Investment Property Loans—A Borrower’s Handbook

by HMLS

Investing in real estate is one tried-and-tested way to get your finances on a growth spurt. Most property enthusiasts save up enough for a down payment before considering the financing options. When you eventually start looking for investment property loans, you realize how different they are from regular primary residence mortgages.

The rental and investment property lending market caters to borrowers of all categories. You’ll find savvy investors going for alternatives like hard money loans instead of traditional bank loans, and the entire landscape can seem confusing if you’re new to investment-related borrowing. We’ll steer you in the right direction by discussing matters like:

  • Suitable lending channels for investment property loans
  • General investment or rental property loan requirements
  • Down payment logistics
  • Best loan options for investment properties

What Is an Investment Property Loan?

An investment property loan is any form of short-term or long-term financing used for purchasing an income-producing property. You can use the funds for commercial, residential, and mixed-use properties—the product will usually be considered an investment-purpose loan as long as you’re not the one living in it (unless you use a second-home mortgage).

Here are some common instances where investment property loans are suitable:

  • Flipping a house—Investors engage in house-flipping to earn short-term profits. They find a fixer-upper, invest in low-intensity construction or renovation activities, and sell the upgraded property for a gain 
  • Buying a rental property—Rental properties offer a steady passive cash flow and capital appreciation. You can also get multiple tax deductions once you start laying out the loan interest and paying property tax, which allows you to maintain a decent net operating income (NOI) rate
  • Holding onto a property for future resale value—The U.S. housing market prices have increased by up to 41% in the past few years, so holding on to a property long-term brings you excellent yield in terms of capital appreciation

How Do Investment Property Loans Work?

Conventional investment property loans work like typical home mortgages but with more entry restrictions. They’re treated like a business transaction rather than a home loan.

From a lender’s point of view, backing up an investment is usually considered riskier than offering a home mortgage due to the possibility of the borrower incurring losses in their portfolio. As a result, investment property loans usually come with stricter qualification requirements and higher down payment and interest rates than traditional mortgage loans. 

Another distinguishing aspect is the tenure—mortgage loans for investment properties have a repayment window of 5–10 years, much shorter than the 15–30 year mortgages for self-occupied property loans.

As an investment-purpose borrower, you have the additional responsibility to keep tabs on the status of your property in the market. For example, you must ensure you’ll retain positive cash flows after you close a fix and flip deal. Similarly, your return on investment (ROI) rate should be profitable if you’re dealing with a rental property. Missing payments on investment property loans can easily lead to foreclosure and capital loss.

Source: paulbr75

Loans for an Investment or Rental Property—What Lending Channel Would Work for You?

Your neighborhood bank may not always be the best choice for the investment you have in mind. In general, you can choose between three popular lending channels. The following table gives you a quick summary of each to help you find the right option:

Lending ChannelExplanation
Conventional bank or similar financial institutionConventional investment property loans are offered by regional and national banks delivered under a Fannie Mae or Freddie Mac program. You don’t have to live on the property to qualify for a loan, but the eligibility requirements are strict and favor affluent borrowers with large cash reserves
Government agency-backed lenderGovernment agency-backed loans work for less affluent borrowers. These products are offered by banks, credit unions, and financial institutions running a mortgage program guaranteed by organizations like:
Federal Housing Administration (FHA)
U.S. Department of Veterans Affairs (VA)
U.S. Department of Agriculture (USDA)
These loans are usually meant to fulfill the housing needs of low-income group borrowers. The qualification guidelines are stringent, and you often have to live on the property for a specified period
Hard money lenderHard money loans are considered perfect for investment properties because they are provided by private lenders who are not restricted by bureaucratic guidelines. These loans are serviced as a percentage of the value of the property about to be purchased or renovated, so the borrower’s credit score and current cash reserves often don’t matter. The paperwork is light, and the funds are often dispensed faster than via other channels

Qualifying for Conventional Bank Loans for Investment Properties

To qualify for conventional investment-purpose bank loans, you have to prove your financial soundness. The eligibility criteria are influenced by the servicing lender and your employment status, among other factors. Here’s what banks usually consider before approving an investment or rental property loan:

