How to Qualify for Investment Property Loans

What Is an Investment Property Loan?

An investment property loan is money you borrow to buy or build a property that has the potential to produce income for you by leasing the space out to a tenant, or by re-selling it after you increase its value.

Investment property loans include construction, purchase, and rehab. Investment property loans are not just for single-family homes. If you want to buy an apartment building or an office tower, you would use an investment property loan.

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Use real estate to create retirement income

Real estate is a popular way for individuals to generate retirement income. In fact, it’s Americans’ favorite long-term investment, according to a 2021 Bankrate study.

That popularity partially relies on real estate producing a steady stream of income, as investors collect a regular monthly rent from their tenants. For retirees, a steady income is exactly the kind of security that they’re looking for when not fully employed.

And retirees have upside on that income. Over time, a well-managed property can increase its rents, putting more money into investors’ pockets each month. The property can also increase in value, so when it comes time to sell or even invest in another property, there’s equity that can be tapped. Of course, investment property has other advantages, especially around taxes.

If you don’t want to get into managing property directly, you can buy it via real estate investment trusts (REITs) in the stock market and let a professional manager deal with all the problems. REITs are tremendously popular with retirees because of their steady dividends.

Can You Get a Construction Loan For An Investment Property?

Yes. You can get a construction loan for an investment property if your project plans and finances meet designated lender requirements. Unlike some home loans, there is no process stating that a construction loan must be applied to a primary residence. Construction loans can be a great option for financing an investment property for many reasons. Most notably, real estate investors likely have experience working with contractors and supervising renovation projects already. Therefore, they may be well suited to oversee the construction of a new property.

There are also renovation loans for an investment property obtained by following a similar approval process. Investors interested in a renovation construction loan will find that the loan is distributed based on the after repair value of the property in question. This is where your investor tool kit will come in handy. Rely on a good rental property calculator and contractor when determining whether or not a renovation loan is the right move for a specific project.

How Can I Qualify For A Construction Loan?

To qualify for a construction loan, borrowers must meet several financial requirements in addition to having their project plans approved. To begin, lenders will typically review your debt-to-income ratio and credit. While the specific requirements vary based on your lender, many ask for a credit score of 650 or more. Borrowers must also have a down payment when setting up a construction loan, which should usually be between 20 and 30 percent. Make sure you shop around when searching for a lender; there are numerous options available for obtaining a construction loan, and each will come with different requirements.

To get the final approval for a construction or renovation loan, you must also submit the project’s construction plans. Lenders will want to see detailed plans for the property and a team of qualified builders attached to the project. It is important to know that while you do need finished plans for the final loan approval, you can get preapproved for a construction loan before buying a property.

Types Of Loan Is Best for An Investment Property?

As challenging as it may be to qualify for an investment property loan, you should still consider it if you’ve found an investment property that you think could be particularly rewarding. Here are the different types of investment property loans you should look into if this is the case:

Conventional Mortgages

Obtaining a conventional investment property loan from a private lender will require you to have a credit score of at least 720, although this number is flexible depending on other factors (such as your debt-to-income ratio and credit history). You will need to make at least a 20 percent down payment as well, and you can expect your interest rate to be between one to three percent higher than that of a traditional home loan. Fees will be higher as a result of the Fannie Mae risk-based pricing adjustment, which is an additional 0.75 percent. The LTV will need to be 80 percent or less. Finally, some lenders will require that you have liquid reserves of up to six months.

Be aware that if you have four mortgages to your name, you’ll no longer be able to take out a conventional investment property loan. You would have to go through a special program established by Fannie Mae, which allows investors to have between five and 10 mortgages to their name. To qualify, you’ll need to make a 25 percent down payment on single-family homes or a 30 percent down payment if it’s a two to four-unit property. If you have six or more mortgages, you will need a minimum credit score of 720.

Hard Money Loans

Hard money loans are also known as commercial real estate loans. They’re used most often by professional real estate investors and investors who want to buy fixer-uppers and flip them within a short period of time. What makes them particularly beneficial is that these types of loans are often approved on the same day the application is submitted and funding is generally available within three days of the approval. Additionally, as long as you can put down between 25 and 30 percent as a down payment, you may be able to qualify despite not having the best credit score or despite having more than four mortgages to your name.

