Real estate is a worthwhile investment because it provides a steady source of income. Like any investment, however, it requires a great deal of consideration and quite a bit of research. The average person rarely has the funds to buy an investment property outright, so financing is often one of the most important. Here is what you need to know about getting a loan for your first investment property.
Know Your Property Loans
Investment property financing is a bit different from financing a home, as many loan programs are only available for primary residences. The following types of loans are available for investment property:
- Conventional Loans: The federal government does not back these home loans and has stricter rules regarding credit and down payments. Generally, a conventional loan requires a credit score of 620-640 and a 5-20% down payment on the home. They come with different payment options (30 years or 15 years) in addition to fixed and adjustable ARM interest rates.
- Home Equity Loans: If you have equity in your home, you can use it as collateral to get a second loan. The advantage of these loans is that they typically have lower interest rates; the disadvantage is that you can only borrow up to 80% of the market value of the home.
- Hard Money Loans: This is a short-term loan that is generally easier to qualify for compared to conventional mortgages. They tend to have higher interest rates and usually require that 10-15% get repaid within the first year. They are a popular choice for flipping houses. Some buyers decide to rent their flipped house instead of selling it immediately by leveraging a management company.
Consider Your Down Payment
One of the best ways to get approved for an investment property home loan is by having a sizeable down payment. This also works to give you more competitive loan terms, such as a lower interest rate. Putting at least 20% on your home also helps you avoid Private Mortgage Insurance (PMI), which can reduce your monthly costs.
Improve Your Credit Scores
Your FICO credit score is one of the most significant determining factors in ascertaining if you get a mortgage, as well as determining your interest rate. A credit score of over 700 puts you in the “Good” category with more competitive interest rates. Making sure your credit score is as high as possible before asking for lending will help improve your chances of securing the best possible rate. Keep your credit balances below 15% at all times to help keep your credit rating consistently good.
That said, you can still obtain a loan with a credit score of less than 700. Some companies will accept credit in the 620-640 range, but you may have to make a larger down payment. Keep in mind, however, that making a down payment can help you with your interest rate and help you make more of your investment.
An investment property can provide a reliable source of extra income, but there are several considerations that go with it, including financing. Weigh all your options carefully and take steps to improve your credit score before applying for a loan. Using these tips can help you make the most of your investment experience.