Is it harder to get a Mortgage for an Investment Property?

Real estate investment is one of the most profitable investments you can make if you know your onions. More than 10% of the wealthiest people in the world post real estate as their source of income, and this sector has become one of the most lucrative over the years, generating three times more revenue than every other income source over the last year.

If you’re a small-time investor, the easiest way to make money off real estate is by renting out a property or flipping a property for profit. However, the personal capital to invest in property is often unavailable, making investment property loans worthwhile. Investment property loans allow you to increase your profit by using the loan to build or rehabilitate a property where there is a need while leveraging the terms of the loan. However, banks and lending institutions often consider investment properties a higher risk, making it harder to secure investment property loans. In this piece, we’ll discuss investment property loans, the challenge in securing them, and how you can increase your chances of securing them.

What are Investment Properties?

Investment properties are properties purchased for the purpose of income generation rather than for residential purposes. These properties are typically undervalued on the market because they require major repairs or a facelift. Thus, you can buy these properties on the cheap and make the necessary renovations, causing the property value to rise again. If you are looking for short-term returns, you could immediately put the property back on the market, flipping it for a profit. For long-term gains, you could rent the property out and accrue income from rents.

What is an Investment Property Loan?

As with all types of properties, it is not particularly easy to afford an investment property. You need money to afford not just the property but also the repairs needed on them. Thus, to offset this cost, you can take an investment property loan.

Investment property loans are granted with the understanding that the property to be purchased will be used for profit-making and that the occupant of the property and the holder of the loan are thus separate entities. This condition is what makes investment property loans difficult to obtain. As far as the banks are concerned, the loan holder has no attachment to the property, increasing their likelihood of defaulting on payments. In addition, the holder of the loan on an investment property may also have a residential loan on a personal property resulting in them being unable to settle the residential loan as agreed.

Investment loans constitute a significant risk to the lending institution, causing them to have steeper terms and higher interest rates.

What makes Investment Property Loans harder to obtain?

Investment property loans usually have a high default rate, especially among investors who also take out a mortgage on their primary residence. Because of this historical statistic, banks and other lending institutions typically have strict qualification criteria for these loans so that only the more credit-worthy customers can obtain them. Some conditions that affect your ability to obtain an investment property loan include;

Higher Credit Score

Your credit score is a metric that helps lenders know how credit-worthy you are. The better your credit score, the more qualified you are to take a loan. While you may be able to get a residential loan with a credit score rating of about 620, you will need a score of at least 740 to secure an investment property loan.

Low Debt-To-Income Ratio

The debt-to-income ratio measures your current debt against your income and gives lenders an idea of how much free money you have to make payments on your mortgage. Typically, lenders want to ensure that you have a stable, large enough income while having a minimal debt to ensure that you can keep up with payments. With investment property loans, the conditions for your debt-to-income ratio are steeper (usually around 43%), considering that you may already be paying a mortgage on your residential home.

Higher Down Payment

Virtually every real estate loan requires a down payment to help offset the risk of having to foreclose on the property since selling the property may not help recoup the loan balance. Depending on the lender and the specific loan program, this down payment is around 3-20% with residential loans. Typically, if the down payment is less than 20%, you will be required to pay private mortgage insuranceto offset some risk if you default on your loan.

Private mortgage insurance does not apply to investment properties, which also have higher risks. Thus, lenders typically ask for a higher down payment of at least 20% and sometimes as high as 25%.

Savings

Besides having a good debt-to-income ratio, you will also typically have to satisfy the lender that you have adequate savings to cover financial eventualities. Typically, you will need to show that you have adequate money to cover three to six months’ worth of mortgage payments, including principal, interest, taxes, and insurance.

Number of Mortgages Owned

The more mortgages you own, the lower your chances of getting an investment property loan. A higher number of mortgages severely impacts your debt-to-income ratio, reducing the lender’s trust in your ability to offset your loan.

Lender’s Past Experience

Even when you meet all the qualifying criteria for an investment property loan, you will likely be dealing with a lender who has previously lost money on an investment property loan. Such a lender may not be willing to take the risk of offering an investment property loan to avoid further losses.

Obtaining Loans to Finance Investment Properties

Investment property loans are common loans that you can obtain from a bank or private lender. The process of applying for an investment loan is similar to that of applying for a regular residential loan. However, the qualifying criteria and, thus, the ease of getting an investment property loan differs.

When seeking an investment property loan, you will find out that there are several loan types available. It’s left for you to pick which offer best suits your circumstance. Here are the most common types of investment property loans;

Conventional Mortgage

Conventional mortgages are the most common type of investment property loans. You can take a conventional mortgage on an investment property when you meet the credit score, debt-to-income ratio, and savings requirement. You also need to make a higher down payment, with a higher interest rate than what is obtainable with traditional home loans. Conventional mortgages on investment property typically have a loan-to-value ratio of 80% or less.

You can only qualify for a conventional mortgage if you have less than four mortgages to your name. Otherwise, you would have to go through a special Fannie Mae program which allows you to have up to 10 investment mortgages.

Hard Money Loans

Hard money loans are a type of commercial real estate loan often utilized by real estate investors that need quick cash with more flexible qualifying criteria and quicker release times. Investors can take advantage of these short-term loans to buy and fix up a property and then flip it for a profit as quickly as possible. Hard money lenders are often not concerned about your credit score or income but are more interested in the potential of the property you want to buy. If you already have up to four mortgages in your name, then a hard money loan is an easy route to get another mortgage.

