Real Estate Investors
Real estate investors, or those planning to purchase real estate for use other than living in it, may not qualify for a traditional mortgage. However, investment property loans are available. These loans provide buyers with a very specific opportunity to invest in a loan secured by the home itself. It is important to know that most consumer-related financing offers, such as FHA loans, are not available for this type of property. But, other opportunities exist.
What Are Real Estate Investment Properties?
What falls under the category as real estate investment properties? Generally speaking, these are homes that can be used for a variety of needs such as:
- Vacation homes a buyer plans to rent during tourism season
- Rental properties the buyer invests in to maintain long-term and rent out
- Properties buyers plan to purchase, rehabilitate, and sell (commonly known as flips)
- Both commercial and residential properties can fit here
Typical properties including apartments, condominiums, and traditional homes. Individuals who make this investment often have access to sizable loans to cover the purchase price. Yet, buying a house as an investment is not a simplistic process. Lenders want to know the buyer has the ability to repay the loan, the property is worth the sale price, and the long-term opportunity for the lender is good.
What Type of Investment Property Loans Are Available?
Investment property loans are available from specialized lenders as well as traditional mortgage lenders. Some specialized investment property lenders can provide more flexible financing. They may also provide access to loans for unproven property owners. Here are some examples.
Conventional Bank Loans
The most common investment property loans are conventional bank loans. These loans conform to guidelines set by the federal government through the Freddie Mac and Fannie Mae programs. However, these loans have no federal government backing, such as USDA, VA, or FHA loans. This presents more risk to the investment property lenders, and therefore often leads to interest rates that are a bit higher. Key factors to these loans include:
- Individuals will need to have a down payment. This typically is about 20 percent of the purchase price of the property (or amount borrowed). Sometimes, this can increase to 30 percent.
- It is possible to use gifted funds for the down payment, which is not common with consumer loans. Proper documentation is necessary.
- The home buyer’s personal credit score and his or her credit history are used to determine eligibility for the loan. Lenders will lend here, but only if the home buyer has a proven record of wise credit use.
- Access to the loan may be determined based on the individual buyer’s income and assets as well. Real estate investment loans have to be paid back, and lenders want to be sure borrowers can do so.
In real estate investment loans, borrowers also need to know that their current income and assets determine access to the loan. That is, future income from the property is not used to determine the debt to income ratio used for obtaining the loan.
Another key factor that is common with conventional real estate investment loans is available cash on hand. Some lenders will require buyers to have three to six months of cash on hand to pay all mortgage-related costs. This may include the mortgage payment, taxes, and insurance costs. This helps ensure the lender will receive payment if it takes longer to find a tenant, for example.
Fix and Flip Investment Home Loans
Many buyers do not need long-term investment home loans. Rather, they need to use a loan to buy the property, so they can sell it within a short amount of time. Some borrowers use private lenders or another specialized financing for this type of loan. A fix and flip loan is more of a short-term loan. The lender will structure these loans like this to ensure they are still profitable for their needs. This type of real estate investment financing can be harder to find from a typical bank, though.
Key things to know about this type of real estate investment financing include:
- The property secures the loan, as in all types of real estate transactions.
- It can be easier to qualify for these rental property loans, but only because they are not through federal mortgage programs.
- They will be more expensive. Investment property mortgage rates here are typically substantially higher, along with other fees.
Buying a House as an Investment: Where to Begin
Rental property loans are not as easy to obtain as others. However, there are some steps borrowers can take to gain better access to lower investment property mortgage rates.
Coming up with a sizable down payment is the first major hurdle. But, lower rental property mortgage rates are easier to access with a larger down payment. Some borrowers tap into their existing home’s equity to use as a down payment. A cash-out refinance, for example, can help to gain access to the funds necessary. However, borrowers need to factor this new loan’s payment into their debt repayments.
Investment Property Rates Concerns
Rental property mortgage rates are higher than those for nonrental property loans. To keep rates as low as possible, borrowers may wish to work with a co-borrower or co-signer on the loan. They may also wish to create a company to manage the investment. Though this does not automatically mean lower investment property rates, it can provide better access to funding for some borrowers.
Real estate investors need to have access to loans that make financial sense to them. If investment property rates are too high, due to a lack of a good credit score or credit history, this makes the investment into the property less desirable. Borrowers need to consider not just access to the loan, but whether or not the property is going to yield enough profit to make this type of transaction worthwhile to the borrower. In the long term, it may once the mortgage is repaid. But, right now, it needs to be affordable and profitable.
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