New Beginning – The Process Of Getting A Loan For Your Investment Property
A new beginning can be anything from a new year to a new job. It’s about starting fresh and letting go of the old.
Conventional loans are one type of loan that investors can use to buy investment properties. These are similar to mortgages for primary residences, but with some additional requirements.
1. Get Pre-Approved
As the name suggests, investment property loans are for homes that you purchase with the intention of renting them out. These can be anything from one- to four-unit rental homes to houses that you fix up and then sell at a profit. Typically, these loans are a bit harder to qualify for than standard mortgages, and you will have to meet stricter guidelines, such as having verifiable income from a full-time job for at least two years.
Additionally, you will likely need a larger down payment and higher credit score for investment properties than what is required for a primary home loan. You will also pay higher appraisal fees, as each unit must be inspected and valued individually.
If you want to make the process of qualifying for an investment property loan easier, it is important to work on improving your credit and saving up cash reserves. This can help you avoid having to pay mortgage points and qualify for a more favorable rate.
2. Look for Properties
Whether your goal is to buy and flip properties for quick profits or to purchase and rent out homes over the long term, it’s crucial to have a clear picture of your financial goals. Be sure to factor in worst-case scenarios, like being unable to find tenants for a few months, so that you’re not taking on more debt than you can afford.
Investment property loans typically carry higher interest rates than conventional mortgages, and you’ll need to have a strong credit score and a large down payment in order to qualify. Additionally, if you’re purchasing a multifamily home, expect to pay extra fees for appraisals that take into account each unit’s individual value and rental income.
You can use sites like Craigslist to look for properties in your area that are being sold by owners, wholesalers, investors, and turnkey sellers. You can also find great deals on properties in need of a lot of work by searching for “flip” opportunities on the site.
3. Find a Lender
The lender a borrower chooses to work with for their investment property loan can make all the difference. Borrowers can find lenders by asking friends and family, looking online, and visiting local banks to ask questions about rates and fees.
Generally, conventional investment property loans require a minimum credit score of 720 and a down payment of 20 percent for single-family homes and 30 percent for two to four-unit properties. A lower credit score or less than a 20 percent down payment can result in higher interest rates, mortgage points, and appraisal fees.
Borrowers should also expect to pay extra fees if they want a faster closing. Having the necessary documents, including W-2s, bank statements, and lease or rental income statements, on hand can help speed up the process.
Borrowers should contact multiple lenders to compare rates and terms, and always read the fine print. Making a larger down payment or paying upfront fees (points) may also help reduce the rate and cost of an investment property loan.
4. Close on the Property
The closing process on an investment property can be a bit more lengthy than it is for a primary residence. This is because lenders require a higher level of financial stability from investors purchasing investment properties and also because they are often required to perform an appraisal of the property.
Depending on the complexity of your financial situation, this could take weeks or even months to complete. It is important to prepare for this by anticipating what information your lender will need and sending it to them promptly.
If you are able to get a conventional loan, you can use it to purchase one-to four-unit homes and rent them out to tenants. You can also obtain a Fannie Mae backed multifamily investment mortgage by meeting certain criteria including having a large down payment. Another option is to draw on the equity you have in your own home through a cash-out refinance. However, this is typically a more expensive option.