Many investors turn to investment property loans when buying investment real estate. You have a few different options to explore when you choose to pursue an investment property loan. In this guide, we will walk you through the top 8 options so you can better determine which one is right for you
A standard mortgage loan to be used for real estate property is called a conventional investment loan . There are specific guidelines that are associated with conventional mortgages. These are established by Fannie Mae or Freddie Mac . The process that you will have to go through to obtain a conventional mortgage depends largely on where you live, as the rules vary by state. With that being said, many of the requirements associated with conventional loans are common throughout the United States. These requirements include the following:
To be considered as having a good credit score, most conventional loans require you score at least 620. However, if you want to ensure that you get reasonable rates with your conventional loan, you should have a credit score of around 740 or higher. Keep in mind that conventional loans are spread out over several years, so you will need to make sure that you can make on-time payments for the length of your loan.
As we just mentioned, conventional loans typically come with terms that are quite lengthy. If you prefer to avoid such loans, we recommend that you steer clear of conventional loans. So, what would a better option be? Consider a hard-money loan. These types of loans are typically much shorter in length. As such, you can choose to pay back your hard-money loan for terms as long as 3 years. The requirements for this type of investment property loan are quite different than those of a conventional loan. For starters, there isn’t a requirement that you need to have for your credit score. Lenders who deal in hard-money loans are more interested in the total value of your property investment, not necessarily your credit score. As such, you can expect to have much higher loan rates when you opt for a hard-money loan. In fact, you can usually expect to be presented with an offer that includes rates as much as 10% higher than that of a conventional loan. Due to this, it is advised that hard-money loans be reversed on affordable properties. Conversely, the same is true when securing a hard-money loan for flipping an investment property.
If your real estate investor can’t secure a loan for your investment property via a bank or lender, you may need to seek out a private money loan that can. This can serve as an excellent alternative to other loan types. A private money loan is a type of loan that is provided by private entities. The money can come from family members, friends, co-workers – basically anyone who is willing to foot the bill for your investment property. Some real estate investors will provide private money loans, as well. Since these types of loans are private, it is much easier to negotiate interest rates and terms. As such, you can usually agree to terms that are more centered on your needs based on your financial situation. The only real issue with private money loans is the risk of the borrower not paying the loan back in a reasonable amount of time. If this happens, the private lender may be forced to foreclose on your property that you are wanting to purchase. What’s more, this can potentially cause great rifts between friendships and relationships, especially if you’re borrowing private money from a close friend or family member. As such, you need to carefully weigh the pros and cons of doing a business deal of such magnitude. Furthermore, you need to make doubly sure that you can and will make your required payments on time and without delay. It is also advised that you have a backup plan in place in case something happens to your financial situation, such as losing your job. In doing so, you can be prepared for such possibilities and continue making your payments without issue.
The federal government may be another source of financial support when seeking loans for property investments. This type of loan is a popular choice for rental properties. As such, you may want to seek out an FHA loan for your investment property. FHA loans let real estate investors buy rental properties. You can also rent the property out to someone else after you have lived in it for more than a year. FHA loans are popular for having low down payments. In some cases, your down payment can be as low as 3%. Additionally, VA loans for a real estate investment come with many of the same requirements as an FHA loan. If the investor is qualified for owner-occupied and federally-funded loans for property investing, it might be a good idea to consider these as options.
Another excellent option for property loans in the housing market. Home equity property loans for rental let real estate investors borrow against the equity in their homes. This allows them to finance and buy a second property. Home equity loans provide funding for much of the purchase price. What’s more, they often allow up to 80% to be borrowed on the home equity’s value. While it’s true that home equity loans are great sources for seeking property financing, you should keep in mind that they do come with bigger interest rates compared to the first mortgage used to buy the property with the equity in question.
Also known as seller or owner financing, a purchase-money loan is another type of investment loan that you may want to look into. Purchase-money loans essentially provide the loan you need for an investment property where the property seller serves as the lender. As such, they provide the loan to the buyer of the property. Although this concept may appear to be somewhat strange on the surface, the lender and borrower both stand to benefit from this type of loan. The borrower gets an investment loan for the property they want to buy, while the property seller can benefit from high investment mortgage rates. In doing so, they will get high-interest payments in return. Purchase-money loans are certainly not the most common option for seeking investment property loans. However, they can still be a beneficial option for real estate investors.
A lease with the option to buy is definitely more popular than a purchase-money investment loan. What’s more, it is a useful type of property financing for real estate investors who are considering buying property. With this option, an investor agrees, along with the seller to pay certain amounts of the rent. These payments will go toward the buying of the investment property. The two parties then agree to a set deadline, at which time they will purchase the investment property. Furthermore, both parties agree to negotiable terms. The flexibility of this investment loan option lets the buyer pay a smaller down payment. It also allows them to have a lower credit score. If you are struggling with bad credit or low credit score, you may want to look into this investment loan option. You may find that it provides the security you need to establish the finances for your property.
If you are interested in getting into commercial investment properties, you will need to use a commercial investment loan. Although the principle of this type of loan is the same as residential rental properties, the particulars can vary. Down payments of these types of loans, for example, can be anywhere from 15 to 35% of the total property price. The interest rates, however, tend to be close to the same.
As you can see, you have a lot of options to consider before deciding on any one investment opportunity. If you are unsure as to which one is the best for your needs, you may want to contact a trusted advisor to assist you in going forward. The key is to make sure that you choose a plan that offers reasonable terms and rates. You don’t want to get stuck making large payments for many years that eventually come to be a problem for you. If you default on your investment loan, you risk losing your property altogether. If you would like more information on loans and properties, check out our wealth of articles ! There, you will find tons of resources to assist you in making the best decision for your needs. And if you have any questions for our Seek Capital experts, contact us any time -- we’re happy to help! Sources https://www.fanniemae.com/ http://www.freddiemac.com/ https://www.hud.gov/buying/loans