An investment property is a type of property that is purchased with the aim to generate income. While investment projects can be lucrative, finding financing can be quite overwhelming. Unlike purchasing a primary residence, there are very few financing options when it comes to investment property.
Investment property loans can come in several forms; hence, it is important to know which will work best for you. Otherwise, the wrong type of financing can negatively impact your investment. In this article, we will look at some of the financing options available for investment properties.
Image Source: unsplash.com
Make a Down Payment
Generally, mortgage insurance doesn’t provide coverage for investment properties. For this reason, you will need to put down a sizeable down payment of at least 20% to help you secure financing from a lender. It would even be better if you can put 25% down, as this will improve your chances of being approved for a home loan and help you get better interest rates.
A higher down payment enables lenders to protect equity in their investment. If the investment doesn’t work out, you are likely to lose your whole stake before the lender begins to lose money from it.
It’s important to know that for owner-occupied properties, the interest rate of investment property loans is usually higher than that of conventional mortgages. Investments in new development may also have restrictions. By putting a large down payment, you will be able to avoid PMI and save thousands of dollars every year.
Seek a Reputable Local Bank/Broker
ent, you can still get financing from a local bank or lender. The advantage of turning to a local bank or broker is that they are more flexible than large national financial institutions. A neighborhood bank may be flexible in lending for local investment even if your credit score is not good or if your down payment is not large.
Alternatively, you can consider working with mortgage brokers as they are more likely to access a plethora of loan products. They will apply for loans on your behalf and negotiate better terms. However, there is a fee involved which is usually 1% of the amount borrowed. Whichever option you choose, ensure that you do adequate research and compare different lenders/brokers before making your decision.
Home Equity Loan/ Home Equity Line of Credit (HELOC)
Another smart way to finance your investment property is borrowing against your home’s equity. Home equity loans can come in handy to back your investment property mortgage. Generally, you can use the equity in your home to buy an investment property.
If your home equity is not enough to finance your new investment, you can borrow a home equity loan or HELOC which includes 20% of the new investment’s purchase price. The lender will give you the loan for a certain period of time and use your home as collateral. You are, however, required to pay back the loan at the end of the specified timeframe. Otherwise, you will be putting your home at risk.
The best thing about home equity loans is that they can be obtained at reasonable fees and with low-interest rates. In addition, the cash-out refinance is likely to lower your mortgage payments.
A creative way of purchasing an investment property especially when you don’t have a sizeable down payment or perfect credit is by getting owner financing. This is where the seller finances the property fully or partially. During the later, the owner can lend you money that is a portion of the price where you will then add-on a conventional loan.
An advantage of this type of financing is that the lender can let you negotiate the loan terms. They may also not require a huge down payment. On the other hand, this loan is for a short period of time like 5 years, after which you are required to pay using a balloon payment. What this means is that you need to qualify for a conventional loan in order to make the balloon payment.
Consider VA Loans
It is impossible to flip homes or purchase a commercial property with VA loans. However, a common misconception is that VA loans cannot be used to finance investment property. VA loans have a down payment of 3.5% to 10% and are a good option for both new and existing investors. In order to get this loan, you need to meet the criteria that include having enough income and credit. You also need a certificate of eligibility showing that you qualify for the loan.
Get a Fix and Flip Loan
If you intend to purchase a property and then renovate it before selling, the fix and a flip loan would be a great option. For some property owners, renovating and selling the property is a more viable option than renting it.
This loan is short term and has high-interest rates; hence, you need to quickly renovate and sell the property. Some loans may come with an interest rate of up to 18%, and this varies with the lender.
Fortunately, qualifying for the fix and flip loan is easy, and the lender may change the terms and period of the loan depending on the estimated after repair value (ARV). Lenders use this value to determine whether you qualify for the fix and flip loan. It is also a hard money loan as it is secured by the property. For this reason, it is easy to get this loan than a traditional loan.
Peer-to-peer lending connects borrowers with lenders who are willing to lend a non-conventional loan. Peer-to-peer lending is a great way to get quick financing with fewer regulations. Something to note about this type of lending is that the lenders opt for low loan-to-value rations of 65%. You, therefore, may not be able to get all the financing you require for the purchase of your investment property.
Lenders will gauge whether you qualify for this lending by looking at your credit score and history. Nonetheless, P2P lending may not be right for everyone, and you need to have an appealing loan listing to get the funding.
With so many financing options for your investment project, it can be daunting to find the best for your needs. You should, therefore, take your time to research and acquire more knowledge, so you can decide the most appropriate option to obtain financing. Also, analyze your credit score to ensure that it will improve your chances of qualifying for financing.