Investment properties can be a great way to diversify your assets and generate passive income. However, financing investment properties requires more capital and often comes with higher interest rates than primary residences. That’s why it’s crucial to understand your investment property loan options before moving forward with a purchase. This complete guide will walk you through the different types of investment property loans, qualification requirements, and tips for getting the best rates and terms in 2023.
Types of Investment Property Loans:
- Conventional loans – These loans from banks are the most common type used for investment properties. Typically require 20-25% down and have higher interest rates than owner-occupied loans.
- FHA loans – Insured by the Federal Housing Administration, these loans only require 3.5% down but come with mortgage insurance. Good option for investors with less capital.
- VA loans – For military veterans and spouses. No down payment required and no mortgage insurance. Competitive interest rates but funding fee is required.
- USDA loans – For properties in designated rural areas. 100% financing available with no down payment and low interest rates.
- Portfolio loans – Offered by community banks and credit unions. May offer more flexible qualifying guidelines than conventional loans.
- Hard money loans – Provided by private investors and real estate companies. Easy to qualify for but come with high rates and fees. Short-term bridge financing option.
- Commercial loans – For larger multifamily properties and apartment buildings. Typically require 25% down or more.
- Maintain a credit score over 700 and low debt-to-income ratio
- Keep reliable income from employment, business or rental properties
- Provide up to 2 years of tax returns to show consistent revenue
- Have sufficient assets for down payment and closing costs
- Work with a lender who specializes in investment property financing
Getting the Best Rates:
- Shop around with multiple lenders to compare rates and fees
- Consider getting pre-approved to show sellers you are serious and ready
- Ask about lender credits to offset closing costs
- Opt for a shorter loan term to get a lower interest rate
- Make a larger down payment if possible to reduce rate and costs
The bottom line is investment property loans allow real estate investors to capitalize on opportunities with less cash upfront. Following the tips above will ensure you get approved for the ideal financing option to match your investment goals and expand your rental portfolio.