Purchasing a property to fix up and flip for a profit or rent out to vacationers can be a great way of creating extra income. If you cannot afford to pay for a property up front, an investment property loan may help you fund this type of purchase.
Here is a closer look at what is involved in an investment property loan to help you find the right mortgage for your investment goals.
Defining Investment Property Loans
An investment property loan is a mortgage that is used to purchase a property that will produce income. It is typically used for purchasing a property to renovate and then sell for a profit, which is often referred to as house flipping, or to generate rental income.
Keep in mind that an investment property loan is only appropriate for properties in which the owner will not be living. For those who intend to purchase a multifamily investment home and live in one of the units while renting the others out, a standard loan program may be a better fit.
What Is An Investment Property?
To meet the definition of an investment property, the real estate must be used to make an income. Some of the most common home types that are used as residential investment properties include multifamily homes, cooperatives, manufactured homes and condominiums.
What Are The Requirements For Obtaining An Investment Property Loan?
Investment property lending is considered riskier than primary residence loans, which means that applicants will need to demonstrate greater financial stability. Here is a look at some of the general requirements for obtaining an investment property loan.
Down payment: While some residential property loans, such as FHA and VA loans, only require 3.5 percent down payments, most lenders require borrowers to place at least 20 percent down on investment property loans. Moreover, gifts are not allowed; the money must all belong to the applicant.
Mortgage reserves: Lenders want to see proof that a borrower has enough money in the bank to cover between two and six months worth of mortgage payments. The precise amount will depend on the number of properties the borrower owns.
Credit score: Borrowers will need a credit score of at least 640 for investment property loans. However, for those who are purchasing multifamily homes, a credit score of at least 700 may be required.
Property Management History: For some types of loans, borrowers will be asked to document their experience renting properties. Some lenders may even require borrowers to present tax returns to prove that they have managed rental homes in the past.
Obtaining An Investment Property Loan
The process of obtaining an investment property loan is somewhat more complicated than a standard residential mortgage. Here is a brief overview of what it entails.
Finding The Right Investment Property Mortgage Lender
Most lenders offer investment property loans, but their rates can vary considerably. Many borrowers find that a local bank is the ideal choice, particularly for those who may fall short on some of the requirements. Neighborhood banks tend to have greater flexibility as well as a vested interest in investing locally.
Filling Out A Loan Application And Supplying Documentation Of Assets
Once the borrower has identified a lender that meets their needs, they must fill out a loan application. The borrower will be asked to provide extra documentation of their assets, such as several months of bank statements, as well as information about the property they are purchasing, such as leases and rental information.
Obtaining An Appraisal
The process of appraising a home that will be used for an investment is very thorough, and it includes reporting details on the average rent other owners are collecting on similar homes in the neighborhood. This report can provide compelling evidence that the investment is a worthwhile one and may have a significant influence on the borrower's chances of being approved.
Reviewing The Closing Disclosure
After the home has been appraised, the lender will provide a closing disclosure in the days leading up to the official closing. Borrowers must review this document carefully to ensure the figures align with their expectations. It is also important to ensure that all of the terms are clearly understood, particularly for those who will be working with a hard money lender.
Closing
Borrowers are expected to bring their required funds to the closing in the form of a cashier's check or send the funding via wire transfer in advance. At the closing, paperwork will be signed and the investment property will be recorded in the borrower’s name.
Discuss Your Investment Goals With Your Community Bank
Woodsboro Bank is invested in the local communities and businesses, and specializes in providing borrowers with solutions that are tailored to help them meet their investment goals. Contact us today to schedule an appointment with a qualified investment property loan specialist to get started.