds for a down payment, a stable employment history, and plenty of cash reserves.

That said, even if you aren't going after a bank loan, taking the time to make sure that your financial profile looks solid can have added benefits. No matter who gives you the loan, your investment property mortgage rate will likely depend on the lender's assessment of your financial stability. The better your finances look as a whole, the lower your mortgage rate is likely to be.

Get clear on your investing strategy

Once your finances are in great shape, the next step is to get clear on your investment strategy. After all, how you plan to handle the property will play a role in determining what type of financing will work best for you.

For example, if you're planning on choosing a buy-and-hold strategy for a residential investment property, you'll likely do better with a fixed-rate loan that offers a stable monthly payment. On the other hand, if you're going with a fix-and-flip strategy, you may want to consider getting an adjustable-rate loan in order to take advantage of the low introductory rate.

Find an investor-friendly lender

Lastly, you'll want to focus on forming a relationship with a loan officer who is comfortable working with investors, especially if you plan on expanding your rental portfolio beyond just a single investment property. In short, the qualifying standards for loans change as you take out more of them. An experienced loan officer will be able to better help you navigate these requirements as you continue to grow.

What you need to apply for an investment property loan

The exact requirements needed to apply for a real estate investment loan will depend on the type of loan you choose and your lender. However, feel free to use the information below as a general set of guidelines.

Conventional loan

If you're applying for a conventional loan, the documents that you need to apply will be largely the same as when you applied for a mortgage on your primary residence. Generally, you will be asked to provide the following:

  1. Two years of W-2s or tax returns.
  2. Copies of your recent pay stubs.
  3. Statement information for your bank accounts and assets.
  4. Information pertaining to any debts and liabilities.

Hard money loan

If you're going the route of trying to get a hard money loan, know that the lender will likely be most concerned with the amount of equity you'll have in the home (i.e., your down payment) and how much money you have in cash reserves. He or she will likely also want to know about your background in real estate and your plan for making money on the property.

Private money loan

Of all the lending options listed here, nailing down what you need to have to apply for a private money loan is the hardest. Ultimately, it comes down to the relationship you have with the person who has agreed to lend you the money. However, they may also ask to see some financial documentation in order to verify that you have the ability to repay the loan as promised.

Home equity loan

As stated above, the documentation needed for approval on a home equity loan is less stringent than applying for a totally new loan. You'll usually have to undergo a credit check, and your lender will likely verify your employment. The lender may also require a new appraisal in order to verify the home's current fair market value.

The bottom line

At the end of the day, choosing the loan that is the best fit for you is all about knowing your options. Don't be afraid to shop around with a few different lenders to get a better sense of what loan programs are available to you. Armed with this knowledge, you should feel comfortable enough to get started with your search.

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