By Karon Warren and Jeff Keleher | Published Sep 12, 2022 1:55 PM
BobVila.com and its partners may earn a commission if you purchase a product through one of our links.
Photo: istockphoto.com
Real estate investing for beginners can involve a real learning curve, the least of which is determining the best way to pay for investment properties. Even experienced real estate investors could benefit from knowing all their options when it comes to financing an investment property. Although there are many options, not every financial option is the right choice for every investor, so it’s important to learn all the ins and outs of every investment property loan. Becoming well versed in these financial tools will play a major role in helping investors get the best return on that investment in years to come.
Photo: istockphoto.com
When shopping for one of the best investment property loans, it’s important to know terms and factors to look for in order to get the right financing. These include having a healthy credit score, a large down payment, and knowing what the application process looks like. Being prepared could save time and increase the odds of approval.
When investing in real estate, borrowers will want to keep in mind that the lender who will finance that investment needs to cover the area where the property is located. If the property is in the same area where the investor lives, going with a local banker could be the right choice when buying rental property. However, if the property is located elsewhere—in another state or city, perhaps—it’s possible financing will need to come from a lender in the same state or geographic area as the property. The first question buyers will want to ask potential lenders will likely be: Will you provide financing for an investment property located in [this area]? Knowing this could prevent wasting time if the lender won’t provide financing where the property is located.
A key consideration is knowing the maximum loan limitations for the various types of investment loans. This provides insight on which loans could provide the financing needed to purchase a rental property. For many investment loans, the maximum loan amount is generally $647,200, but there are products that could provide higher loan amounts for properties in areas where real estate is more expensive. When speaking with investment loan lenders, the second question buyers will want to ask is what the lender’s loan limits are. If the lender can’t or won’t provide the amount necessary to buy the property, the buyer can cross it off the list and move on to the next one.
As is the case with all property loans, investment property mortgage rates are based on a number of factors. Generally speaking, the rates for an investment property loan typically are slightly higher than those for a primary residence mortgage. This is because lenders typically consider investment property loans a higher-risk product than a traditional mortgage on the borrower’s primary residence. In addition, the borrower’s credit score almost always affects the loan’s interest rate. The general rule of thumb is the higher the credit score, the lower the interest rate. The amount the borrower pays as a down payment also could affect the interest rate. A higher down payment could result in a lower interest rate.
As with other loans, lenders will review the borrower’s credit score in an effort to determine the borrower’s creditworthiness. The higher the credit score, the higher the odds for loan approval. That being said, lenders do work with borrowers that have less-than-stellar credit scores. Some lenders accept a minimum credit score as low as 620, but many lenders will only lend to borrowers whose credit score is 640 or higher. Taking steps to boost their credit score could result not only in loan approval for borrowers, but also lower interest rates and more favorable loan terms. Therefore, it’s important for borrowers to review their credit score before applying for any loans to determine what effect it could have on an investment loan application.
In the same way a traditional home mortgage works, lenders will require a down payment for an investment property loan. The exact amount depends on the lender and the type of loan, but many lenders often want a down payment that’s equal to 20 percent of the property’s value. If the borrower chooses a loan backed by the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA) to purchase a multifamily unit in which the borrower also lives, the down payment could be just 3.5 percent. Borrowers who pay higher down payments increase the likelihood of receiving loan approval as well as lower interest rates. Keep in mind, though, that borrowers cannot use money given to them as a gift from family members or friends for the down payment with investment loans other than FHA or VA loans.
There are several types of loans to purchase a home for borrowers wanting to invest in real estate. A conventional loan is a standard loan with no requirements to live in the property. FHA and VA loans can be used to purchase a multifamily property with up to four units, provided the borrower lives in one of the units. Borrowers who do not qualify for conventional, FHA, or VA loans can apply for a non-qualified mortgage, which uses the estimated rental income for qualification. Owner financing is another option, provided the seller is willing to act as the lender.
Borrowers with a lot of equity in their primary residence could also leverage that home equity to obtain a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance to purchase an investment property. The risk here, though, is borrowers could lose their primary residence if they cannot repay these loans.
If the borrower plans to flip the investment property, a fix-and-flip loan—also called a hard- money loan—could be an option.
Applying for any loan typically takes some time, but applying for an investment property loan requires some extra steps because the borrower has to provide additional information on the property. Borrowers will want to look for a lender that streamlines this process so it’s efficient and easy to complete. Today, many lenders offer an application process both online and by phone, so borrowers can choose the process they prefer. Having the necessary paperwork at hand also can speed up the process. This includes not only W-2s and bank statements but also leasing or rental income statements on the property, plus any documentation of the borrower’s financial assets, such as a stock portfolio or retirement account statements.
Waiting to close on an investment property loan can feel like an eternity, but many lenders generally have a closing time frame of 30 days. Some lenders could have a shorter or longer closing interval, so buyers will want to ask lenders for their estimated time frames to get an idea of when the loan proceeds will be available. This is important in the event the seller wants to sell in a hurry, or there is a lot of competition for the property. No borrower wants to miss out on a great investment property because the lender took too long to close the loan.
