Investment Property Loans
Purchasing an investment property is a very different experience than purchasing a primary residence. The approach and method to purchasing investment properties is very different than buying a home to use as a primary residence. The loans or mortgage options available for investment properties are actually much easier to qualify for.
When you speak with an investment property lender, it is important to understand your long term goals for the property you are purchasing. Do you plan to hold it for a long time? Is your intention to rehab and then flip the property? Knowing these answers will help your lender to craft the mortgage offer that makes the most sense for you.
Investment Property Loan Requirements
There are specific property requirements that need to be met if you plan to finance your purchase with an investment loan. The requirements will vary for each lender and there are no overarching national guidelines outlined like you may find with Fannie Mae. The only government mandate that all lenders must follow is investment loans cannot be used for primary residences.
Down Payment Requirements for Investment Properties
Buy and hold investments – Down payment of 20% or more
Fix and Flip investments – Down payment of 10% or more for experienced flippers.
Construction Projects – Down payment of 20% or more
Property requirements
- No primary residences
- Single family homes
- Multi family buildings
- Mixed use properties
- Commercial properties
The property type may have an impact on the rate and terms offered by the lender. Some lenders will be selective in the type of property they are willing to finance.
Credit Score Requirements for Investment Loans
Credit scores will play a major role in determining the interest rate, down payment and even whether the mortgage will be approved.
Many lenders require credit scores starting at 650 with the most favorable terms offered to those whose credit scores are in the upper 700’s. If your credit scores are poor, financing opportunities are very hard to find but it is possible.
DSCR debt service coverage ratio
Many investment lenders use the Debt Service Coverage Ratio (DSCR) to determine whether they can finance the property, or what the terms of the loan will be. The DSCR is essentially a ratio that is calculated by dividing the monthly rent roll by the basic expenses. A DSCR of “1” means the rent just covers the expenses. Lenders are typically looking for a DSCR of 1.2 or more.
This is an example of how the DSCR is calculated:
Monthly Rent Roll / (proposed mortgage payment + monthly taxes + monthly insurance + monthly HOA)
Monthly rent roll = $2000
Mortgage Payment = $850
Monthly taxes = $300
Monthly Insurance = $95
Monthly HOA = $250
Total Expenses = $1495
$2000 / $1494 = 1.33 DSCR
If the DSCR is less than 1, then the property has a negative cash flow each month and most lenders will not finance the property. If this is your situation, we can still help you.
Investment Loan Rates
Interest rates for investment loans are going to be higher than what you may get if you were financing a primary residence. Today, the investment loan rates are about 2% higher than a conventional primary residence loan.
Investment loan rates will vary based upon your credit score and down payment percentage. Lenders can use rate adjustments as a way to remove or reduce pre-payment penalties, add interest only features, or extend the overall term of the loan.
Interest rates for investment loans start in the upper 4% range and can go as high as 10% or more. Each property and opportunity will result in an offer from the lender that may look different than what they may offer on another property.
We can provide you with an estimate of what your rate will be based upon the purchase price, possible rent roll, annual taxes, and annual homeowner’s insurance. Click to get a rate quote for your investment purchase
Pre-payment penalties
Various investment loans come with pre-payment penalties that range from 6 months of interest to as much as 5% of the loan amount. Pre-payment penalties for investment loans are common in the industry but you can negotiate with the lender to reduce or eliminate the penalty. That negotiation typically results in a higher interest rate.
Pre-payment penalties are not always a problem depending upon what your plans are for the investment property. If you are not planning to hold onto the property for very long, then it may make sense to find a short term loan with no pre-pay penalty but with a higher interest rate.
Investing Experience Benefits
Your investing experience in owning or flipping many properties could be a benefit to you when negotiating the terms of your loan. Some lenders offer lower down payments to experienced investors.
Fix and Flip Mortgage
Fix and flip mortgages are short term loans offered to investors who plan to purchase a property, rehab it, and then sell it for a profit. These mortgages are typically designed to be for a maximum term of two years and have higher interest rates.
You can purchase a home with a fix and flip loan with just 10% down and borrow the funds needed to fund the rehab costs. Read our article on fix and flip loans for more information.
Buy and Hold Rental Mortgage
If you are purchasing an investment property with the intention of holding it for an extended period of time, then you may want to consider an investment loan with a longer term and a prepayment penalty.
The mortgage programs offered for a buy and hold scenario will have low down payments and interest rates based upon your credit scores.
No Doc Investment Loans
True no doc loans still exist when financing investment properties. Lenders will not ask about your job, your income, and they do not need to see your tax returns. The only documentation needed is a bank statement showing that you have the down payment and closing costs needed to fund the deal.
Read [No Doc Loans]
Hard Money Loans
Hard money loans are offered by private investors for short term real estate transactions for investment purposes. If you need to close fast and do not mind paying a high rate and points, then this is the loan for you. Read our article about hard money loans.
Investment Property Loans with 10% down
Investment property loans with 10% down are available for fix and flip or rehab scenarios. You may also have the opportunity to borrow the rehab funds needed too. If you are looking for an investment loan with a low down payment, then contact us and we will review your investment opportunity together.
Investment Property Refinance – Cash Out
With rising property values and lower interest rates, many investors are looking to cash out some equity to use for other purposes.
A cash out refinance of an investment property will allow you to tap into that equity to use as the down payment for the purchase of another investment.
You may also use that cash out of the equity to potentially update and rehab the existing property to help justify an increase in rents.
Cash out refinances of investment properties can be done up to 80% of the appraised value depending upon the cash flow of the building, your credit score, and loan amount. Please be aware that a 75% loan to value ratio is most common.
Favorable terms are available for cash out refinances now and you can also get the mortgage in an interest only version which will reduce your monthly payment and improve your cash flow.
Investor Property Lenders
These are just a few examples of some investment property lenders who offer products that may fit what you need. Meanwhile, there are too many to list and we can help you to find the right lender based upon your specific needs. Contact us for a free quote.
- Iglesias Loans – residential, retail, office, land, churches, warehouses, and more
- America First Credit Union – Loan terms up to 10 years with down payments as little as 20%. Will allow for loan amounts as little as $5,000. They also offer home equity products.
- Investors Choice Lending – This lender offers non owner occupied financing with no income documentation, cash out refinances, and they also finance mixed use properties.
Investment Property Loans for LLC
Many investor lenders will ask you to purchase the investment property under an LLC. There are some benefits to doing this and potentially some negatives.
First, you are getting personal protection from liability related to the property and your tenants. If someone is injured, they are not able to come after you personally.
Second, there are some tax benefits that are different than if you owned the home personally. We suggest contacting an accountant to provide you with the pros and cons from a tax perspective.
READ [Buying a Home Under an LLC]