As you can imagine, there are a few potential drawbacks. First of all, hard money loans are for short-term investors. You’ll have to pay them back within 1 to 2 years or 3 to 5 years. Interest rates tend to be quite high as well at 9 to 14 percent. Even upfront fees can be as high as 2 to 4 percent of the loan. These types of loans are obviously poor for long-term investors (such as if you’re purchasing a rental property).

Private Money Lenders

You don’t necessarily have to go to a professional money lender, like a bank. Private money may be available to you from individuals who have extra money and are looking for good ways to invest it. Such people could include family members, friends, co-workers, or other property investors. There are a number of advantages to borrowing private money. There are fewer formalities involved, conditions are much less strict, and interest rates are usually lower. The length of your loan will be more negotiable as well.

 Of course, you will need to secure the loan with the income property’s existing mortgage or with a promissory note, meaning that if you don’t pay the loan back, the lender can foreclose. While you risk foreclosure when you take out a professional loan, remember that if you borrow private money from someone you know, there is a risk that you could damage your personal relationship with them if you don’t pay your loan back according to the agreed upon terms.

Home Equity Loans

Instead of getting a loan specifically for buying an investment property, you could also take out a home equity loan against the equity you’ve built up in your primary residence. A home equity loan is easier to qualify for and will likely have better terms since your personal home will be used as collateral, reducing the risk that you will default on your loan. Generally, you’ll only need to have a credit score of 620 or higher, a debt-to-income ratio of 43 percent or lower, and a solid credit history in order to qualify.

The reason you can use a home equity loan for an investment property is that the loan is provided in a lump sum that can be used in any way you want, including on another property.  You could borrow up to 80 percent of your home’s equity value using a home equity loan. However, this will only work if the investment property isn’t significantly more expensive than your personal home’s value.

Commercial Investment Loans

Investing in commercial real estate is a different matter altogether. Commercial real estate tends to be more expensive to begin with, requiring a  commercial investment property loan. In addition to having to make a down payment of at least 15 to 30 percent and having a good credit score, you will also need to have a good business plan outlined. Lenders will want to see that you have a solid plan to ensure a steady cash flow. Keep in mind that such a loan is expensive–interest rates tend to be between 8 and 13 percent and most financing options are for terms that only last one to three years. 

Fix-And-Flip Loans

Fix-and-flip loans are perfect for investors who want to buy fixer-uppers, renovate them, and then sell them at a profit. Fix-and-flip loans are short-term loans that aren’t too difficult to qualify for, which means they are very similar to hard money loans. Lenders focus more on the potential profit of the property than the credit score and income of the borrower (although those factors remain important). There are some drawbacks for such a loan, however. The loan term is often quite short, sometimes as short as a year, interest rates can reach as high as 18 percent, and you can expect closing costs to be higher than conventional loans as well.

Different Types of Construction Loans

There are several different types of construction loans that home-builders and renovators can choose from. Let’s take a look at 4 of the most common ones:

  • Construction-to-permanent loans: If you’re looking for a way to finance a home construction project and a mortgage at the same time, this is the perfect two-for-one loan option. This type of loan will provide you with the funds to build a house and finance your mortgage as well. You can obtain this type of loan from banks and other traditional institutions.

  • Construction-only loans: These funds would be used strictly for the construction of a property.

  • Renovation loans: Take out a renovation loan if you plan to make upgrades to an existing home.

  • Owner-builder construction loans: If you’re a licensed builder, you have the option of obtaining an owner-builder construction loan. This unique type of loan will provide funders for a builder who will also own the house that they’re constructing.

Is it hard to find investment property loans?

As a rule, it gets easier to find an investment property mortgage when the economy’s doing well and more difficult when it’s struggling. That’s because lenders see investment property loans as riskier than primary home loans. And they may restrict access to moderate their risk level in tough times.

For example, when the Covid-19 pandemic choked the economy, many lenders made qualifying for one of these loans very tough.

