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If you are looking for a new source of income, investment property can be a smart strategy. The rental market is booming. According to Abodo, the national median rent for a one-bedroom apartment is $ 1,025.

If you want to become a homeowner, you will likely need to take out a home loan to buy your first investment property. Here’s everything you need to know about your financing options.

4 types of real estate investment loans

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If you are thinking of buying a rental property, there are four main types of loans:

1. Conventional loans

One financing option is to take out a conventional loan or mortgage. With this approach, you take out a mortgage that meets the guidelines set out by Freddie Mac and Fannie Mae – mortgage companies created by Congress.

To qualify for a conventional mortgage, you usually need to make a large down payment. For investment properties, you will generally have to deposit 20 to 25% of the value of the house, At least. For a $ 200,000 property, that means you will need to save at least $ 40,000 to $ 50,000 for the down payment.

You will need good to excellent personal credit and a low debt-to-income ratio for the mortgage lender to see that you can comfortably pay the monthly loan payments. Ideally, your debt to income ratio will be less than 36%.

2. Government guaranteed loans

If you don’t have enough money set aside for the down payment you need for a conventional mortgage, consider a government guaranteed loan. With Federal Housing Administration (FHA) and Veterans Affairs (VA) loans, you can get a mortgage with a down payment of 3.5% for FHA loans and 0% for VA loans.

However, there is a catch: For investment property, you can only qualify for VA and FHA loans if you buy a multi-unit property – like a duplex – and live in one of the units.

3. Portfolio loans

If you plan to buy more than one investment properties, you may have difficulty qualifying for a traditional or government guaranteed mortgage. An alternative financing option is a portfolio loan. These loans do not meet the guidelines of Freddie Mac or Fannie Mae, and the lender keeps the loan, rather than selling it as collateral in the stock market.

Portfolio loans have less stringent requirements for borrowers, but they tend to have higher interest rates and fees than other types of mortgages.

4. Business loans

If you are planning a commercial property, such as an office building or a shopping center, you will need a commercial real estate loan.

Commercial loans tend to have shorter repayment terms than residential mortgages. And, you will have tighter loan-to-value ratio restrictions.

Since business loans are not guaranteed by the government or private mortgage insurance, they often rely on real estate as collateral.

Where to get an investment real estate loan

When it comes to obtaining an investment real estate loan, several options are available to you:

Traditional banks

Many banks, such as Bank of America and Wells Fargo, offer investment real estate loans. Whether you are buying a single-family home or a multi-family dwelling, you can get a conventional mortgage or government guaranteed mortgages from most major banks.

Online mortgage lenders

If you want an easy application process that you can do entirely online, working with an online mortgage lender can be a smart option. Lenders like Quicken Loans and Viso allow you to apply for a mortgage online and manage every step of the process from your computer, without having to visit a bank during business hours.

Hard money lenders

If you’re having trouble finding financial assistance, look for a hard money lender. Hard money lenders look at the collateral you have for the loan, rather than your credit score and income.

The rates vary from one lender to another. In general, they have higher interest rates and shorter repayment terms than other loans. However, they can help you get the money you need much faster than other lenders.

How to get an investment real estate loan

Qualifying for a home loan can be more difficult than qualifying for a residential mortgage. You can increase your chances of getting approved by following these tips:

  • Make a deposit: At a minimum, you will need to have saved at least 20% of the value of the house to serve as a down payment. However, some lenders will find you more attractive as a borrower if you have saved 25-30% instead.
  • Be an ideal borrower: Most lenders will expect you to have good to excellent credit. You can increase your chances of being approved by increasing your credit score. Pay off any current debt and make all your monthly payments on time to improve your score.
  • Go to a local bank: Some local banks or credit unions may be willing to work with you if you have a smaller down payment or less than stellar credit, especially if you are an existing customer.
  • Negotiate owner’s financing: In some cases, you may be able to obtain owner financing. With this approach, you make payments directly to the owner. You’ll usually have a shorter repayment term and higher interest rates with this strategy, but it can be a great option if you’re struggling to find financing.
  • Explore alternatives: If you’re having trouble getting a home loan, explore other options. You may be able to get enough money with a personal loan or home equity loan to finance the purchase and get the money faster.

Last word

Buying investment property can be a great way to build long-term wealth. If you don’t have enough cash on hand to complete the cash transaction, there are a number of investment home loans available to help you achieve your goals.

This article was originally written on November 14, 2019 and updated on February 2, 2021.

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