Investing in property is an outstanding way to build a strong, profit-making portfolio. While there can be higher levels of risk and (in most cases) a lot more work involved, investment properties can bring a steady income, often outpacing traditional investments like stocks and mutual fund accounts.
But far more people own typical investment accounts than commercial and residential property.
Why is that?
Probably the biggest reasons is that investment property is expensive. Even moderately-priced investment properties cost around $100,000, and commercial or rental properties can cost go into the multimillions. For this reason, some people overlook investment properties, but there is a solution: loans for investment properties.
If you are seeking an investment-property loan, you might think your choices are limited. But in truth there are many options.
Finding the right financing for your needs is important, so let’s learn about the top loans for investment properties…
7 Types of Loans for Investment Properties
Conventional loans are possibly the most common type of loan used throughout the real estate industry. It’s also a common way for investors to finance their properties. These loans conform to the guidelines set by Fannie Mae or Freddie Mac, but there are different qualifications for investment properties compared to owner-occupied homes.
If you are using a conventional loan, you will likely need 20% down. This is a large sum, but requiring this payment reduces the chances of a default on the loan. It also ensures that more investors are coming from strong financial footing before purchasing an investment property.
Many factors will be at play when you apply for a conventional loan on an investment property, including your credit score, income, and debt load. These factors will impact the interest you pay on the loan, so the better your credit, the lower your rate.
Cash-Out Refinancing on Personal Home
Cash-out refinancing is generally used for purchasing appliances, making home repairs, or remodeling a certain room in the home; kitchens and bathrooms in particular. But one use for refinancing that doesn’t get discussed enough is investment properties.
Cash-out refinancing is simply a way to convert the equity you already have in your home and turning it into usable cash. You get a loan and use your home as collateral; usually you need at about 20% equity to use this option, but the more you have in equity the more you will be able to borrow.
If you have a significant level of equity, this could be a useful option. Because you are purchasing an entire property, you will likely need 80% equity or higher, depending on the value of your home and the price for your investment property.
The FHA is largely concerned with supporting owner-occupied homeownership. Their overarching goal is to help Americans purchase homes where they will live for years; it’s not to help investors build a portfolio. However, you can use FHA loans to purchase an investment property, and it’s not at all a loophole or a trick.
The FHA supports loans for single-family homes, but you have to live in the property for a certain period, usually about two years. Once that period is over, you can move out and use the property as a rental home. This allows for convenient access to financing, while also creating long-term opportunities for investment properties.
There is another way to use FHA loans to purchase a property that earns an income right away. You can purchase a multiunit property, such as a duplex, and rent out units right away. Like before, you’ll have to live on the property for a certain period. So if you purchase a four-unit property, you could live in one unit and rent out the other three. And, also like before, after a certain time passes, you can move out and place the entire property under rental.
With all property loans, you’ll have to verify your income during the application. Except for one option: the no-income loan. It’s possible to purchase an income property and, instead of using your income during the application, you simply use the income you will generate from the rental property.
To use this option, you need to have a market survey completed on the home. Essentially, this is a basic analysis, conducted by a trained professional, to determine how much you will be able to earn off the property. Using this information, the lending agent can then determine whether the rental income (and the rental income alone) is enough for qualification.
Bank statements can provide a wealth of information to lenders. In many ways, they are more reliable than paystubs and other forms of financial information, as they not only show how much you earn, but how much you have in savings and how much you tend to spend on a monthly basis. This can give lending agents a clear understanding of your financial foothold.
To use a bank-statement loan for an investment property, you will need to bring as much data as possible. While it may be possible to get approval with as little as a month of information, two years (or more) would be far more ideal.
Residential property is not the only type of investment property. Commercial property is also a good choice, although it can have even more risk, and an even higher price, than residential homes. To get a loan for commercial property that you will use as a rental (not as a location for your company, but renting it out to other businesses) you will need a variety of information, just like a typical loan. The final result, however, is a loan that can provide your investment portfolio with a commercial property that can earn significant returns.
Clear, Honest Advice for Investment Property Loans
Want to learn more about loans for investment properties? Contact our staff today and we’ll make sure you get the right information. From jumbo loans for commercial properties to government-supported financing for a moderate starter home, we are here to make it happen for you!
“Chad Baker is THE BEST, most professional, understanding, HONEST person I’ve ever worked in the mortgage industry. He knows exactly what he’s talking about, will never promise something he can’t deliver, and will bend over backwards to get you what you need. I had a very unique problem qualifying and every other mortgage company I worked with assured me from the beginning that they could get me financed, and then it would all fall apart once we hit underwriting. Chad understood my circumstance from the beginning and patiently explained every step of the way. I can’t thank you enough Chad! Juliann has been great keeping me updated and making sure that everything comes together in a timely fashion. She also appreciates my sense of humor, which gives personality to a boring funding process. Thanks Juliann! I HIGHLY recommend Home Point and if I ever buy another home, will absolutely use them again.”
Chad and his team were very attentive to all of my needs, they called , emailed and checked in often. No question was left unanswered! Maria was a superstar! taking all my calls no matter the time or day and walking me through every process. The follow through was amazing and I am just so happy that my realtor referred them to me. I was originally referred to another lender that pretty much had no time for me nor did they even bother to try and find me the right loan since I am a widow with one income and a first time buyer with so so credit. I am completely happy with my loan and everything they did for me! Thank you Chad, Maria and Karina for all you did!
“This is the second time that I have worked with Chad (home purchase & refinance). He has become my subject matter expert and someone I depend on for all finance needs related to our home and real estate investments. My favorite things about Chad are his depth of knowledge, responsiveness, honesty and the great service he provides. I have referred countless friends and family of mine to work with him for no other reason than I know that he will treat them well and equip them for the best possible outcome. Chad will add tremendous value to any real estate transaction that you have and I am grateful to have him as a resource.”