Investment Property Loans – Understanding Investment Property Mortgage Loans And The Factors That Can Affect Loan Rates

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Rationale Behind Investment Property Loans

Personally funding your own real estate investments can bleed you dry. Most newbie real estate investors do not have the money to fully pay off an investment property, that’s why they will need to secure funding from somewhere. Even savvy real estate investors who have the wherewithal to pay investment properties in full would definitely not do so. They use investment property loans as leverage so that they do not touch their own personal funds. In investor parlance, they use OPM or Other People’s Money to make money.

Investment Property Mortgage Loans Versus Residential Mortgage Loans

If you are buying a property that you do not intend to use as a place of residence but for profit, then it is considered as an investment property. If this is your first time to obtain a mortgage loan for your rental or other investment property, do not expect lenders to look for the same things that you were asked for when applying for a mortgage loan for your personal or primary residence. How the property is to be used is crucial for lenders in deciding on collateral, down payment, and income verification requirements, and the terms and rates.

Requirements For Income Verification. If you can remember it right, you were required to verify your source of income when trying to obtain a residential mortgage loan. This is because lenders would want to be certain that the borrower can afford to consistently pay for the monthly mortgage payments. The debt to income ratio is often used to determine this.

The process of income verification to obtain a loan for a real estate investment is another story because it will not concern your income but the income that the real estate can generate. So no payslips and other personal financial documents may be required. However, lenders may also require that you show them rental receipts, net income statement and other financial documents as filed on your income tax schedules, if you already own a property used as a rental home, vacation home or for commercial use. This is to find out the proportion between income and the loan amount.

Collateral and Down Payment. The lender makes use of the down payment to establish the level of risk that he will be coming up against. For a residential loan, lenders commonly require a minimum 20 percent down payment, bringing about an 80 percent loan-to-value or LTV ratio. At this rate, the homeowner is not liable for any additional requirements, like a private mortgage insurance. This insurance is required for mortgages with LTVs that are more than 80 percent.

On the other hand, you do not have to make a down payment when obtaining an real estate investment loan as it is already secured by the property itself. With the rents and other income earned by your investment property, your lender is assured that you can service the loan.

Terms and Rates of the Loan. As an investor-borrower, you have the advantage to bargain a better loan rate and terms than if you are borrowing for a personal home. This is again because of the consistent cash flow that can be expected from the rental property. The lender would also be more willing to give a real estate investor a more favorable rate and terms to cultivate a good business relationship than to an ordinary homeowner if they spot business opportunities related to the said real estate.

Factors That Affect Investment Property Loan Rates

The mortgage rate you get for your real estate investment will depend on several factors. Some are discussed below.

Rental Property Versus Buy-Rehab-Sell. You can get a better rate with a rental property that already has a dependable tenant whose monthly rental is higher than the monthly mortgage payments, as opposed to a house that you intend to fix and resell for a profit. If you are into rehabbing handyman specials, you have to substantiate that you can afford to make the monthly payments even if the home has not been sold yet.

100% Mortgage and Down Payments. Loan terms that do not require a down payment, labeled as 100 percent mortgage, may also exact a higher interest rate than those that do.

Property Location. If your rental property is in a good neighborhood where vacancy rates are low, this reassures your lender that you can fulfill the payment schedule, hence, it is in your cards to get a lower rate.

There are more factors that can affect your loan rate. Rates also vary from one type of lender to another. Shop around to get an idea of the range of rates you can get and so that you can haggle. You can use a mortgage rate calculator in one of the many sites in the Internet to compute for your rate.

Can You Obtain An Investment Property Loan Through FHA?

Some people prefer obtaining mortgage loan from the Federal Housing Authority because of its more lenient credit qualifying criteria and the down payment or equity requirements are less as compared to conventional loans. Moreover, borrowers with a slightly marred credit record or those who do not have credit history yet may qualify for an FHA.

Despite these advantages, however, you as an investor may not be able to secure an FHA loan to finance your real estate investment because only properties that are to be used as primary residence can qualify. But if it is a duplex or a 4-plex and you are planning to make one of the units your primary residence, then you may qualify. If, later on, you move out of the unit, the property may still be considered as an FHA property and may qualify for streamline refinance or loan modification.

Investment property loans are essential to any real estate investor as it can be used as a leverage to make profit using other people’s money, of course, at a cost. Besides other factors, the earning potential of the real estate holds sway in determining the loan rates.

Investment Property Financing – Finance Investment Properties With 100% Financing

Real Estate Investors’ Big Secret – Investment Property Financing

With the down market, people keep saying that now is a good time to invest in real estate. However, newbie real estate investors could only scratch their heads as they do not have the money to buy their first property. Sure, the prices of real estate may have dropped insanely low but still the cash on hand just isn’t enough. Who says you have to take your payment from your own pocket? One of the biggest secrets how savvy real estate investors make money is by using other people’s money, through investment property financing.