The best investment property loans come from lenders who serve a wide coverage area, work with borrowers who may have less-than-perfect credit, and have an easy application process.
Why It Made the Cut: PennyMac offers a large coverage area, varied rate-lock options, a fast and convenient online quote tool, and various online tools such as mortgage calculators, affordability calculators, and home valuation tools.
PennyMac has a lot going for it, starting with a large coverage area that includes Washington, D.C., and all states except New York. Also, borrowers who apply for and receive preapproval can qualify for a discount on their principal loan amount. The discount is 0.5 percent of the principal amount up to $5,000, which could help borrowers save money on their investment loan. In addition, customers can lock in their rate for 60, 75, or 90 days, giving them ample time to find an investment property after being preapproved for a loan. Longer rate-lock periods could protect borrowers from rising interest rates, which would mean paying less interest over the life of the loan.
PennyMac has fairly high eligibility standards borrowers must meet to qualify for a loan, including a good to great credit score (680 or above) and 6 months of cash reserves in their accounts, and only offers one loan type: a conventional loan. However, for customers who meet these qualifications and need this loan type, PennyMac may have the best rates and terms available.
The company’s website offers various online tools for borrowers to use, including mortgage calculators, affordability calculators, and home valuation tools, plus a convenient online quote tool, making it easier for borrowers to understand and apply for loans. The quote process doesn’t include a credit pull, which means the quote won’t appear on the applicant’s credit report and affect their credit score. The results break down different loan options comparing interest rates, monthly payments, and APR so borrowers can see how much they’ll pay for financing.
Specs
Pros
Cons
Why It Made the Cut: Lima One Capital features numerous financing options, a convenient loan-management dashboard, and real estate market analysis, plus a large coverage area and straightforward application process.
Lima One offers multiple ways for customers to finance their investment property purchase, including rental, fix-and-flip, new construction, and multifamily property loans. With more options available, borrowers may be better able to find the right loan to finance their real estate investment.
Furthermore, Lima One’s online dashboard is easy to use and lets borrowers check the status of loan applications, apply for new loans, make payments on existing loans, and submit requests for services such as loan extensions. This one-stop shop makes it convenient for borrowers to stay on top of their loans, especially if they plan to branch out and purchase multiple investment properties using the same lender.
Although interest rates with Lima One for first-time borrowers are on the higher end (starting out at 12 percent), experienced borrowers may find much lower rates for investment property loans. Additionally, borrowers can use Lima One’s market analysis to make more-informed decisions about their real estate investments and decide whether it makes financial sense to buy property in certain areas.
Specs
Pros
Cons
Why It Made the Cut: Kiavi offers flexible eligibility requirements, including the ability to get a loan without an appraisal or proof of income, and does not have a firm debt-to-income (DTI) ratio requirement.
Thanks to Kiavi’s flexible eligibility requirements, borrowers just learning how to invest in real estate with no money may get the loan they need. The lender does not require borrowers to submit proof of income, such as W-2 forms or tax returns, to qualify for a loan. This can help borrowers with irregular income streams get the financing they need to invest in real estate.
And while many lenders have DTI requirements that borrowers need to meet in order to qualify for a loan, Kiavi does not have a minimum DTI requirement. This allows more people to qualify for an investment property loan who otherwise might have trouble securing financing. However, Kiavi’s relatively limited coverage area means that some borrowers won’t be able to get a loan in their area and will need to look to another lender that does.
Appraisals are not required on fix-and-flip loans, so investors can get financing without going through the time and expense of a home appraisal. They also don’t need to worry about their loan falling through because of complications with a home appraisal, which might be the case with a lender that requires an appraisal.
Specs
Pros
Cons
Why It Made the Cut: Specializing in real estate investment property loans, LendingOne features a fast 10- to 14-day closing time frame plus a wide variety of financing options for borrowers.
Because LendingOne’s business is focused specifically on investment property loans, the company’s loan officers and support staff have the specialized knowledge to answer any questions a borrower might have or address any concerns. LendingOne offers multiple types of investment property loans to choose from, including new construction and fix-to-rent loans. Regardless of the type of rental property a borrower is trying to finance, it’s likely that LendingOne has a loan option that will suit the situation. In addition, the company offers a relatively short closing time frame of just 10 to 14 days, which means that borrowers can secure their financing without delay, complete their purchase, and start earning rental income from their new property as soon as possible.
LendingOne works solely with investors who have purchased at least one investment property in the past, so first-time investors will need to look elsewhere for their loan needs. While the minimum credit score requirement of 680 is on the high end, this may not be a factor for many experienced investors looking to finance their next property.
Specs
Pros
Cons
Why It Made the Cut: Veterans United specializes in VA loans, so it can work with eligible service members who want to use a VA loan to buy investment property in which they plan to live.
