The housing crash of a decade ago is fading from our collective memories, and home prices are rising nicely at a 6-7% clip per year. But what does this mean for investing in real estate and financing for that matter?
Interest rates are slowly on the rise but are still under 5% for a 30-year fixed mortgage on an owner-occupied home (expect to pay more for investment properties). But the days of getting easily approved for investment property loans is over. While it is still possible, there are more restrictions on getting home loans for properties that you intend to rent out. But if you keep the considerations below in mind, you will have a better chance of getting approved for investment property loans.
Talk to Savvy Lenders About Attractive Investment Home Loan Programs that Get You in the Game!
1. Down Payment
Mortgage insurance is usually required on a home that you are living in if you make less than a 20% down payment. This provides protection to the lender in case you default. But this does not apply to investment properties as mortgage insurance companies will not insure them. You will need to put down at least 20% to get a mortgage on your investment property. If you can put down at least 25%, you may be able to get a better rate.
Government backed mortgages cannot be used on investment properties. However, if you intend to live in part of the home and rent another unit out, you can qualify for an FHA loan with as low as a 3.5% down payment.
2. Have Strong Borrower Credentials
There are many factors that will influence whether you get a loan, such as the loan to value ratio and the lending policies of the lender. But regardless, your credit score will influence whether you get the investment home loan and the rate you get.
Below a 740 or 720 credit score, you will start to have to pay a higher interest rate to get the mortgage. You could have to pay between .25% to 2% more for the same loan if your score is below 700.
Also, the lender may want you to have cash reserves in the bank to pay for all of your expenses – both personal and investment – for several months. It also will help if you have experience as a landlord and have a portfolio of investment properties.
If you have several investment properties, the lender may want to see cash reserves for each of them for you to get another mortgage.
3. Consider Smaller Lenders
If your down payment is smaller or if your credit is not great, you might consider going to a community bank for your financing rather than a big bank you see on TV. Many community banks have more flexibility in their lending practices. They also might be more familiar with the local market and have an interest in investing in the local community.
Mortgage brokers with access to many lending programs are also a good choice because they may be able to find a specialty product that works well for your situation.
Some investment property owners advise working with a direct lender that has experience with landlords. This means that you will be in closer contact with the underwriter and other decision makers when the loan is being processed. It is possible when working with a mortgage broker that you will have less control, and lending standards could change in the middle of the process.
4. Think About Owner Financing
Asking for owner financing before the market crash could make the seller suspicious because back then, almost anyone with a pulse could get approved for a mortgage loan. But today, asking for owner financing on investment property is more common because credit is tighter.
But if you want owner financing, you need to go into the situation with a strong proposal. You should approach the owner and ask if they will accept owner financing with a certain down payment and these terms. You will need to work on selling the owner on owner financing, and that you are a good risk.
5. Think Creatively
If you have your eyes on a good property with a good chance of high rent and appreciation, think about getting a down payment or money to renovate it through a home equity line of credit on your personal residence. You might even consider getting a personal loan or using credit cards or life insurance policies, IF the property is a good one.
Financing the home could be possible through a personal loan or a peer to peer lending site such as LendingClub or Prosper. Just know that if you are fairly new to the investment property game, you might see some skepticism. Some peer to peer lending groups also may require that your credit history be at a certain level.
The bottom line is you need to have your finances in order to get loans on investment properties in 2018. But if you do that and you check with smaller lenders that are comfortable with landlords, you should be able to get financing that works for you.