Investing in real estate can be both exciting and profitable, but many prospective investors lack an adequate knowledge of the investment property loans that will be required to provide the necessary capital to become successful. Many individuals operate under the misconception that mortgages and investment property loans are basically the same and that no additional information will be used in the loan process. However, there are quite a few differences and factors that must be understood when looking for loans on investment property.
Many lenders that are willing to offer loans on investment property prefer to work with experienced real estate investors, so it may be somewhat more difficult for an individual without past positive results to obtain an approval. Lending on investment properties is often considered to be a much higher risk than lending money to a person that has the intent of living within the home. Properties that are going to be rented also may become damaged and there is also a fair amount of liability involved with real estate investments. Because of the increased risk, companies that offer investment property loans will often require a higher credit score and additional documentation that will prove a sufficient ability to pay.
A common goal of real estate investors is to borrow money in a company name in order to keep it off of their personal credit report, but many investment property loan providers will only allow this if the company is very well established. Typical investment property loans almost always require a personal guarantor.
One of the most important things to understand is that the interest rate associated with investment property loans is going to be higher than other mortgages. The increased risk of lending on collateral that is used as an investment justifies the additional cost and should just be considered a part of the process. While there are many products that do offer fixed interest rates, some loans for investment property consist of adjustable rates with a variety of different terms. Some investment property loans may have a balloon that must be paid at the end of 24 months, and there are other repayment periods available as well.
Although all mortgages factor in the loan to value ratio, investment property loans are strongly dependent upon the current value and future worth. Most lenders are much more reluctant to lend a large amount of money if the collateral is not a primary residence. As a result, the loan to value ratio is often capped at 65-75% when dealing with an investment property. Many appraisals will be much less lenient on houses that are not going to be owner occupied and a thorough inspection could make it difficult to obtain an investment property loan.
Many of the differences found in the various types of investment property loans depend on the actual use of the property and focus on whether there is a single dwelling or multi-family building. Some lenders may allow a loan application for a multi-family building to include rental income derived from it, but most single dwellings are considered to be harder to keep rented. If there is only one tenant possible, there is a much higher risk of vacancy and the income may not be allowed to be included on the application.
There are investment property loans available for both residential and commercial applications, and it is often necessary for prospective investors to understand the differences. A lender may not always consider a rental home to be residential and some guidelines will place it under commercial lending restrictions. On the flip side, some properties in commercial areas may be zoned as residential and a normal loan may be possible. Most companies will work with a real estate investor for both types of investment property loans, but there may be different appraisal processes required. Many commercial investment property loans require surveys and must meet or exceed environmental and health regulations.
For some real estate purposes, the best way to borrow money is through the use of a hard money lender. These specialists will provide investment property loans that are designed for use by house flippers and individuals that must perform significant repairs before more permanent financing can be obtained. It is important to note that the interest rate on a hard money loan is often very high, but the funds are only intended for temporary use.
While it is true that there is much more to investment property loans than most real estate investors realize, there is no need for discouragement. A wide variety of lenders are willing to provide funds if their clear expectations are met. An excellent way to compare multiple different options at once is to use a comparison website that will match borrowers with companies looking to lend. A successful venture in real estate may be within reach.