Assessment FactorDetails
Credit scoreMost lenders have a minimum credit score requirement of 680–720. Your credit history should be near-spotless
Income sourceYou have to prove you have the means to pay off the loan and accrued interest. Most banks ask you to submit:
Monthly bank statements
Tax returns
Pay stubs
W-2s and 1099s
Employer statements attesting to your income
Many lenders allow you to include the future rental income in calculations if you’re considering a rental property loan
Liquid reservesYour financials must indicate that you will have the cash reserves to cover your interest obligation (for all existing mortgages) for at least six months
Debt-to-income (DTI) ratioMost banks consider 36% to be the ideal DTI ratio for servicing investment property borrowers, although seasoned investors can be considered for higher limits 
Existing mortgagesYou usually cannot have more than four conventional mortgages under your name. Fannie Mae has established a special program for investors who want 5–10 mortgages, but the eligibility requirements are stricter than for standard loans
Property documentationLenders want to inspect the following documents before approving commercial property loans:
Purchase contract
Blueprints
Market analysis for the property
Project budget and scope of work (if construction is involved)

Interest and Down Payment for Conventional Investment Property Loans

Conventional investment property loans have interest rates about 1%–3% higher than standard home mortgage rates. A lender typically conducts a risk-based analysis of your application to get a serviceable rate, and the process can take between 30 and 90 days.

Banks usually ask for 20%–30% of the money down—the rate depends on the property location and the type of structure. The loan-to-value (LTV) ratio can be up to 80%. In some cases, the bank may ask you to commit to private mortgage insurance (PMI) before fixing a high-rate LTV.

Source: Kampus Production

Requirements for an Investment Property Loan Offered by a Government Agency-Backed Lender

Loans backed by government agencies like FHA and VA are similar to conventional investment loans in terms of processing time but are easier to qualify for. The basic requirements include:

  • Minimum credit score of 580–620
  • DTI ratio of 45% or less
  • Mandatory mortgage insurance
  • Down payment of 10% or lower (no down payment required for VA loans)

FHA and VA lenders support the purchase of properties with single or multiple housing units for housing purposes only—the borrower must live in one of the units to qualify. The paperwork load tends to be heavy when you want to apply for government agency-backed loans. You will be asked to submit copies of the following:

  • Government-issued ID
  • Proof of a Social Security number
  • W-2s and pay stubs (dating up to two years back)
  • Relevant property documents
  • Documents proving that you have managed properties in the past (if you’re looking for rental property loans)

A unique aspect of FHA/VA loans is that gift funds are allowed for meeting down payment and closing costs, but the giver must specify that the action is without any strings attached. Gift fund payments are not allowed for conventional loans.

The best feature of government agency-backed loans is that you get below-market interest rates, but most users find the overall logistics too rigid and incompatible with investments.

Hard Money Loan—Best Type of Loan for an Investment Property

Qualifying for a conventional or government agency-backed loan is a lengthy and back-breaking process—one that often seems like a bump in the road when you want to grab a property fast. A hard money loan is an investor’s best friend in the fiercely competitive real estate market because it’s hardcore asset-based funding. While lenders do consider your financial health to an extent, you ultimately get a loan based on the profitability of your collateral.

Many property investors choose hard money loans as their first financing choice. They eye a lucrative property, go to a hard money lender, get financed within two weeks, and complete the purchase before the other buyers. Borrowers also go for this type of funding if they:

  • Don’t qualify for traditional loans
  • Have maxed out their ceiling for the number of conventional mortgages
  • Want to avoid the hassle of accumulating tons of paperwork
  • Don’t want their financial history to be scrutinized

Investment-Purpose Hard Money Loans—Interest Rate and Tenure

The convenient servicing means you’ll have to pay 0.5%–10% higher interest rates than with conventional investment loans. The range is wide because every state has different guidelines regarding hard money lending.

A potential downside of hard money loans is their short tenure. This form of funding is designed to be short-term—usually 1–3 years. While the tenure works for quick-moving investments like fix-and-flip deals, you have to refinance with a conventional loan if you plan to hold on to the property long-term. Many investors use a hard money loan as a bridge while they wait for a bank to approve their long-term construction or rental property loan.

Source: Thirdman

How To Find Top-Notch Hard Money Lenders

While hard money lending is semi-regulated by state authorities, the lenders operate privately and don’t have to follow standardized service norms like banks. You have to be mindful of customer experience when looking for lenders. Talk to your peers in the investment industry to get a list of popular lenders in your area. You can also try checking online reviews (if available) to evaluate how a particular lender operates.

An ideal hard money lender should be transparent, direct, and property-focused. Avoid lenders who don’t ask for property appraisal papers or dilly-dally because that suggests a feeble, even unethical, lending mindset.