5 Ways To Finance Investment Property

There are several ways you can obtain funding for your real estate deal provided you have a bang-up credit rating. Even if you don’t, there are still other creative ways to financially prop your real estate deals up. The following are some ways that may help you source your funding:
Traditional Route. Borrowing from banks, credit unions and other lending companies has been the customary way for people to obtain funding for their property. However, after the mess with the sub-prime housing, these lenders have toughened up their criteria for lending, such as a credit score of 740 or better. They also require tons of paper work to show a good ratio between income and debts. And if you do qualify, chances are, you will be asked for at least 10 percent down payment, although you may find some plans that may ask for less.
Subject-To Existing Financing. This method of financing, which savvy investors nickname “subject-to”, involves a buyer who is willing to acquire the home provided that the current loan is maintained and remains in the seller’s name, but the buyer makes the payments. The title will be transferred though. This is a great way to fund a deal, especially if the property is on the verge of foreclosure,  because you do not have to make a down payment and it can be the quickest you can get. But it could also be the shortest since the seller will not feel at ease while the mortgage is still under his name for a prolonged period. So you have to set a plan to refinance in six months. Although quite risky for the seller, hard-pressed homeowners would agree to this in order to get rid of the house quick. When using this technique to fund your real estate deal, ensure that you fulfill your obligation to the deal and pay on time even if the mortgage is still under the seller’s name.
Seller Carry Back. If you chance upon a seller whose ownership of a property is free and clear of any encumbrance and agrees to receive a monthly payment for it, then you can use this form of owner financing. Typically, however, the seller will set a deadline for when the note must be fully paid, usually from one to five years. Just keep in mind that you have to refinance at some future time, which is just great since it is easier to get a refinance loan than a purchase loan.
The above examples are just some ways of obtaining financing for your real estate investment. As you get yourself deeper into the business, you will discover a lot more ways to fund a real estate deal, or you can even come up with one yourself.

Quick Tips On Financing Investment Properties

If you are considering obtaining financing for an investment property: (1) prepare a substantial down payment of at least 20 percent to secure traditional financing; (2) strive for a credit rating of at least 740 so that you can negotiate better terms and rates and avoid additional costs; (3) avoid large banks and opt for local ones or mortgage brokers, especially if you don’t have substantial amount for down payment, to avail of the latter’s flexibility.

No Cash For a Down Payment? Consider 100% Financing on Investment Properties

Another option you have in funding your real estate deal is by obtaining 100% financing for your investment property, meaning you do not have to make a down payment although you may have to pay for a higher interest rate. The typical financing would require you to pay 20% as down payment to get a loan-to-value ratio of 80 percent. Beyond this rate, you would be required to purchase a Private Mortgage Insurance (PMI) to secure the loan.
Some lenders would be willing to provide 100% financing especially for investment properties that make sense since the property in question can be used to secure the mortgage. The usual structure of this type of loan is “80/20 piggyback,” which involves borrowing for the first and second mortgage from one lender or different lenders. Sticking to one lender though helps to avoid future confusion and complications. However, if you cannot find one sole lender for the two loans, consider seeking financing from other sources, such as another bank, through seller financing, from private money lenders with self-directed IRA’s, a lease option, among others.

Despite the tightened criteria to qualify for a loan, it is still possible to obtain 100 % investment property financing if your real estate investment makes sense, and if you have a good credit rating and some creativity.

Investment Property Mortgage – Ways To Get The Best Loan Rates For Your Investment Properties Including The Use Of A Calculator

Savvy Investors Leverage on Investment Property Mortgages

Investment property mortgage is the lifeblood of any real estate business. Most investors cannot, or would not, use personal funds to purchase investment real estate. They make use of other people’s money to make money. Of course, you cannot do this if the interest rate you get is higher than your rate of return. So here are a few tips on how to obtain better rates and terms.

Sort Out Your Income and Debt Before Applying for an Investment Property Mortgage

Your income and debt could either decrease or increase your loan rates, whether applying for a personal or rental property. If debt servicing eats up more than 36 percent of your income, chances are, you will merit a higher financing rate. To obtain a significantly lower loan rate, fix your finances first in such a way that debt servicing will constitute only 28 percent of your income.

Raise That Score To Get Better Investment Property Mortgage Rates and Terms

Another factor of mortgage rate is your credit rating. Evidently, a stellar credit score will more likely merit a lower rate. A score of 620 may add as much as three percent to your rate as compared to having a score of 760 to 850. So before applying for financing, check you score first and take pains to improve it if it is still below par.

