Despite fluctuations in the market, real estate is still an attractive option to many investors, whether it’s buying properties to flip for a profit, or to use as rentals. The process of getting financing for investment properties can be a little bit more complex than getting money for a property that you intend to live in. Although it’s more complex, it doesn’t have to be more difficult, so long as you follow a few simple tips.
Financing Investment Properties
Tip 1: Double-check Your Credit Score.
Lenders tend to require higher credit scores for people trying to get financing for investment properties. Where you might be able to get by with a 650 for a conventional loan on a primary residence, and even as low as 580 for an FHA loan, when it comes to investment properties, banks prefer a credit score of at least 700. The stricter requirements could be due in part to the fact that the property is not your primary home; therefore you won’t have as much to lose if the bank has to foreclose. So, the bank tries to cover all its bases by only approving people who have stellar credit scores. If your score is not up to 700, then then first thing you should do is work on raising it, and keeping up there for at least a year before you try getting financing for an investment property.
Tip 2: Find the Right Loan and Get Pre-Approved
Once you are sure that your credit score qualifies you for a loan, you then need to figure out what type of loan you want to get. There are conventional loans, FHA loans, and VA Loans, all of which have different criteria and limitations.
If you are a veteran, active service member, or spouse, you could qualify for a VA loan. Because VA loans are guaranteed by the government, you wouldn’t have to make a down payment, which could make it easier to get the property you want. However, the VA has restrictions on financing investment properties — specifically, the property must have no more than four units, and the borrower must occupy at least one of them.
If you are a veteran, and are not planning to live on-site, then a VA loan won’t be an option. However, if you have no problem with living on-site, you can find VA loans from a variety of approved lenders, such as USAA or Low VA Rates.
FHA loans offer similar breaks to the VA loan, especially to potential buyers who might have difficulty making a down payment, but it also has the same occupancy criteria.
If you wish to buy a property, and do not want to live on-site, then a conventional loan is your only option. Once you have determined they type of loan you need, start the process of getting pre-qualified, that way, you’ll be ready to make an offer when you find the property you want.
Tip 3: Have a Large Down Payment Ready
If you are going with a VA or FHA loan, you might not need to come up with a large down payment (or any payment at all), but you will need one if you are going the conventional route. Conventional lenders usually want 20 to 25 percent down to secure financing. A larger down payment could also secure you a better interest rate.
Work-Arounds
If you have trouble getting your credit score above 650, or coming up with a 25-percent down payment, there are some ways that you can do to get your hands on an investment property.
· Try for owner financing. This is where you bypass the banks and set up a payment agreement directly with the current owner. Owner financing can be tricky, but it’s a great way for a seller to unload a property that they are having trouble selling, and for a buyer with less-than-stellar credit to get the property he needs;
· Try for a conventional, FHA, or VA loan for a primary residence, live on-site, and then refinance the property as an investment property. If you don’t have the credit scores to qualify for an investment mortgage, getting a residential mortgage can help you improve your credit score – as long as you make your payments on-time. You can live in the property while you upgrade or remodel it, and then rent it out once you have met the residency requirements, or can qualify for another loan.