Hard money loans have the disadvantage of being short-term, payable within 6 to 24 months, with high interest rates. You also have to make a down payment of at least 25%, with upfront fees as high as 2 to 4 percent of the loan. Hard money loans are not provided by banks but rather by private lenders willing to take the risk.

Private Loan

Rather than taking a loan from a bank or professional lender, you can take advantage of your relationships to secure a loan from a friend or family member who has spare money around and is willing to invest in your venture.

Taking a private loan offers the advantage of flexible terms and payment plans. Your friend may not expect you to meet a credit score requirement and will almost certainly offer you lower interest rates. However, you need to ensure that there is an established note of agreement between you and them. The major downside of a private loan is that it has the potential to damage relationships if you fail to meet the agreed terms.

Home Equity Loans

Instead of obtaining a loan specifically to purchase an investment property, you might obtain a home equity loan against the equity in your principal residence. Because your personal house will be used as security, a home equity loan is easier to qualify for and will likely have better conditions. To qualify, you must have a credit score of 620 or higher, a debt-to-income ratio of 43% or less, and a strong credit history. However, you will only be able to obtain a home equity loan if the value of your current residence matches that of the property you want to purchase.

Increasing your chance of approval for an Investment Property Loan

Investment property loans have steep requirements that make them hard to obtain However, there are certain actions that you can take to help increase your chances of qualifying for such loans. These include;

Experience in Real Estate Investment

One of the best ways to increase your chances of getting an investment property loan is to show lenders that you have experience in making a profit from properties and that you truly know what you’re doing. Such a display of knowledge will make the investors more comfortable with you, knowing that you can provide returns on any amount borrowed. You must show the lender that you have done proper risk analysis and that you are ready for whatever eventualities may occur. Typically, you are more likely to get a favorable response if you can show evidence of similar successes in the past.

Improve Your Credit Rating

A good credit score is a requirement to get an investment property loan. Thus, when you know that you need such a loan, it will be best to work proactively on improving your credit score to match the requirements of the loan. You can improve your credit score by paying off outstanding debts, paying all your bills on time, and reducing your debt-to-credit ratio down to at most 30 percent.

Maintain Cash Reserves

Your chances of securing an investment property loan significantly improve if you have huge amounts in personal savings. This must be enough to make the down payment and at least six months’ worth of mortgage payment on your loan. Having a huge cash reserve is a good way of gaining the lender’s trust and assuring them that you are not a big risk. Cash reserves are especially vital if you want to renovate and flip a property since you’ll need money for repairs and improvements.

Tips to get a good Investment Property Loan

When looking for an investment property loan, it is particularly vital that you try to secure a good deal for yourself beyond merely improving your chances of securing the loan. Applying the following helpful tips will help you increase your chances of getting a good deal;

1. Explore various options: There are different financial institutions that offer investment property loans. Each of these institutions has unique requirements and terms, and some are more favorable to you than others. It is always best to visit multiple lenders to compare their terms to get the most favorable options for you.
2. Consider the purpose of the property and your long-term goals: Investment property loans confer a significant debt on you. How this debt will affect you depends on the purpose of the property for which you’re taking the loan. If your purpose is to flip the property for a quick profit, then you must have plans in motion to enable you to flip the property quickly. However, if you’re considering renting out the property, then the debt will be with you for longer, and you must have plans to deal with this significant debt over time. One principle to remember is to never take a short term loan to finance a long term investment.
3. Assess available properties and determine that you can afford: Being able to afford a property does not rest solely on how much you can get through a loan but rather on what your current and long-term finance permits. It is important that you take the time to really assess your situation and hire the services of an independent auditor if necessary. When assessing your finances, it is best to view it from a worst-case scenario standpoint – “what is the worst things can get and how will this property affect me at that point?” Never assume that your property will appreciate in value, that you will find tenants quickly, or that they will maintain their lease agreement. Imagine that all of these fail and plan to deal with them before taking a loan.
4. Make efforts to reduce the interest rates: When it comes to investment property loans, interest rates are typically quite high. There are a few options for lowering these rates. First, focus on increasing your credit score and decreasing your debt-to-income ratio. The better your financial situation, the more willing lenders will be to work with you. Then think about saving greater cash for your down payment. The larger your down payment, the lower your interest rate will be (and the less of it you’ll have to pay over the life of the loan).

Financing an Investment Property with a Non-QM Loan

A non-QM loan is an unsecured loan that is an alternative to a typical bank mortgage. It’s ideal for people looking to invest in real estate, but it’s also an option if you need more help with debt than your credit score will allow. The Non-QM loan is available to people who can’t meet the Qualified Mortgage (QM) requirements for a Quasi-Market Mortgage Loan. These are typically people with moderate income and poor credit histories. Non-QM loans are similar to hard money loans because they offer quick payouts. However, they typically have lower interest rates and down payments. Non-QM loans also take your credit history into account, although with milder requirements. Aurum & Sharpe offers asset-based non-QM loans for investment properties with excellent terms. A non-QM loan provides an excellent option to finance an investment property without hassles.

You can get an Investment Property Mortgage

“Is it harder to get an investment property loan?” Yes. However, it is not impossible. While lenders are generally weary of the prevailing statistics that show high default rates on investment property loans, you can show them that you are different. I have already laid out all the conditions you must meet to qualify for such loans, and you will hardly be rejected once you meet those criteria. Make sure to show the lending institution that you know what you are doing, and they’ll be all too happy to sign off on that investment loan.

To discuss options for non-QM loans on investment properties, do well to contact me at 9177404325.

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