Investment Property Financing & Requirements
This article is part of a larger series on Business Financing.
Investment property financing is the acquisition of residential property to be used for earning income, either through renting it or by selling it for a profit. Investment property financing considers your personal credit and financial history in addition to your business credit and finances. An investment property mortgage loan can be obtained using only your personal income and credit information.
These loans carry a higher risk to lenders because they’re loans for nonowner-occupied properties. Therefore, qualification requirements are more stringent than for owner-occupied mortgages, and interest rates will also be higher. However, rates tend to be lower on investment property financing than commercial real estate (CRE) financing.
If you’re searching for an investment property mortgage loan, LendingTree is an excellent place to start. LendingTree is a marketplace allowing you to choose from several loan offers. Check out LendingTree’s website for more information.
Investment Property Financing Basic Requirements
Interest Rates | 2.5% to 4.125%, fixed and adjustable |
Loan Terms | Up to 30 years |
Maximum Loan Amounts | Generally up to $647,200, higher amounts in high-cost areas or with jumbo loans |
Minimum Credit Score | 680 |
1.25x | |
Typically less than 40% | |
Down Payment Required | At least 20% to avoid private mortgage insurance (PMI) |
Tax Returns | At least two years |
Pay Stubs | At least three most recent |
Bank Statements | At least three most recent |
Previous Experience | Some lenders open to first-time investors, most want some prior experience |
Any documentation you would need to acquire a first mortgage on your primary residence will be required to obtain an investment property loan. This usually includes any identifying documents, your two most recent tax returns, and your three most recent pay stubs and bank statements. You will also need at least 20% down, or you could be forced to pay for PMI.
Interest rates generally are at least 0.5% higher on investment property loans than owner-occupied first mortgages. Lenders may also want you to have previous investment property ownership experience. This will vary from lender to lender, so be sure to look into that before applying. While lenders have to calculate a DSCR on investment property, it will likely be your debt to income ratio that will weigh heavily on your potential approval.
Investment Property Financing vs Commercial Real Estate Financing
Terms and Rates | Investment property financing | Commercial real estate financing |
|---|---|---|
Interest Rates | 2.5% to 4.125%, fixed and adjustable | 4.75% and up |
Loan Term | Up to 30 years | Up to 25 years |
Maximum Loan Amount | $647,200 generally $970,800 in high-cost areas Higher amounts would fall under jumbo loans | No maximum |
Minimum Credit Score | 680 | 600 for hard money loans 660 for most other CRE loans |
Other Factors | Borrower usually needs to be well-qualified | Often requires owner-occupancy of at least 51% of the building |
Funding Speed | Usually 30 days or fewer | 10 to 120 days |
Provider |
The reasons to choose investment property financing over commercial real estate financing include lower interest rates, longer terms, and shorter funding times. In addition, CRE loans often come with an owner-occupancy requirement, meaning that you’ll need to occupy at least 51% of the space in the property. Those specific CRE loans wouldn’t work with a single-family investment property.
Conversely, CRE financing has an advantage over investment property financing due to larger loan amounts―in some cases without a maximum limit―and lower credit score requirements. However, commercial real estate loan rates are almost always higher, and in specific instances such as hard money loans, significantly higher.
Unless you secure a portfolio mortgage, the investment property loan you get will have to conform to the federal guidelines set by the Federal National Mortgage Association (Fannie Mae), including maximum loan size. Loans exceeding the maximum conforming limits are considered jumbo loans. Even jumbo loan sizes are usually smaller than most CRE loans.
Another advantage of a commercial real estate mortgage loan is the ability to defer capital gains tax when selling the property and acquiring another one using a section 1031 exchange.
To find out the tax benefits of either type of mortgage loan, consult your tax professional.
Common Types of Investment Property Financing
There are many types of investment property financing available. Each type of financing usually has a specific purpose that makes it the perfect choice for your needs. Before applying for any specific type of investment property financing, check out our guide to getting a small business loan.
Conventional Mortgage Loan
The most common type of investment property financing is a conventional mortgage loan. It’s the same type of loan used to finance a home. However, because the borrower doesn’t live in the investment property, the risk is higher to the lender. This means higher interest rates and usually more stringent qualifications for investment property mortgages as opposed to owner-occupied residential mortgages. You can check with your local bank for financing, or you can check out an online marketplace such as LendingTree.
Fix & Flip Loans
Fix-and-flip loans are short-term loans used to purchase a property with extra money to complete renovations. At the end of the term, the property is sold for profit, or the owner will seek permanent financing and keep it for rental purposes. Many of these loans fall into the CRE loan category, but many lenders, such as LendingTree, will offer fix and flip loans for investment property financing.
Balloon Mortgage
Another type of short-term mortgage loan is a balloon mortgage. This type of mortgage typically has a term of five to seven years. A portion of the principal amount is repaid during the loan term, with the remainder due at maturity in a balloon payment. At this point, the property can be sold, refinanced, or the balloon can be paid in full and the mortgage lien released. LendingTree can also help you secure a balloon mortgage.
Owner Financing
If a borrower cannot obtain a mortgage to buy a property due to poor credit or property in disrepair, they can arrange owner financing to secure it. The buyer makes installment payments directly to the owner until the debt is satisfied, or the buyer can secure a mortgage and complete the purchase. There are unique challenges specific to owner financing, so be sure to consult your tax professional and legal advisor before entering into such an arrangement.
Investment Property Line of Credit
Once you have an investment property purchased, you can use the available equity in the property to secure an investment property line of credit. It operates in the same manner as a home equity line of credit. It’s also similar to a business credit card in that you only pay interest on the amount used at any given time. It can be used to rehab an existing property, purchase and renovate a new property, or pay off expensive debts such as private money loans or merchant cash advances. CoreVest is an excellent provider of investment property lines of credit.
HUD Loans
The United States Department of Housing and Urban Development (HUD) loans allow you to purchase one- to four-unit residential properties acquired by the HUD due to a foreclosure on a Federal Housing Administration (FHA)-insured mortgage. HUD sells them to recover the loss on the foreclosures. Hard money loans, FHA loans, and conventional mortgages are options for purchasing HUD houses.
If the properties are multifamily, you can also choose from different multifamily financing options to buy the property. There are specific guidelines for purchasing HUD homes, so be sure to check out the HUD website for more information. If you finance a HUD property with a hard money loan, Kiavi is a great choice, thanks to fast funding, no hidden fees in its closing costs, and no personal income qualifier.
Blanket Mortgages
If you want to acquire several residential properties, you can finance them under the same loan using a blanket mortgage. Blanket mortgages are easier to manage, with fewer loan fees, one set of terms, and one payment for all your properties. However, if you default on the loan, you could lose multiple properties. They may also be harder to find and qualify for than individual investment property mortgages. CoreVest is also an excellent place to shop for blanket mortgages.
Interest-only Mortgages
Interest-only mortgages require the borrower to pay the ongoing interest charge as a monthly payment, as opposed to paying both interest and principal. The principal amount remaining is refinanced or paid in full at the end of the term. Despite higher interest rates with interest-only mortgages, they’re preferred by some investors due to the lower monthly payments when compared to traditional mortgages. Interest-only mortgages often show up as construction loans, balloon mortgages, hard money loans, bridge loans, and seller financing.
Bottom Line
Investment property financing can allow you to acquire income-producing property for rental income or sale for profit. There are many different types of investment property financing. Before applying, figure out the short- and long-term plans for the property to decide on the correct type of financing for the project. You should always consult with your financing and legal advisors about potential tax and legal implications when purchasing any investment properties.
