Real estate is an excellent way to diversify investment portfolios. However, it requires a large capital outlay, making it difficult for many investors to participate and leaving capable investors with cash flow problems.
Real estate leveraging, or using borrowed capital to increase the potential return on investment, is a common practice for investors looking to expand their real estate holdings. This strategy allows them to invest without liquidating assets or tying up large amounts of capital. Investment mortgages are a popular form of real estate leveraging that will be discussed at length in this blog.
What is an Investment Mortgage?
An investment mortgage is a financing instrument designed explicitly for income-generating properties. It allows investors to purchase property while only putting down a fraction of the total cost. The mortgage covers the remainder, and any profits earned from the property can then be used to pay off the loan and generate positive cash flow.
What Qualifies as an Investment Property?
A property that generates income through rental payments or other forms of revenue qualifies as an investment mortgage. Typical examples of investment properties include:
- Residential rental properties
- Commercial properties
- Vacation rentals
- Multi-unit properties
- Raw land
Investment Mortgages Options
Borrowers have several options when financing an investment property, just like traditional mortgages. These can range from government-backed programs to lines of credit, as shown below:
Conventional loans: These loans do not impose specific occupancy requirements on the borrower, unlike government-backed mortgages.
VA joint loans: Eligible military borrowers can purchase a multi-unit property of up to seven units (four family units, one business unit, and one additional unit for each veteran), provided the borrowers occupy at least one unit.
FHA loans: An FHA loan can be used to purchase a property with two to four units. However, one unit must be used as the borrower’s primary residence for at least 12 months after the purchase.
Non-QM loans: Non-QM loans are for borrowers who do not meet the eligibility criteria for the above programs. Eligibility will depend on the rental income, but interest rates will be higher.
Home equity loan: HELOCs and home equity loans are suitable for borrowers who want to leverage equity in their primary residence to renovate an investment property.
Cash-out refinance: Maryland homeowners can also take out a new mortgage for more than the amount they owe on their primary residence and use the extra funds to renovate an investment property.
Hard money loans: These are commonly used for flipping as they have a shorter repayment period (generally six months to 18 months). However, their interest rates are high, often crossing the 25% mark, as are their rates and upfront points.
Eligibility Requirements for Maryland Investment Mortgages
Investment property loans are structured differently from mortgages for primary residences. This is due to the higher risk of investing in income-generating properties.
Below are primary requirements that Maryland mortgage lenders look for before approving an investment mortgage.
Higher credit score requirements: Lenders thoroughly scrutinize an investor's credit history. Borrowers typically require a solid credit score of at least 640 to qualify, but this may rise to 700 or higher for multifamily homes.
Higher Down Payment: Maryland mortgage lenders typically require a 15-25% down payment, compared to 3-5% for conventional mortgages.
Higher Interest Rates: A higher risk translates to higher interest rates as lenders strive to protect their investments.
Mortgage Reserves: Lenders also require borrowers to have enough cash reserves in a bank account, typically equal to two to six months' worth of mortgage payments.
Proof of rental income: Maryland mortgage lenders may also require proof of rental income, including copies of active leases, a rent roll history, and tax returns.
History of property management: Some lenders may also require formal documentation of the borrower's experience managing rental properties. This helps ascertain their ability to generate income from the investment property.
How to Get an Investment Mortgage in Maryland
Maryland's investors who have determined their financing needs and meet the eligibility criteria for investment mortgages should take the following steps to secure financing:
- Get pre-approved from multiple lenders to compare their offerings (some may not offer specific options, such as non-QM loans), interest rates, and repayment terms.
- Prepare all the required documentation, including tax returns, bank statements, proof of rental income, and property management history.
- Complete the application process, which is often similar to other mortgage types.
- Pay for and coordinate an investment appraisal of the property.
- Understand the closing disclosure, including rate adjustments, mortgage payments, and penalty fees.
- Close and pay closing costs.
It is essential for borrowers to carefully consider the risks involved in investment mortgages. Seeking the guidance of financial advisors is advisable to ensure it is economically viable and to prevent financial setbacks.
Secure a Maryland Investment Mortgage With Woodsboro Bank
As a local bank, Woodsboro Bank is committed to guiding Maryland investors into making sound decisions and funding their investment ventures. Woodsboro Bank's mortgage experts can help you decide if an investment mortgage aligns with your financial standing and goals and help you secure a loan with favorable rates and terms. Contact Woodsboro Bank today to start on your Maryland real estate investment journey.