If you’re ready to borrow for a residential investment property, these tips can improve your chances of success.
Tips to finance investment property:
- Make a sizable down payment
- Be a ‘strong borrower’
- Shy away from big banks
- Ask for owner financing
- Think creatively
1. Make a sizable down payment
Since mortgage insurance won’t cover investment properties, you’ll need to put at least 20 percent down to secure traditional financing. If you can put down 25 percent, you may qualify for an even better interest
rate. If you don’t have the down payment money, you can try to get a second mortgage on the property, but it’s likely to be an uphill struggle.
2. Be a ‘strong borrower’
Although many factors — among them the loan-to-value ratio and the policies of the lender you’re dealing with — can influence the terms of a loan on an investment property, you’ll want to check your credit score before
attempting a deal.
Below (a score of) 740, it can start to cost you additional money for the same interest rate. Below 740, you will have to pay a fee to have the interest rate stay the same. That can range from one-quarter of a point to 2 points to keep the same
The alternative to paying points if your score is below 740 is to accept a higher interest rate.
In addition, having reserves in the bank to pay all your expenses — personal and investment-related — for at least six months has become part of the lending equation.
3. Shy away from big banIf your down payment isn’t quite as big as it should be or if you have other extenuating circumstances, consider going to a neighborhood bank for financing rather than a large national financial institution. They’re
going to have a little more flexibility. They also may know the local market better and have more interest in investing locally. Mortgage brokers are another good option because they have access to a wide range of loan products — but do some research
before settling on one. What is their background? Do they have a college degree? Do they belong to any professional organizations? You have to do a little bit of due diligence.
4. Ask for owner financingA request for owner financing used to make sellers suspicious of potential buyers, during the days when almost anyone could qualify for a bank loan. But now, it’s more acceptable because of the tightening of
However, you should have a game plan if you decide to go this route. You have to say, ‘I would like to do owner financing with this amount of money and these terms". You have to sell the seller on owner financing, and on you.
5. Think creativelyIf you’re looking at a good property with a high chance of profit, consider securing a down payment or renovation money through a home equity line of credit, from credit cards or even via some life insurance policies.
Financing for the actual purchase of the property might be possible through private, personal loans from peer-to-peer lending sites which connect investors with individual lenders. Just be aware that you may be met with some skepticism, especially
if you don’t have a long history of successful real estate investments. Some peer-to-peer groups also require that your credit history meet certain criteria. When you’re borrowing from a person as opposed to an entity, that person is generally
going to be more conservative and more protective of giving their money to a stranger.