How Hard is it to Get an Investment Property Loan?

Do you want to make investments like the big sharks? If so, you need to look into investment properties. 11% of the wealthiest people swear by real estate investments as a great income stream. In fact, real estate investments outpaced every other stream of income by three times the amount of revenue.

If you haven’t started looking at getting investment property loans, now is the time. Mortgage rates are lower than ever, and real estate property values are increasing steadily.

The amount of money you could make is endless. First, let’s learn how to get started with your very own investment loan.

What Are Investment Property Loans?

A rental property loan is one that understands that the occupant of the home and the owner of the loan are different. There is a fancy loan term for this called a first-lien mortgage loan.

But, in order for the property to qualify for that type of loan, an investment loan, it must be rent-ready. The property has to be suited for short-term or long-term rentals. (But most people use them for long-term rentals because of the stability).

This means that you can use this kind of loan for vacation rentals too, as long as the property qualifies. The following home types qualify as an investment property:

  • Single-family homes with one to four dwelling units
  • Condos
  • Townhomes

If you’re looking to use one of these home types for your investment properties, you should find an investment loan. These are set up specifically to make paying off mortgages more attainable, especially if you’re just starting out with real estate investing.

How to Get an Investment Loan

Getting an investment loan isn’t as far out of reach as it may seem. Just like banks and private lenders offer mortgage loans, they also offer investment loans. You just have to shop around for the right kind of loan for you.

When you’re hunting for the right investment loan for you, you’ll notice that there are several kinds of loans to choose from.

Be sure to find the loan that you want before you start talking to potential lenders. Here is a list off the most popular investment property loans:

Conventional Mortgage Loans

The first (and most common) is the conventional mortgage loan. You can have up to four mortgage loans running at a time as long as they are specifically cited as investment loans.

If you’re looking to add more, you need to go through a special program under Fannie Mae. This program allows investors to have up to ten mortgages under one name.

In order to qualify for the conventional mortgage loan for investment properties, you’ll need to put at least 25% down on single-family homes or 30% down for two- to four-unit homes.

Conventional mortgages also require an excellent credit score of at least 720. Although, this isn’t uncommon for most investment mortgages.

Hard Money Loans

Hard money loans, or commercial real estate loans, are common choices for professional investors and flippers.

Hard money loans have a quick turnaround period. In general, you’ll receive approval the same day that you submit your application, and you’ll receive the money within three business days after that.

This kind of investment loan also makes it easier for people with lower credit scores to qualify. If you’re able to put down 25-30%, you’re going to be more likely to qualify for the loan despite your credit score.

If you do take on a hard money loan, you need to pay it back relatively quickly. It could even be within one or two years. However, some offer terms as long as five years.

The interest rate and fees for these kinds of loans are also higher than those for others. However, it may be worth it for the mortgage term.

Private Money Lenders

Private money lenders are those people who have enough of their own money to help you with your real estate investments. You could get this money from friends, family, coworkers, or someone else.

Getting a loan from a private lender usually comes with fewer terms and conditions. You may also get a lower interest rate and a more flexible loan term.

However, you should make sure that you and the other individual have some kind of contract drawn up. You don’t want to risk your personal relationship for the sake of a loan.

Home Equity Loans

A home equity loan uses your personal home as collateral against the investment loan. So, you can have a lower credit score and a lower down payment and still qualify for the loan.

The loan comes in a lump sum so you can use the money any way that you want.

However, you can only borrow up to 80% of your personal property’s value. So, this may not be an option if the investment home is much more expensive than your personal home.

How Hard is it to Get an Investment Property Loan?

Investment property loans are more difficult to get than traditional mortgage loans. However, this is because investment property loans are considered more high-risk investments for lenders.

If your investment property falls through, you may not pay back the loan.

Because investment loans are a higher risk, lenders are going to look for the best of the best when it comes to finances. They’re looking for the following:

  • High credit score (minimum of 720)
  • Low debt-to-income ratio (less than 43%)
  • High down payment (at least 20%)

If you meet these criteria, you’re set to get an investment loan.

However, if you don’t meet these criteria, you may need to negotiate or spend a few years building your personal wealth.

Get the Right Investment Loan for You

Investment property loans are more difficult to get than traditional mortgage loans, but they aren’t impossible.

You have to do some planning and make sure that you’re financially ready. However, it’s best for you to work towards a high credit score and low debt-to-income ratio anyways.

When you’re ready to get started, look no further than Compass Mortgage. Check out our investment property loans guide and get started on your real estate investment dream today.

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