Investment Mortgages

Investing

Investment Property Loan Requirements — An In-Depth Guide

January 31, 2019 | by Jake Cardenas

At A Glance

Investment property financing options are very different from traditional residential mortgages and loans. Understanding the different types of investing financing available, and the requirements and terms associated with each is the best way to choose the right funding source for your property.

Investment Mortgages

Have you decided to start building a real estate investment portfolio this year? Managing investment properties is a great way to earn additional income and secure long-term profit. Applying for financing, however, is a slightly different process with different qualifications and terms from residential mortgages.

If you’re ready to take the plunge and purchase your first investment property, here’s everything you need to know about investment property financing requirements.

Start the Process with a Qualified Real Estate Agent

While you’ll need to apply for the specific loans you’re interested in yourself, finding a talented local agent with a history in investing is a recommended first step. A qualified agent will have great instincts for the local market and can help walk you through investment options.

A great agent can also offer advice on financing options and answer any questions you have along the way. Let Clever help you start this process by matching you with an experienced agent near you.

Explore Financing Options

There are many different ways to help fund your real estate investments and it’s recommended you review all available loan types before making your decision. Your agent can also help you navigate through all of your financial options.

While qualifications will differ between funding types, in general, investors should expect to provide a larger down payment and pay higher interest rates than common for residential mortgages. Having an established savings account and good income history are also assets for securing investment funding.

Alternative funding solutions are also available to investors and should be explored if traditional qualifications are too strict. Likewise, different financing methods might make more sense depending upon the type of property being acquired.

To find out which form of investment funding is right for you, take a look at the 6 most common forms of property investment financing.

1. Conventional Investment Mortgages

The most common form of funding investment projects is through a traditional mortgage. While it may be the most common loan investors acquire, that doesn’t make it the best. Requirements for this type of mortgage are higher than some other forms of financing, though it can be a great option if you qualify.

Conventional investment loans conform to Fannie Mae and Freddie Mac standards, which means investors will have to adhere to strict qualifications in order to be approved.

These qualifications include:

  • Minimum of 20% down payment
  • Credit score of 620 for approval; 740 for a good rate
  • Substantial savings (6 months worth of expenses saved)

Additional qualifications can vary from lender-to-lender. In addition, larger down payments and better credit scores can help borrowers qualify for some of the lowest investment mortgage rates possible.

2. Hard Money Loans

It’s not a requirement to have perfect credit to get into the investment game. Hard money loans are secured from companies or other professionals and are a popular option for potential investors who might have a few issues on their credit report. That’s because hard money loans are made against the value of the property, rather than the investor’s credit score. Hard money loans also get funding to investors faster than traditional bank loans.

While hard money loans are easier to secure and have very few qualifications, there are some drawbacks. These loans are short-term financing solutions and often have higher interest rates. Some investors will expect to be paid back within 12 - 36 months.

That makes hard money loans ideal for investors looking for purchase property, renovate, and resell in a short period of time.

3. Home Equity Loans and Lines of Credit

If you are already a homeowner, a home equity loan or line of credit is another form of investment funding available to you. These loans are issued by traditional banks and financial institutions but have strict application qualifications.

Typical qualifications include:

  • Owning the rental property for at least one year
  • An average minimum credit score of 680 (varies from lender to lender)
  • Substantial savings account to show financial responsibility
  • History of successful real estate investing

Home equity loans and lines of credit also differ from each other. A home equity loan is a lump sum of money provided to the investor in one lump sum, while a home equity line of credit is a revolving line of financing with a limit, similar to a credit card. Both have different terms and qualifications and vary.

4. Crowdfunding Financing

Crowdfunding has become a popular way for passive investors to fund investment projects. There are different forms of crowdfunding. Equity crowdfunding allows investors to purchase partial ownership of your company or property, but won’t require you to pay investors back. Debt funding allows you to borrow money from crowdfunding investors that will be paid back while allowing you to maintain ownership of the property.

While crowdfunding can be appealing to many, it does limit the amount of ROI you can take in from a property, since you’ll often be sharing your wealth. In addition, each crowdfunding website has different rules and stipulations, so be sure to review them closely before selecting one.

5. Private Loans

Borrowing money from a private source is another way to finance your investment property. Generally, these loans are offered by individuals with excess income that you might know, such as friends, family members, and co-workers. The borrower will likely set the terms and offer more flexible qualifications than banks.

This can be a great option for any investor with poor credit who has been turned down by a bank. The repayment options are often more flexible, though personal relationships can be strained if you find yourself unable to make regular payments.

6. Commercial Investment Property Loans

If you’re considering acquiring commercial investment property, a commercial investment loan might be your best option. These loans are different from traditional mortgages in a few different ways.

First of all, to apply for a commercial loan, you’ll need to have a formal business plan in place to show lenders. You’ll also need a good credit score in some cases. In addition, investors should expect to have a down payment of 15% to 35% to qualify.

There are different types of commercial property loans available and qualifications and terms will vary by lender.

Summary

If you’re hoping to secure an investment property, there are many types of funding options available. From traditional and commercial loans to hard money and private loans, the qualifications, risks, and benefits vary greatly between each form of financing.

Financing investment projects is possible for all types of investors, from those with high credit scores to those working to improve their credit. Alternative funding can be a great resource to help investors grow their portfolio without having to meet strict financing requirements.

Investors can work with a qualified real estate agent to help explore all of their available property financing options and make the best decision for their investment property. To get started and find the perfect agent for your real estate ventures, let Clever connect you with a qualified agent today.

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