Real estate investing can be one of the most exciting and lucrative decisions you can make. Searching for a home to invest in, coming up with ways to make improvements to the home and getting it all clean and tidy to either rent or flip are often what excites investors the most.
From wading through online real estate listings to visiting open houses to scheduling private showings with a real estate agent, there’s nothing quite like finding an investment property to call your own.
While the process of looking for an investment property might be easy and enjoyable, the same cannot be said for finding a home loan. The mortgage industry seems to be changing constantly, with interest rates going up and down for what may seem like no particular reason.
It can also be difficult to understand exactly what it will take to qualify for a home loan. There are a number of different mortgage options available, and each program has different requirements.
No matter what mortgage program you wish to qualify for, your lender will require you to provide financial documents and personal information. This includes:
- Social Security number
- Last two years of W2s (or 1099s if you are self-employed)
- Last 30 days of pay stubs
- Last 60 days of bank statements
- Last two years of tax returns
You may also be required to provide other documentation depending on your situation and/or mortgage program you use. As a real estate investor, some mortgage programs will not be available for you to use. For those that are, you may be required to provide additional information and financial documentation that you wouldn’t have to provide if you were purchasing the property to live in.
Your lender will analyze these documents to figure out your credit score and debt-to-income ratio. Lenders use this information to assess your ability to repay the loan.
The question still remains, though: What does it take to qualify for a home loan? Let’s take a look at the main mortgage programs available to see what the requirements are.
Conventional Loan Requirements
Conventional loans are one of the most popular types of mortgages for real estate investors. They offer great benefits such as fixed interest rates, but they are tougher to qualify for than other types of loans.
- Credit score: You will need to have a credit score of at least 620. Some lenders may even have a minimum of 640, especially if you are financing another home, such as your primary residence.
- Down payment: Most lenders will require a 20 percent down payment for investment loans.
- Private Mortgage Insurance (PMI): You won’t need to pay PMI because you’ll be making a down payment of at least 20 percent.
- Debt-to-income ratio (DTI): Lenders will take into account not only your monthly payments for the real estate investment property and your other monthly debts, but your ability to pay your primary mortgage as well (if you have one). In addition, they may require you to have six months’ worth of loan payments available in reserves to pay for the loan just in case.
Hard Money Loan Requirements
Another option for financing your real estate investment property is a hard money loan. These are offered through either individuals or professional companies that serve as lenders specifically for real estate investing.
Hard money loans typically go through quicker than conventional mortgages. Another positive aspect of this type of financing is the lender in this case will concentrate on the potential of the property itself rather than on your credit score.
On the flip side, here are some of the potential downsides to hard money loans:
- They have much higher interest rates than conventional loans, sometimes 10 percent higher than the rates for conventional loans.
- They are short-term loans, providing financing for potentially only three years (36 months) in some cases.
- They come with a very formal approval process that includes guarantees and extensive documentation.
Because of this, hard money loans are not for every real estate investor or property. They may be great for investors who are aiming for a short-term flip of a property, but not so for those who are intending to turn the property into a long-term rental.
Private Money Loan Requirements
Private money loans are similar to hard money loans in that they originate from non-traditional lending institutions. Instead, the financing comes from private individuals who are looking for a good return on investment from their money through alternate means. The individual lender could be someone close to you such as a family member, or a business associate.
Some of the positives of private money loans is that the interest rates and terms of the loans are often flexible. In addition, because you will have a personal relationship with the lender in this case, you often will have the ability to negotiate the terms on a more fluid basis.
Individuals who serve as the lender for private money loans will often require a promissory note as security for their investment. They may also require other types of collateral to secure their note.
Home Equity Loan Requirements
Another option to finance the purchase of a real estate investment property is a home equity loan. This type of loan would allow you to draw from the equity you have in your primary residence to pay for your investment property.
There are a few positives to using a home equity loan for real estate investment. First, you will be borrowing money from a lender you already have a relationship with. Second, most lenders will allow you to borrow up to 80 percent of the total equity in your home. They will determine your equity amount by appraising your home’s current market value and deducting how much you owe on the loan from that.
The interest rate on a home equity loan will be higher than that on your original mortgage. These rates are often lower than some other lending options, such as hard money loans, though.
One downside to home equity loans is you are directly tying your real estate investment to your primary residence. If your investment fails and/or you can’t afford to make payments on your home equity loan, therefore, you could be risking your primary residence as well.
Fix-and-Flip Loan Requirements
If you are intending to purchase a real estate investment as a fix-and-flip situation rather than as a long-term rental, you might find it better to opt for a fix-and-flip loan. These are short-term loans that may be more desirable to you than longer-term loans such as a conventional mortgage.
These types of loans are often easier to qualify for than conventional loans as well. Much like hard money loans, the lender, in this case, will be more concerned about the property’s investment potential than it will be on your credit score and ability to repay the loan over the long haul.
In exchange for this, flip-and-flip loans often come with higher interest rates, possibly as high as 18-20 percent, depending on the lender. In addition, the terms of fix-and-flip loans are short, sometimes as short as one year. That’s because lenders who give these types of loans want to see the property fixed and flipped quickly.
Commercial Investment Loan Requirements
One final loan option for real estate investment properties is a commercial investment loan. These loans may only be good for commercial properties, though, and not residential properties.
In addition to requiring a good credit score, lenders who offer commercial investment loans will also want to see that you have a solid business plan. The business plan should outline the potential profits of the commercial property as well as how you intend to reach those profits. In this sense, commercial investment loans are much more akin to business loans than they are mortgages.
Commercial investment loans come in different forms, too, such as hard money loans for short-term investments. Down payments on this type of loan could be anywhere from 15-35 percent, depending on the lender.
Analyze Your Investment Strategy Before Securing Financing
There are many financing options for real estate investment properties, though most look quite different from those available to people who are purchasing a property as their primary residence. Each mortgage type comes with its positives and negatives. But what makes the most sense for you should primarily be determined by what type of investor you intend to be.
If you are looking to find an investment property that you will fix up and flip for a quick profit, then it might be best for you to finance the purchase with a short-term loan such as a hard money loan or fix-and-flip loan. If you intend to own a property over a longer period of time and rent it, then a conventional mortgage, a private money loan or a home equity loan might be right for you.
Once you have made the determination of what type of real estate investor you want to be, then you can make a well-informed decision as to the best way to finance your purchase.
When you have made that decision, you can start searching for solid real estate investment possibilities by partnering with HomeUnion®. HomeUnion® provides real estate investors with a wealth of resources and knowledge to not only learn how to become a successful real estate investor but also provides people with the opportunity to invest money in real estate. By removing the barrier of location, HomeUnion® allows its members to invest their money wisely in the best markets throughout the country.
For more information, visit us online or call us at (866) 250-5610.