Save Up For Down Payment For Your Investment Property Mortgage Loans

The higher down payment you can put up, the lower the rate you can get. That is why, it is crucial to save up some money for this payment. Try to have at least 20 percent for down payment to get better rates. Choose your lender well as some may ask for a heftier down payment for investment properties. In UK, rates for real estate investment also used to be higher than those for residential properties.

If you cannot raise money for down payment, you can opt to get a second loan to take care of this. Some investors advice that you obtain the 2nd loan from the same lender to avoid confusion and complications in the future.

Refinance Mortgages for Investment Properties

If you already own a property that has substantial equity, but you feel burdened by the high mortgage rate or you need to improve your cash flow, consider refinancing your loan. A cash-out refinance is one way to convert equity into cash. You can also refinance to a lower rate or longer term so that you can better afford your monthly mortgage payments and further improve cash flow.

Try An Investment Property Mortgage Calculator

Before jumping onto the first mortgage you get, shop around first to get an idea of the range of rates you can obtain. Many websites provide investment property mortgage calculators to make things easy in determining how much equity you need to have, and also get suggestions on the most appropriate loan for you.

Every shrewd investor knows that a better investment property mortgage rate has a tremendous impact on cash flow and the profitability of the investment; hence, knowing the factors that affect rates and how to work on them to your advantage is crucial.

Refinance Investment Property – 4 Other Reasons For Refinancing Loans For Investment Properties Besides Lower Mortgage Rates And To Cash Investment Out

Refinance Investment Property To Adjust Terms According To Your Current Needs

After some time of paying off the mortgage for an investment property, your personal earnings and investment needs may have altered. Hence, you may find to need to refinance investment property so that you can either change the terms or loan period or even the interest rate. Should you now be able to afford a higher monthly mortgage payment than before, making your loan duration shorter allows you to pay less interest and take ownership of your investment property sooner. Should you find yourself in the opposite side of the financial spectrum where you need more affordable monthly loan payments, the you can also refinance to extend the loan period so that you minimize the risk of missing out on payments.

To Switch To Lower Investment Property Refinance Rates

One of the main reasons investors refinance investment property is to substitute current mortgage with a new loan that provides lower interest rates. A two to three percent reduction in interest rate can contribute to a few dollars of monthly savings, depending on your total mortgage debts. And yes, more savings mean more profit.

Besides looking for lower rates, some investors also refinance their mortgage to switch from their adjustable rate mortgage (ARM) to a loan offering fixed interest rates. This is especially sound to do when current interest rates are really low, hence, you can opt to lock in dirt-cheap interest rates. On the other hand, if you still see interest rates in the long run to plummet, you refinance to switch from a fixed mortgage loan to ARM.

Cash Out Refinance Investment Property To Boost Cash Flow

If you find your real estate business financially tight and needing more liquidity, refinancing is one way to cash your investment. You can do this if you have accumulated sufficient equity in the property. Even without the cash out scheme, you are still, in essence, boosting your cash flow when you refinance a property with a lower interest rate or extended loan duration since you will be paying less in monthly mortgage.

Refinance Investment Properties To Upgrade Properties and Increase Rents

Some investors opt for the cash out refinancing and use the cash to bring the property to code. Doing so increases the market value of the real estate, hence, enabling them to also increase rental fees. Now you have an idea of where to get funding should you decide to renovate doors, floors, kitchen appliances and cabinetry, extend the structure to increase living space, replace the roof, or whatever renovations you are considering.

Obtain Investment Property Mortgage Refinance To Acquire Another Property

Besides renovating your property, you can also use cash out refinance to invest in another property leveraging on the accumulated equity of the existing property.

Use Investment Property Refinance Loans To Use Money For Other Purposes

Actually, you can cash out refinance to fund just about anything, not just for your real estate investments. You can also use it to diversify your investments in other baskets such as the stock market and market for other commodities. You can increase your retirement savings, consolidate debt, start a new business, buy a new car, augment funding for the college tuition of your kids, and just about anything.

With lesser interest rates and monthly mortgage payments, and possibly additional cash, you can refinance investment property to boost cash flow, strengthen your investment power, increase long-term wealth, pay off debts and just about anything.

 Investment Property Loans   Understanding Investment Property Mortgage Loans And The Factors That Can Affect Loan Rates

Comments

  1. Hi there. I enjoyed reading this blog and i learned so much today. Thanks, keep posting.

  2. I really enjoy reading this blog as i learn so much about investment property loans today. this blog is giving me the knowledge to get going on my investment property plan. greatly appreciated and Thanks.

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