With a nationwide coverage area, Veterans United works solely with eligible service members looking to invest in owner-occupied properties. As such, borrowers would not be able to go this route if they wanted to, for instance, buy a vacation rental property. In fact, borrowers would be very limited in the type of investment property they could purchase with this lender.
Because Veterans United specializes in VA loans, the company is better equipped to navigate eligibility requirements and help borrowers get the right financing for their purchase. And with the company’s relatively low credit-score requirements, more people could potentially qualify for a loan, assuming they meet other VA loan-eligibility standards.
Specs
Pros
Cons
Why It Made the Cut: CoreVest Finance features a large coverage area, specialty in real estate investment loans, and numerous financing options for borrowers who have fairly significant previous experience with real estate investments.
CoreVest Finance specializes in real estate investment loans, so it understands the type of financing needed to purchase investment properties and the nuances that come with this type of real estate transaction. Borrowers can feel more confident that there won’t be any unexpected obstacles when securing financing because the lender primarily processes loans for real estate investments. It’s important to note that borrowers must have completed at least three real estate investment transactions over the previous 2 years to be eligible for a loan, which can be a barrier for newer investors.
For those who do qualify, CoreVest Finance has several investment property loan options to choose from, including rental, fix-and-flip, new construction, and multifamily property loans. As such, borrowers are more likely to find the right type of financing needed to purchase the specific kind of investment property they want.
Specs
Pros
Cons
We chose PennyMac as Best Overall because it offers fast and convenient tools for borrowers, plus it serves borrowers in all states but New York. Lima One Capital was selected as Runner-Up thanks to its numerous financing options as well as a convenient loan management dashboard.
When considering the best investment property loans, we looked at lenders’ coverage areas to check service availability as well as eligibility requirements such as minimum credit scores and previous investment experience. We also considered the different loan options and types of financing available and who they might appeal to most. Another consideration was the type of investment property the lender would finance. Customer experience–related factors were also accounted for, such as the availability of online tools and resources, closing time frames, and application processes. Although this is not an exhaustive list of qualifying factors, we felt it provided a good basis for determining the best investment property loan providers.
The research provided here is a starting point for borrowers interested in investing in real estate and searching for financing for potential investment properties. However, the lenders listed here may not be a good fit for every investor, so it’s important for borrowers to do independent research to find the right lender for their investment. It’s possible a local bank or credit union also could provide good options for financing an investment property, so borrowers may want to check with local lenders to see whether they offer any loan options for their investment. Investing in real estate involves a certain level of risk, so borrowers will want to be well informed before applying for any loan or making any property purchase.
As with all types of loans, the cost of taking out an investment property loan with any lender, including those listed in this guide, will vary on a number of factors. Two of the key factors include the borrower’s credit score and amount of money used as a down payment. A lower credit score or down payment could result in higher interest rates, which would increase the total cost of the loan. The fees lenders charge for investment property loans also vary, so it’s imperative for borrowers to ask for a complete list of all associated fees with the loan in order to compare them from lender to lender. Finally, buyers will want to keep in mind additional expenses that come along with investment properties, such as obtaining a policy from one of the best rental property insurance companies, fees to list the property on one (or more) of the best rental listing sites, and the costs of hiring one of the best property management companies to help the investor with the day-to-day oversight of the rental property.
Investing in real estate could provide much-needed income, retirement savings, and extra funds for such expenses as college tuition, buying another car, or paying for a vacation. By working with one of the best investment property loan providers, borrowers could find peace of mind knowing they are working with lenders who are experienced and knowledgeable in investment property loans.
Investing in real estate is not something to jump into lightly. Potential investors will want to be knowledgeable about the process as well as what’s required to qualify for an investment property loan before ever applying for any loan. These are some of the top questions investors ask when considering an investment property loan.
An investment property loan is a loan used to purchase a property that is not the borrower’s primary residence, or a multifamily unit in which the borrower resides in one unit and rents out the others for profit.
Some of the most common investment property loans include conventional loans, FHA and VA loans, and non-qualified mortgage loans.
Many lenders require a minimum down payment of 20 percent. For FHA and VA loans, the minimum down payment is typically 3.5 percent. Borrowers will want to check with their chosen lender to determine the exact down payment requirements for the loan they want.
For borrowers with a good credit score, adequate down payment, and a portfolio of financial assets, it may not be hard to get a mortgage for an investment property.
For many investment loans, the maximum loan amount is generally $647,200, but there are products that could provide higher loan amounts for properties in areas where real estate is more expensive.
That depends on the property, where it is located, and other factors. Borrowers will want to weigh all these factors before purchasing a property to determine the chances they will be able to make a profit from renting it out, bearing in mind there will be additional costs to consider, such as purchasing a policy from one of the best short-term rental insurance companies for investors with vacation rental properties.
Disclosure: BobVila.com participates in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for publishers to earn fees by linking to Amazon.com and affiliated sites.
Copyright © 2022 Acton Media Inc. All rights reserved.
Articles may contain affiliate links which enable us to share in the revenue of any purchases made.
About Author
