Investment Property Programs
An Investment Property loan refers to a mortgage for a property that generates income and is not intended for use as a primary or secondary residence. Properties that fall into the investment category include flipped homes, which are renovated and sold for a profit, as well as short-term rental properties.
Conventional loans are the most flexible option when purchasing an investment property. They do not have any special requirements and are generally easier to qualify for. Unlike FHA loans, VA loans, or USDA loans, conventional loans are not backed by the federal government.
Conventional loans offer financing options for 15, 20, and 30 years, depending on the borrower's financial situation and credit history. The interest rates for these loans depend on both the federal government rates and the borrower's credit score. A down payment of 20% is typically required.
Commercial loans are suitable for investment properties held by a Limited Liability Company (LLC), which is a legal business structure that combines corporate and partnership features. These loans can be used to purchase various types of commercial properties, ranging from raw land to medical office space and industrial warehouses.
The Requirements for an Investment Property Loan
The requirements for an investment property loan can vary based on the chosen lender. They also depend on the borrower's credit history and financial capacity.
Here are a few general requirements that apply to most borrowers:
Considerable down payments: Whether you opt for a conventional or commercial loan, you must provide a minimum of a 20% down payment for your investment property. Down payment assistance programs cannot be used for investment loans, and traditional investment mortgages do not permit gifts for purchasing a rental home.
Reserves: When making a significant financial investment, your chosen creditor or lender will require proof of funds. The amount needed varies, but typically lenders look for proof of two to six months' worth of mortgage payments.
How do I secure an investment property loan?
Conventional Loan
Property Type: Generally limited to residential properties consisting of one to four units.
Borrower Profile: Designed for real estate investors with less than ten properties rather than business entities.
Loan Term: Typically offers fixed-rate terms of 15, 20, or 30 years.
Credit Score: Generally requires a good to excellent personal credit score.
Debt-to-Income Ratio: Loan approval considers personal financial statements, tax returns, and debt-to-income ratio.
Underwriting: Follows a more standardized underwriting process compared to commercial loans.
Commercial Loan
Property Type: Can be used for various property types, including multi-family units (more than four), retail spaces, owner-occupied office buildings, medical offices, and industrial warehouses.
Borrower Profile: Aimed at business entities such as LLCs, corporations, etc.
Loan Term: Can have shorter loan terms (5-20 years) and potentially include a balloon payment.
Debt-to-Income Ratio: DTI may be analyzed based on the property's income-generating potential (Debt Service Coverage Ratio).
Underwriting: A more flexible and customized process, often involving business plans and revenue projections. Remember, terms and conditions may vary among different financial institutions.