Hard Money Loan (HML) Solutions Offers the Best Investment Property Loans

If you’re looking to invest in quality real estate, contact Hard Money Loan (HML) Solutions for quick processing and funding. The lending group specializes in:

  • All types of hard money loans (for commercial, investment, or consumer use)
  • Expert funding consultancy (offered by a team of veteran investors)

HML Solutions has been funding hot real estate deals for years and has a 5/5 star rating on Google. The HML team is known for servicing time-sensitive loan requests—highly qualified clients can enjoy access to funds within 3–10 days. Many regular clients rave about the group’s competitive lending terms and ability to fund complicated deals that are otherwise turned down by traditional or private lenders.

Source: Mikhail Nilov

A loan package at HML Solutions is customized to complement the borrower’s financial profile and the nature of the deal. Here’s a typical loan structure for funding a property deal with HML:

ParameterHML Solutions
Loan amount$100,000–$50,000,000
Term1–3 years
Interest rate typeFixed
Interest rates9.99%–12% (depends on LTV)
LTVUp to 70% of the current purchase price or appraised asset value (whichever is lower)
Origination fee2 points or 2%
Closing time3 days to 2 weeks
AmortizationNo amortization (interest-only payments)
Prepayment penaltyNo penalty after 6 months

HML Solutions doesn’t ask for a down payment—the funds are allotted to the borrower for better flexibility in dealings. 

Why HML Solutions?

HML Solutions isn’t chasing quick profits—the group has a collective growth mindset and aims to build long-term relationships with investment enthusiasts. They make sure to uphold the highest standards of ethical lending.

Apply for an HML loan online, and you will get a quick answer on whether the team can service your deal or not. The company guarantees:

  1. Transparency—All loan terms and cost commitments are communicated clearly from the beginning
  2. Integrity to commitments—Private lenders often get a bad rap for backing out of deals. The HML team pre-assesses the risk factors of each deal carefully, so the funding is guaranteed for every approved loan
  3. Strive to be helpful—If necessary, the experienced team walks clients through relevant aspects of property investment. In case a client comes with an unserviceable deal, HML lenders make an effort to offer them alternative borrowing advice (in good faith)

How To Get Approved for an Investment Property Loan at HML

Qualifying for a loan is a cakewalk as long as you:

  1. Present a real estate deal with potential
  2. Have equity in the property

HML lenders don’t waste time with irrelevant paperwork like bank documents, credit reports, tax returns, or even social security cards. In most cases, you only provide basic business and property papers. Here’s how to reach out to the lending team:

  1. Access the online loan application form
  2. Enter details like:
    1. Requested loan amount
    2. Contact details
    3. Real estate address
  3. Submit the form

A lender will soon call you to discuss the deal. They may appraise the property to calculate its latest market value. Once they accept the request, their legal team will take over to prepare the title work, solidify the deal, and expedite the release of funds.

HML Solutions finances all types of real estate properties, such as:

  • Single-family homes
  • Multi-family units
  • Townhomes
  • Apartments
  • Commercial structures
  • Vacant land

The group also offers funding packages for other scenarios like business acquisition, bank foreclosure, short sale, construction, bridging, refinance, and cash-out refinance. Fill out an application to start your investment journey with HML!

Source: Nataliya Vaitkevich

Alternatives to an Investment Property Loan—How Realistic Are They?

Getting an investment property loan isn’t the only option for financing a real estate purchase. You can:

  • Draw on your home equity—If you already have a house with decent equity holding, you have the option to leverage it for extra cash. You can consider products like home equity loans, cash-out loans, and home equity lines of credit (HELOC), but remember that you are diluting your equity with such loans
  • Ask about seller financing—Seller financing allows buyers to hold on to an investment without spending their own capital. You typically offer a down payment, sign a note of purchase, and pay monthly installments to the seller until the price of the property is paid off
  • Use a crowdfunding platform—Dozens of investment property crowdfunding websites connect borrowers with individual investors. You can host your property details online. If your deal passes site-specific due diligence, you can start attracting investors
  • Join a real estate investment club—If you have access to a real estate investment club, you can use your network to connect with peer-to-peer lenders

Keep in mind that the alternatives may not be as fast, conclusive, and efficient as hard money loans. If you’re getting into a non-traditional loan agreement, read the lending terms carefully and make sure everything’s transparent and sensible.

Featured image source: nattanan23

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