So how easily you’re going to find the loan you want will depend on the economic environment when you apply. But, during normal and good times, there are usually plenty of lenders willing to help out.

Investment property loan rates

Lenders know that investment property loans are riskier than loans for owner-occupied homes. That’s because if a borrower gets into financial trouble, they’ll prioritize paying their main mortgage over their investment property mortgage.

As a result, lenders charge a higher interest rate for investment property loans than for ordinary mortgages as well as setting higher barriers to qualifying.

As we’ve already mentioned, these rates are often 0.50 to 0.75% (sometimes 0.875%) higher. That will vary by lender as well as your down payment, credit score, cash reserves, and DTI. You’ll get the best interest rate on an investment property with a down payment of at least 25%.

To find out more, read: Investment and rental property mortgage rates.

The Bottom Line: Get On The Path To Owning An Investment Property

Are you ready to take advantage of the benefits of real estate investing? If so, it’s time to research properties in your area. There are other ways to consider whether you’re ready: Assess your financial stability and return on investment for a particular property, and decide whether you have time to manage a property. You’ll also need to consider the housing market, property taxes and whether you’d want to hire a property management company.

If you’ve carefully considered whether you’re ready and would like to move forward with buying an investment property, the next step is to get your financing in order. Get approved with Rocket Mortgage and you’ll be on your way to purchasing your first investment property.

3. Turn to a local bank or broker

If your down payment isn’t quite as big as it should be or if you have other extenuating circumstances, consider going to a neighborhood bank for financing rather than a large national financial institution.

“They’re going to have a little more flexibility,” Huettner says. They also may know the local market better and have more interest in investing locally.

Mortgage brokers are another good option because they have access to a wide range of loan products — but do some research before settling on one.

“What is their background?” Huettner asks. “Do they have a college degree? Do they belong to any professional organizations? You have to do a little bit of due diligence.”

Is it hard to get a loan for an investment property?

Getting a conventional loan for an investment property is actually quite similar to getting a loan for your primary residence. You’ll need an acceptable credit score and cash reserves, as well as a down payment that meets the lender’s requirements.

Investment property mortgage rates and closing costs

Lenders must mark up investment property mortgage rates to cover the extra risk that the loans might default. In general, rates for an investment property will be 0.5 to 0.875 percentage points higher than for a primary residence.

Your credit score and down payment also substantially impact the rate you’re offered. In fact, lower credit score borrowers may end up paying mortgage points to obtain an investment property loan.

A note about investment property appraisals

Appraisal fees are more expensive due to lenders’ extra work to estimate both the property value and the average rent value. If you’re buying a multifamily home appraisal, expect an extra $100 to $300 above the standard $300 to $400 it costs for a regular appraisal, since each unit must be inspected and valued.

Fix-and-Flip Loans

A fix-and-flip loan is designed for real estate investors who plan to renovate and resell a property quickly. An investor who flips homes has very different needs than one who buys a property to rent out for many years, and so the loan they might need is also different.

First, while a conventional mortgage is designed to cover the cost of the home minus down payment, fix-and-flip loans also take into account the repair costs the investors will incur. As a result, they may well be borrowing more than the home is currently worth.

Another feature of fix-and-flip loans is that they often have higher interest rates than conventional loans. This rate accounts for the fact that the financial institution is lending more than the property is actually worth and the fact that the borrower is likely to pay off the loan in a shorter period of time. For example, a fix-and-flip loan might have a term of just 12 to 18 months.

Some fix-and-flip loans come with interest-only repayment periods, during which time the investor won’t be required to make payments toward the principal.

It’s important to note that while these loans come with some benefits, including the fact that they’re tailored to house flippers, there are also some risks. If you aren’t able to sell the home as quickly or for as much as you hoped, you could find yourself underwater on a loan with a high interest rate and unaffordable monthly payments.

Is it Harder to Get a Mortgage for an Investment Property than a Home?

Your home buying experience may be limited to the homes you’ve taken a mortgage on to live in, and you’re wondering if you’d even qualify for an investment property loan.

