Funding investment property can be challenging for people who are just entering the real estate investment realm. There are many types of loans today that one can consider, depending on how quickly you need the money, your credit history, and other factors.
This article covers three popular lending vehicles for new property investors.
Hard Money Loans
Hard money loans are popular with flippers, and others who are buying a distressed property that will need repairs before you can put it on the rental market.
Lenders process hard money loans faster than traditional mortgages, so if you need money quickly, this may be the option for you.
Short-term loans are often the best financing option for people who are buying foreclosed properties at auction. With this type of loan,you must come up with cash in a few days. It’s also important to note that there is a price to pay for quick money. You should expect to pay higher interest rates, more points to the lenders, and a big down payment—sometimes as much as 30% down.
When you are competing with cash offers or trying to overcome a recent bankruptcy filing, a hard money loan may be the only financing option some can qualify for. Use caution when taking out this type of investment because the lenders have the same foreclosure authority as a traditional lender—if your plans fall through and you cannot make payments on time, you may lose your investment property.
Traditional & Alternative Mortgage Packages
There are a number of financing structures that fall under the umbrella of traditional mortgage loans. Most people are familiar with the conventional mortgage that has a 15- or 30-year fixed interest rate term. The interest is based on the federal prime rate and an applicant’s credit history and debt to income ratio. Conventional loans typically require a down payment between 3 percent and 20 percent, and a credit score of 620 or above.
Other loan types available from credit unions, banks, and mortgage lenders include:
FHA Loans: These aregovernment-guaranteed loans with low down payment requirements. Because a low credit score often means higher down payments, people with limited or negative credit and/or limited cash on hand may prefer an FHA loan that only requires 10 percent down from people who have 500-579 credit scores. You can even use borrowed money or a grant to satisfy the down payment and points.
VA Loans: Veterans, reservists, active-duty military personnel, and their family members may apply for VA loans to purchase an investment property. There is no minimum income required as long as you can prove you have a steady income, and as a bonus, there is a low interest rate. VA loans can only be used as a bridge loan because you must occupy the home while it is financed. This option is great for people who want to buy a distressed home, live in it a few years while fixing it up, and then sell it for profit.
Relationship-Based Investment Loans
Private money lenders are typically friends, relatives, colleagues, investors, and other people with the funds on-hand to give you a loan. Interest rates and terms vary widely.
Private money loans are the right choice for people who:
- Plan to sell a property within 12 months.
- Need quick cash.
- Want to buy and renovate a property before applying for a traditional mortgage loan.
- Have long-term investment goals but want to boost their credit or buying power before applying for a conventional mortgage.
- Need to establish a property performance history to qualify for a conventional loan. This type of investor may also hire a property management firmto enhance revenue potential.
There are many types of property investment loans available today. For some people, the hardest part of getting into the real estate investment world is figuring out where to get their initial funding. Whether you have an excellent credit score and plenty of available cash, or you’re trying to recover from a recent economic catastrophe, there is a lender out there willing to help.
Explore your options,prepare your case,then apply with confidence—your dreams are waiting.
Patrick Freeze is the President of Bay Management Group, which manages about 4,000 units in the Mid-Atlantic Region. The company is overseeing more than $700 million worth of real estate as of October 1st, 2018.