Investing in real estate is a great way to build wealth, but it’s crucial to utilize the right financing methods. To achieve your real estate investment goals, there are various borrowing channels to choose from.
From local bank loans to leveraging the equity in your property, there are multiple avenues to secure the funds needed to kickstart your real estate investing journey.
Financing for purchasing a primary residence differs from investment properties. Financing for investment properties can be more challenging due to higher perceived risks by lending institutions, leading to stricter approval criteria and qualification requirements.
As an investor, you may need to provide a higher down payment compared to someone buying a primary residence and have a better credit score. Additionally, interest rates for investment property loans are typically higher to compensate for the additional risk borne by the lending institutions.
However, on the positive side, according to the Mortgage Loan Report, lenders often consider 75% of future rental income as part of your qualifying income. You will be required to submit lease plans or existing lease agreements, and an appraiser will evaluate your rental income based on similar rental properties in the local area.
Conventional loans, which are not backed by the federal government, have stricter approval standards as they are not government-guaranteed. A higher credit score is needed, with a recommended score close to 720 for better chances of approval.
Conventional loans generally require a minimum down payment of 3%, while the debt-to-income ratio (DTI) usually cannot exceed 36%, although some lenders may allow up to 45%.
The Department of Veterans Affairs offers multiple-unit residential loans specifically for eligible veterans. This program allows veterans or their co-borrowers to purchase up to six residential units, with the condition that the borrower must reside in one unit and meet other requirements.
Properties purchased under this program must meet the Department of Veterans Affairs’ strict evaluation standards, and reserves must be prepared to satisfy mortgage reserve requirements. Experience as a landlord may be required if seeking to use rental income to qualify for the loan.
While these loans offer advantages such as no down payment requirement, no mortgage insurance, and the ability to qualify based on rental income, non-qualified mortgage loans cater to borrowers who cannot provide the income or documentation required for standard loans.
However, non-qualified loans do not meet the standards set by the Consumer Financial Protection Bureau for qualified mortgages. With less regulation, lenders offering non-qualified loans have greater flexibility on borrower qualifications and loan terms.
Though these loans may provide easier access to financing, the costs can be high due to potentially elevated interest rates, placing financial strain on borrowers.
Non-qualified loans sometimes do not have specific debt-to-income requirements and may accept bank statements in place of tax documents. The waiting period after bankruptcy is typically shorter with non-qualified loans compared to qualified loans.
Down payments for non-qualified loans generally range from 10% to 25%, and there is usually no limit on the number of financed properties.
In some cases, sellers may act as the lenders themselves. Opting for seller financing may require full payment of the remaining loan balance within a short period, which could take 5 to 10 years, based on LendingTree data.
This period could allow you to improve your financial situation if you do not currently qualify for standard loans, and then apply for a loan to cover the lump sum due after the specified time.
Hard money loans are not issued by banks but rather by private individuals or companies. These loans typically require faster repayment, often within five years, and are secured against your investment property, disregarding your credit history.
Such financing methods are commonly utilized by property flippers looking to quickly turn properties for profit.
Similar to hard money loans, private financing often comes from individual lenders who focus more on the property’s value than the borrower’s credit status. These loans feature flexible terms and faster approval processes but come with higher interest rates, shorter repayment periods, and require larger down payments.
Finding the right financing method starts with clarifying your investment goals. Are you looking to hold properties long-term or flip them quickly? Short-term loans may be more suitable if your plan involves rapid reselling.
Your overall financial circumstances will impact the financing options available to you. Seeking advice from financial advisors can help determine which financing method aligns best with your situation.
Remember, it’s crucial to conduct thorough research and carefully consider your options when delving into real estate investments to maximize your wealth-building potential.