Investment Properties
This article will cover everything you need to know about non-QM loans for investment properties. What You Need to Know About Non-QM Loans For Investment Properties.
Owning investment properties is slowly becoming quite a lucrative investment venture these days. Whether you are flipping property, buying and holding land for future development, buying a property and letting it appreciate, or renting it out, buying an investment property is, in fact, a great way of diversifying your investment portfolio. Unlike other investments, such as investing in stock, which don’t require too much money, investment property is quite expensive, and you always need to secure an investment property loan to finance it. In this article, we want to look at investment property financing to understand how many options are out there and which would suit you the best.
What is investment property financing?
Property investment involves either a transactional sale or acquisition of property to generate income through rent, a profitable resale, or other tax benefits. Investment properties aren’t used as primary residences. Still, when it comes to financing it, the process is similar to residential property, including applying for a mortgage to fund the investment. By definition, investment property mortgages are funds secured to finance a property meant for financial gain. Given the volatile and high-risk commercial real estate market, investment property loans have stricter terms, require a larger down payment, and attract higher interest rates than residential mortgages. The amount of money you can get depends on your credit score and income.
The various types of investment property loan options
There are various options for investment property financing. The interest rates, the loan’s term, and the down payment vary depending on your chosen financing option. Here are the most common options:
Conventional bank loans – these are mortgages that conform to the guidelines set by Fannie Mae & Freddie Mac. Unlike the FHA, VA, or USDA loans, conventional mortgages aren’t backed by the federal government. When financing a residential investment with a conventional loan, the expectation is a 20% down payment. However, for an investment property, they may require you to have a 30% down payment. In addition, the lender will review your credit score and credit history to determine whether or not you get approved for the loan or the kind of interest to be charged to the mortgage. It would be best if you had a decent credit score or at least 620 FICO. The lender will also review your income and assets, and if you have an existing mortgage, the lender will want to know that you can afford both mortgages. Lastly, with this option, the lenders always expect you to have set aside funds to cover both mortgages for at least six months.
Hard money loans are short-term loan ideal for flipping investment properties, as opposed to buying and holding them, developing on them, or even renting them out. Investors looking to purchase an investment property they want to keep and not flip can still use the hard money loan option and take another loan to pay it off. However, taking out the other options instead of the hard money loan is much more convenient and cost-effective. The good thing about this option is that the requirements are relaxed compared to conventional loans. Rather than focusing too much on your income and credit history, the lender’s primary focus is on the property’s profitability. The lenders for hard money mortgages estimate the after-repair value to gauge your ability to repay the loan. The other advantage of this option is that it gets processed pretty quickly, in a matter of days, compared to the weeks or months you wait for a conventional mortgage. On the flip side, hard money loans have high-interest rates, and the repayment period can be too short.
Private money loans – these are loans from one individual to another. It could come from a friend or a family member of the investor. The terms and interests of these loans can vary significantly from very favorable to predatory, depending on how the borrower relates with the lender. Also, some legal contracts might be used depending on whom the lender is, allowing the lender to foreclose on the investment property should you default on your payments. Of course, there are other impacts of borrowing funds from loved ones, given that when you default, you risk ruining your relationship.
Home equity – drawing from home equity is the other option for investment property financing. You can do this through a home equity loan, cash-out refinance, or home equity line of credit (HELOC). Many lenders would allow you to borrow up to 80% of the home equity value. This amount would facilitate the purchase and even repair of the investment property. For cash-out refinance, the investor is able to cash out on your existing mortgage, replacing it with a larger one. Then, you will have access to the difference between the two mortgages in the form of cash. This is the money you will use to finance your investment property. As for HELOC, you will be able to draw funds from your home equity when needed instead of receiving it as a lump sum. The interest rates might be lower, but there is no guarantee that the rates won’t go up in the future.
What do you need to get approved for a loan?
The requirements largely depend on the lender and the type of financing you choose. For private lenders, only a good relationship with the borrower is required. For hard money loans, you need access to a hot real estate market that can give you a decent after-repair value. And for home equity and conventional loans, you will need to have a decent credit history and income streams to qualify. It’s good to keep in mind that, just like all other investments, there are risks when it comes to investment properties. We are talking about risks like property depreciation, legal formalities, financial losses, and many more. But you don’t have to be bothered about these risks; you need to focus on your investment strategies to ensure that you get the best possible result.
Getting Qualified For Non-QM Mortgages For Investment Properties
In conclusion, investment property loans can be a great way to finance your investment property. However, you need to be aware of the risks involved and make sure you are getting the best loan for your needs. Talk to a loan officer at your local bank or credit union to learn more about investment property loans and get started on your investment today!