What Is an Investment Property Loan?

An investment property loan is money you borrow to buy or build a property that has the potential to produce income for you by leasing the space out to a tenant, or by re-selling it after you increase its value. Investment property loans include construction, purchase, and rehab. Investment property loans are not just for single-family homes. If you want to buy an apartment building or an office tower, you would use an investment property loan.

What Are the Most Common Investment Property Loans?

Investors try to use a conventional mortgage to buy a property with one to four units if they can meet the bank’s criteria because this is where they’ll find the lowest rates and fees. To buy a home to renovate and resell or lease, investors often turn to private lenders that specialize in this process. Many banks either won’t provide these loans or take too long to close for an investor’s preference, so private money lenders are successful here. Private and hard money lenders are also helpful when investors want to buy commercial properties like apartment complexes, medical office buildings, or office towers for example. Their terms are more flexible than conventional mortgages and they will work with borrowers who have lower credit scores where banks and credit unions may not.

Is It Hard to Get a Loan for an Investment Property?

Qualifying for an investment property loan is more challenging because lenders view investment properties as a greater risk. Lenders will want to make sure that you earn enough to afford monthly mortgage payments in the worst-case scenario, such as your tenant stops making their payments. Compared to loans for your personal residence where you may qualify for a 0% or 3% down program, lenders want to see a larger down payment on investment properties, often between 20% to 35%. To get the best rates and terms, you’ll want to get a traditional mortgage, which is why most of our winners here have come from that sector. However, you can max out at four conventional loans for investment properties. If you want to keep going, you’ll need to convert to private and hard money lenders.

Investment Property Loan Options

There are several programs to choose from when you’re purchasing investment homes.

Conventional loans:

The only standard loan program that allows you to buy an investment property with no strings attached is the conventional loan program. Unlike with government-backed mortgages, you don’t have to live in the property to qualify.

FHA Loans:

You can buy a two- to four-unit home with a mortgage backed by the Federal Housing Administration (FHA) and collect rent on the other units to qualify, as long as you live in one of the units for at least 12 months.

VA Joint Loans:

This VA multifamily loan program is exclusively for eligible military borrowers. It allows them to buy a property with up to seven units, as long as they live in one of the units. The U.S. Department of Veterans Affairs (VA) guarantees these loans with no down payment requirement.

Non QM Loans:

Borrowers that don’t qualify for any of the programs above may be eligible for a non qualified mortgage (non-QM) loan based exclusively on the rental income received on the home they’re buying. The down payment requirement and interest rates are higher than with regular loan programs.

Home Equity Loan:

If you currently own a home with a good chunk of equity, you can borrow against the equity with a home equity loan or a home equity line of credit. With home equity loans and, you borrow a portion of your equity and leave your current mortgage loan in place. A home equity loan is paid in a lump sum with a fixed rate, while a works more like a credit card that you can use and pay off for a set time.

Hard Money Loans:

These loans are more common for flipping investors hard money investors are willing to lend you money knowing you’ll pay it off quickly. However, you’ll often need at least a 25% down payment and will pay high rates and upfront points. And it’s not uncommon for there to be a prepayment penalty.

How To Get An Investment Property Loan:

Most lenders offer some type of investment property loan option, but the rates may vary significantly between companies. Not all lenders offer non-QM loans, so you may have to make some extra calls if you need one. Hard money lenders are often private individuals or partnerships ask your real estate agent or other real estate investors for recommendations. If you’re applying for a standard loan program like a conventional, FHA or VA loan, the process is similar to any other type of loan. However, non-QM lenders and hard money lenders may have their own process or application system.

Have at least two months of bank statements and any current leases or rental information on the property you’re purchasing. Lenders typically permit you to use a percentage of your retirement or 401(k) vesting toward your reserve requirement, so have a current statement handy. The home appraisal process requires an extra report detailing the average rent collected on similar homes in the area. In some cases, the rental income from this report can be used to help you qualify for the loan.

After your loan conditions clear and the appraisal is completed, the lender will issue a closing disclosure three business days before closing. Review it to make sure all the figures are what you expected. If you’re taking out a hard money loan, make sure you understand any prepayment penalties or “guaranteed interest” language. Typically hard money lenders want to make a set amount of interest, regardless of how quickly you pay back the loan. You’ll send a wire or bring a cashier’s check for your closing funds. Once the mortgage closing paperwork is signed, your loan funds are sent, and the property is recorded in your name.

How to Get a Loan for an Investment Property

Because they aren’t for a primary residence, getting an loan for an investment property usually requires a better financial profile than a loan for a primary residence. Based on the lender you apply with; the terms of your loan will vary. Make sure that you are ready to expand into investment property by establishing financial stability so that you can secure the most favorable loan terms. How much you pay as a down payment, how good your credit is, the rental income, and the value of the property that you intend to buy are all factors in the terms of your investment property loan. A mortgage lender like Griffin Funding can help you determine whether you qualify for a mortgage based on their own investment property loan requirements and provide you with a quote for loan terms, which you can then accept or keep looking.

To find out if you qualify for a Griffin Funding investment property loan, submit an application online or speak with one of our loan specialists today. Our 10-step loan approval process is streamlined to make it as stress-free and efficient as possible. The most important thing you can do is ensure that you’re able to provide all the documentation we need like proof of income with a quick turnaround. Together, we can help you secure an investment property loan that helps you purchase or refinance a second home.

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