Just like with personal mortgages, you’ll need good credit to qualify for the best rates. But even if you don’t have great credit, there will be financing options for you.

If you’re new to investment properties, be sure to consider what your monthly repayment cost will be and make sure you can afford it. If you’re trying to flip a home, you’re not guaranteed to sell it before that payment comes due, so if you can’t cover it, you risk foreclosing on the property.

Can I Find an Investment Property Loan with 10% Down?

A sizable down payment is standard when you take out investment property loans. But you may be able to buy an investment property with as little as 10%, 3.5%, or even 0% down. 

Loan programs like HomeReady and Home Possible make purchasing an investment property with 10% down or less a possibility. To qualify, you’ll need to satisfy a lender’s approval criteria. In addition to more stringent credit score and cash reserve requirements, you may need to do the following: 

  • Become an owner-occupant and move into the property for a minimum of one year.
  • Show proof of income high enough to qualify for the loan, but below the local median income.

Either loan may work for owner-occupied investment properties. But they’ll also appear on your personal credit reports with Equifax, TransUnion, and Experian. The mortgage could impact your credit for the good or for the bad, based upon whether or not you make all periodic payments in a timely manner.

Let’s dive deeper into these two programs.

Fannie Mae’s HomeReady Loan Program

One option that can work well for buyers looking to purchase a home with a smaller down payment is Fannie Mae’s HomeReady Loan Program. Qualified buyers may be able to secure a fixed-rate mortgage rate for as little as 3% down. 

This mortgage loan program is designed to help moderate- to low-income borrowers with decent credit become homeowners. The HomeReady loan program may work well for owner-occupants who wish to rent out a portion of their home (or a multi-home unit) to help cover the cost of housing. 

Here’s why the HomeReady program can be helpful to owner-occupant investors. The program lets borrowers include income from “accessory units and borders” for qualification purposes. Don’t earn enough income to satisfy the lender’s debt-to-income ratio requirements? The rent money you’ll collect on the property might help you qualify. 

You’ll need to supply acceptable documentation for rental income to count on your loan application. Lenders may accept a lease or a Fannie Mae Single-Family Comparable Rent Schedule from the property appraiser as proof of the income source. 

Freddie Mac’s Home Possible Loan Program

Freddie Mac’s Home Possible Mortgage offers low- and moderate-income borrowers the opportunity to purchase a home with as little as 3% down. If you wish to use the program to finance an investment property, you’ll need to live in the home (or at least a portion of a multi-unit property). 

Again, your lender may be able to count rental income while calculating your debt-to-income ratio. But the rental income will need to satisfy Freddie Mac guidelines. For example, you’ll need to prove that your renter has lived with you for at least a year and plans to continue residing at the new residence. 

Even with a lower credit score, you may be able to qualify for a mortgage loan through the Home Possible program. But you may need to provide a larger down payment of 5% in this situation. 

Get fast dependable rental property loans from Visio Lending

Visio Lending is a leading provider of 30-year financing to investors in single-family (1-4 unit) residential rental properties, including vacation rentals. Visio underwrites its flagship product, the Rental360, based on property level cash flow and borrower credit, rather than the borrower’s personal income. As a result, the Rental360 is an ideal financing product for the self-employed investor or the investor that is building a portfolio of rental properties.

Key advantages of Visio’s Rental360 program over agency or bank portfolio loans include:

  • No personal debt-to-income calculation: Visio uses either in place or market rents when estimating the property level cash flow
  • Low documentation requirements: Visio does not require tax returns or employment verification
  • Legal protections: Visio allows a customer to finance their rental properties in LLCs and corporations to shield their other personal assets from potential liability
  • Scalable: With proven experience and payment performance, there is no hard limit to how many properties an investor can finance with the Rental360 program

Visio provides purchase and refinance financing up to 75% LTV. Commonly a customer obtains a cash-out refinance from Visio to purchase or improve another rental property. Since late 2015, Visio has financed more than $2 billion in Rental360 loans.

Contact us today to get started

Editor’s Note: This post was originally published in April 2021 and has been updated in July 2022 for freshness and accuracy. 

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