What are investment property loans?
Investment property loans are used for the purchase of non-primary residences with the intent of earning a return on the investment. That return can come in a variety of forms, including via price appreciation during future resale, short-term fix-and-flipping, long-term rental income, or vacation rental earnings.
Since the loans are for properties that aren’t used as fully owner-occupied homes — and therefore carry more risk than standard primary residence mortgages — they typically require more money down and have higher interest rates than primary or even second home purchase loans.
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What kinds of investment property loans exist?
There are several options for obtaining an investment property loan that will appeal to different borrowers, depending upon their unique situation.
Hard Money and Private Money Mortgages
A borrower with less favorable credit but a substantial downpayment or adequate collateral may be able to get investment property financing in the form of a hard money or private money loan. These loans often carry higher interest rates and shorter repayment terms but can close more quickly and accommodate borrowers with less stellar credit profiles. More often than not, these loans are used by borrowers that intend to recoup their investment quickly through a fix & flip, not for a long-term rental.
Private Investor
Private lenders or investors are also an option for borrowers that have been turned down by traditional lenders like banks. Borrowers that go this route usually benefit from negotiable interest rates, repayment terms, down payments and more.
Home equity Loan
Another common way borrowers get financing for investment properties is through a home equity loan that positions their current residence, or another property they own, as collateral.
Fix & Flip Loan
Fix & flip loans tend to be hard money mortgages offered by private money lenders. This type of financing is usually accompanied by short repayment periods, which perfectly fit most flippers’ project timeframes. Private money lenders are also more likely to offer fix & flip loans with no money down, no credit check, or to borrowers with bad credit. Some of these lenders also offer fix and flip loans that cover up to 100% of the rehab costs.
Conventional Loan
A borrower with a good credit profile will likely be eligible for a conventional, prime loan from a bank or credit union. These mortgages require full documentation in order to be qualify to be backed by Freddie Mac or Fannie Mae and are commonly used for a property that will be maintained as a vacation home, second home or a rental.
How to get a loan for an investment property?
What a borrower intends to do with a property will generally determine what loan product they’re looking for. Are they looking to renovate a fixer-upper and sell it quickly for a profit? Fix-and-flip loans are available via many lenders. Will they rent it to tenants as a source of passive income? Several lenders offer rental property loans for single-family residences, apartments, condos, townhomes and more. Of course, the type of loan a borrower is seeking will also dictate the investment property mortgage rates, terms and qualifications.
What are Commercial Investment Property Loans?
These loans vary from their residential counterparts described above in several ways, including that they cover income producing properties, such as offices, industrial warehouses, mixed use properties and much more. Loan terms also vary from residential with generally shorter repayment periods (5-20 years) with higher interest rates. Borrowers must also consider that commercial properties typically cost much more than residential properties, necessitating a larger downpayment for those looking to buy a property. Many options are available to borrowers in search of a commercial investment property loan, such as short-term hard money loans, private lenders and even banks.
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Which lenders offer investment property loans?
Many lenders offer mortgages for investment properties, including banks, nonbanks and private lenders. Banks offer conventional loans that require full documentation and credit checks but the terms are similar to those you could get for a primary residence. Alternately, many private and hard money lenders can finance a loan with less scrupulous documentation. Borrowers that opt for one of these loans will have to deal with shorter repayment times and higher interest rates but can typically close much more quickly than through ha bank for credit union. The specific situation a borrower faces will dictate the type of lender and loan that will be best for their project. However, you will be able to find a lender for most investment properties by using Lender Search by Scotsman Guide.
