Investing in real estate can be exciting. If you take the time to find the right investment property, you might be able to increase your monthly cash flow or generate additional income. The right loan for your investment property can make a big difference in the profitability of your property.
Many investors are looking for cheaper ways to finance their investments because of the high down payment requirements. While lower down payments for rental property loans are not always easy, there are other options you might be interested in.
What is an Investment Property Loan?
You can get a mortgage to purchase a house for yourself. The same applies to property investors. You might want to purchase a few apartment buildings to generate income from the rent each month, but you need financial help. An investment property loan is the best option.
What are the most common investment property loans?
Owner-occupants can make it affordable to invest in real estate, especially in areas like urban areas or parts of the country that are high on homeownership. You may be able to purchase a property with less money than you would have to pay if you had to put 20% down.
Be aware that if you make a lower down payment, your lender might require you to cover mortgage insurance. The additional fee may offset any savings you might get by having a lower interest rate.
Get your complete business credit score & reports. This includes the FICO SBSS score, which is used to prescreen SBA loans.
If you are interested in becoming an owner-occupant, there are many small business loans available that can help you save money.
FHA Loan
FHA mortgages are one of the loan options. The Federal Housing Administration provides insurance. FHA-approved lenders might be willing to lend money or offer lower interest rates to borrowers who are considered riskier because the government guarantees the loan. Lenders may approve your application, even if you have credit problems or income restrictions.
The low 3.5% down payment is one of the greatest perks to qualifying for an FHA loan. FHA loans often have lower interest rates.
An FHA loan can be used to buy a home that has up to four units. However, you must live there. The property’s location will limit the amount that you can borrow.
VA Loan
Another mortgage that is insured by the government is a VA loan. You may be eligible for a VA mortgage if you are able to buy up to four units of property with no down payment.
VA loan benefits are only available to eligible borrowers.
- Active-Duty Members
- Honorably Discharged Veterans
- Qualifying members of the National Guard and Reservists
- Eligible Spouses Surviving Spouses
You will need to live in one unit if you are going to use VA financing for a rental property. After a year, however, you may be eligible to apply for a VA loan on another property. Not all VA loans can be approved without sufficient entitlement.
USDA Loan
USDA loans are government-backed mortgage that does not require a down payment. Low-interest, fixed-rate mortgage loans are available to low- and medium-income borrowers. They can be used to finance “safe and sanitary dwellings in rural areas.” You can get a USDA loan to buy single-family and multi-family homes if you are eligible.
You must meet the requirements of a lender to be eligible for a loan.
- You must be either a U.S citizen or a permanent resident holding a Green Card.
- According to the USDA, the property must be located in a rural area.
- You must live in your home.
Conventional mortgage
A conventional lender may also be able to offer a loan for investment properties, multi-family units, and otherwise. Investment loans require a higher down payment than conventional loans.
Owner-occupants will often have less stringent loan approval requirements. Conventional mortgages can have down payments as low as 5%-10% for owner-occupied properties.
You may also save money on interest charges if your rental property is your primary residence. This scenario can result in mortgage rates that are 0.5% to 0.875% less than an investment property mortgage rate.
FHA 203k Rehab Loans
Are you looking to buy an investment property that is in dire need of repairs? FHA 203k mortgage insurance may be a good financing option. A government-backed mortgage allows you to buy a property and pays for the repairs.
You may be eligible for a fixed-rate loan, similar to traditional FHA loans. The down payment can be as low as 3.5%. If you intend to rent out the property, you will need to live there. The loan may be a good option if you plan to purchase a multi-family home and live in one unit while renting the other.
NACA Loans
NACA stands for Neighborhood Assistance Corporation of America. It is a non-profit program that promotes affordable home ownership in rural and urban areas across the country.
Qualified borrowers have the opportunity to enjoy NACA mortgage benefits, which include zero down payments, no closing costs, as well as no fees. You don’t have to have perfect credit to qualify for competitive interest rates.
A NACA loan can be taken out for single-family homes or multi-family properties. To use a NACA loan for investment properties, you will need to make the home or at least one unit your primary residence. To satisfy the NACA program requirements, you will need to take and host classes.
Programs for down payment assistance
If you are planning to live in the property you will also rent to others, then you might be eligible for down payment assistance. If you don’t have enough cash to purchase the property, down payment assistance programs may make it more affordable.
The type of loan used to buy your owner-occupied rental will determine if down payment assistance programs may be available. You may also be eligible for down payment assistance programs in your state.
You can find out more about the state’s home loan and down payment programs. You can start your search by visiting the U.S. Department of Housing and Urban Development.
Is there an SBA loan for an investment property?
You might be familiar with low-interest loans for small businesses offered by the U.S. Small Business Administration (SBA). However, you may wonder if they can be used to purchase an investment property. In fact, you can. You can use the SBA’s 504 loan program to purchase property or land as well as for improvements and renovations of commercial real estate.
How to Qualify For an Investment Property Loan
Consider your eligibility requirements for an investment property loan.
Both your personal credit score and your business credit score will likely be taken into account to determine your creditworthiness. Mortgage lenders may also be interested in how long you have been in business.
Is it harder to get a mortgage for an investment property than a home?
Because of the higher risk, getting an investment mortgage can be more difficult than a home mortgage. Lenders must ensure that you have the financial strength to repay the loan, in the event of tenants not paying. To qualify for the best rates, you will need to have higher credit scores and a lower ratio of debt to income. Even if your credit score isn’t great, you may still be eligible for financing.
You should consider your monthly repayment costs if you are new to investing in property. Also, make sure that you have the funds available to pay it. You can’t guarantee that you will flip your home before the payment is due. If you don’t have enough money, you could end up foreclosing.
How to apply for an investment property loan
Filling out an application can take some time. Make sure to gather all the necessary information and paperwork in advance. It is possible that you will need to submit tax returns and financial statements, as well as information about the business.
After you have been approved, you will receive a loan agreement that lists the terms of your loan, as well as your mortgage rate. Once you have approved, you will be asked to sign the documents. Your account should then be credited with the funds.
Bottom line
You can get a loan for investment property with only 10% down. However, it is complicated. If you don’t want to pay 20% down (or more) for non-owner-occupied investment loan loans, you may have to take on additional risk and inconvenience.
If you find the above options too complicated or risky, it’s fine. It may be easier to search for a rental property loan via a traditional route. Although it may take longer to save a large downpayment, this could allow you to secure financing that is more comfortable.
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