Investment property loans are mortgages used to purchase income-producing properties such as rental homes or fixer-uppers that can be flipped for a profit. Generally, these loans carry higher interest rates and stricter qualifying criteria than conventional home loans do.
Investors can secure investment property loans from a range of sources, including traditional lenders and private money sources like hard money lenders. It’s essential to do your due diligence and identify the loan that best meets your individual needs and goals.
1. Conventional
Conventional real estate investment loans are the most popular financing option available to property investors. These mortgages are guaranteed by private entities such as banks and lenders and adhere to Fannie Mae or Freddie Mac rules and regulations.
When looking to secure conventional mortgage loans for investment properties, the process varies by state. Typically, property investors must put down at least 20 percent of the purchase price as a down payment to protect themselves against defaulting on their payments. This large down payment helps protect investors against financial ruin if their investments don’t perform as expected.
In addition to this down payment, a credit score of 620 or higher is usually necessary for approval on conventional mortgage loans for investment properties. This requirement exists because borrowers with this score tend to possess greater stability and financial standing than those with lower scores.
Better Mortgage offers both conforming and non-conforming conventional loan programs for qualified borrowers who want to purchase second homes, vacation properties, or investment properties. For conforming loans on second homes or vacation properties we require a minimum credit score of 620 and down payment of 10%; on non-conforming investments we suggest a credit score of 700 with an initial down payment of 20%.
2. FHA
FHA loans differ from conventional mortgages in that they are insured by the federal government, meaning the lender has less risk of loss if you default on your loan. Furthermore, FHA loans feature a lower down payment requirement and lower interest rates.
However, these advantages come at the cost of ongoing mortgage insurance premiums that must be paid. Your premiums depend on the term of your loan, its loan-to-value ratio and how much money you put down as a down payment.
There are a few exceptions to this general rule, however.
One option involves multi-family housing: With an FHA loan, you can buy a duplex, triplex or fourplex as long as you live in one unit and rent the others out to tenants. This provides the chance for real estate investing experience that may boost your credibility when applying for future mortgages.
If you’re considering starting in real estate investing, an FHA loan could be the ideal first step. But it’s essential to weigh all the pros and cons before determining if this type of loan is right for you.
3. Portfolio
Portfolio real estate investment loans provide a unique financing option. These loans are originated and held within an institution rather than sold on the secondary market like traditional mortgages, so lenders may be more accommodating with their lending terms.
If you need to finance a large single-family home or multiple rental properties, portfolio loans may be an ideal solution. They feature flexible loan terms and the capacity to cross collateralize multiple properties into one mortgage.
Portfolio real estate investment loans provide investors with the means to expand their current portfolio, purchase additional properties or construct brand-new ones from scratch. Furthermore, these loans enable investors to consolidate all their assets into one monthly payment, eliminating the need for multiple invoices. Furthermore, it takes away the hassle of dealing with multiple property-specific lenders and service providers; simplifying the process and focusing on what matters most: building their portfolio and generating passive income streams.
4. Home Equity
Home equity is a type of real estate investment loan that allows you to borrow against the value of your home. This is an ideal option if you’re looking to purchase another house or renovate your current one.
Prior to signing up for a home equity loan for investment properties, you should weigh the risks involved. But with the right knowledge and skillset, it can be an efficient way to make money in the real estate market.
When you borrow against the equity in your home, it’s referred to as a “second mortgage” or a “home equity line of credit.” The lender provides you with a lump sum of cash and then requires that you repay it over time at an agreed-upon interest rate.
Home equity is not only an important tool for financial success, but it can be an uplifting motivator as well. It can help you reach your personal financial objectives such as paying off high-cost debts, investing in education or starting a business venture.
