While the COVID-19 pandemic has hit many Americans hard financially, for others who have been able to hold onto their jobs, it has been a time of saving money on commutes and lack of vacations and entertainment. That extra cash, coupled with the fact that mortgage interest rates have remained near record lows, means plenty of people are thinking now could be a great time to jump into the real estate investment market. If you are one of them, learning about the various mortgage options is an important first step.
Just like with a first mortgage, lenders will run a credit check as well as require income, assets, and debt documentation. Because this purchase will be placing an additional financial liability on your, the qualifications for a rental property are usually stricter. For example, you can expect to pay between 20% to 25% for a down payment and slightly higher interest rates and fees than on a first mortgage.
Each investment property loan includes its own specific requirements. Here are the most common options:
- Conventional Loans
Also known as “conforming loans,” they are backed by Fannie Mae and Freddie Mac, and must therefore meet the guidelines for those government-sponsored entities. The good news is that if you can qualify, conventional loans offer low interest rates and fees, and the down payments can be as low as 15%. Plus, if you decide to buy more rental properties you can take out up to four of them with a single lender and up to 10 with multiple lenders.
- FHA Multi-Family Loans
These mortgages are guaranteed by the Federal Housing Administration (FHA) and can be used not only for property purchase but also for new construction and renovation on existing rentals. The down payment and credit score qualifications are sometimes even lower than with conventional loans and you can even use income from any other rental property you have to meet the income requirements. Here’s the big “but”: you must occupy one of the units you are buying for one year or more.
- VA Multi-Family Loans
Sponsored by the U.S. Department of Veterans Affairs, these mortgages are only available to active-duty service members, veterans, or their eligible spouses. If you fall in those categories though, these VA loans do not require any down payment or a minimum credit score. They allow borrowers to purchase up to seven units, but again as the owner you must live in one of the units for a year.
- Blanket Mortgages
These loans allow you to buy or refinance several rental properties under one loan umbrella. This works because the properties serve as collateral for each other. The down payment, interest rate, and credit score requirements will depend on the specific properties and from lender to lender. It is possible to negotiate to have a release clause that allows you to sell off a single property within the loan without cancelling the loan on all.
- Portfolio Loans
These can be used to finance single or multi-unit rental properties with the same lender. The down payment and credit score qualifications are more fluid but that also means the fees are higher. They sometimes include balloon payments where the entire balance is due after a short term.
- HELOC or Home Equity Loans
This loan is essentially a second mortgage on your current home. You take money out of your existing equity and use it to buy a rental property. Because this creates more risk of you not being able to keep up with your first mortgage, the interest rates and fees are typically higher.
- Seller Financing
In some cases, where the seller owns the property free and clear, they may be willing to let you make payments to them directly. Sometimes sellers actually like this because it allows them to spread out capital gains.
There are plenty of options when it comes to buying an investment property. The key is to make sure you are financially ready to take on the extra responsibility to make those loans work!
If you need help financing a rental property – give us a call today.