Ideas On Getting A Loan For Investing On A Real Estate Property

Financing real estate investments can be tricky. Several types of lenders make loans on investment properties, and the requirements to finance an investment property can be significantly different than they are for a primary home.

Having said that, there are a ton of financing options out there, and it isn’t difficult to find a loan for your next real estate investment. However, finding the best possible loan for your investment requires a bit more work. Here are five suggestions that can help you make sure that the process goes smoothly, and that you’re financing your investment property with the best possible terms you can get.

If you are a reasonably qualified borrower, you can typically find someone to loan you the money for your real estate investments. However, you don’t want just any loan — you want the best investment property loan you could get.

To do that, you need to be the most attractive applicant possible in the eyes of lenders. With that in mind, here are some suggestions to help you find the best loan for your next investment property.

Whether you’re applying for a conventional mortgage for your investment property or a commercial asset-based loan, you can be sure that your credit score will come into play. Lenders generally check your credit score from all major credit bureaus and use that credit score to determine your eligibility, your down payment requirement, and your interest rate.

Some asset-based lenders don’t care about your income or employment history when you apply for an investment property loan and to be clear, they can be great options. However, conventional lenders generally offer better terms than asset-based lenders, and they will certainly consider your income and employment situation when making loan decisions.

If you’re applying for a conventional loan, you generally can’t have a debt-to-income ratio of more than 45%, including the expected payment on your new investment property loan. You can include three-fourths of the property’s expected rental income for qualification purposes, but you’ll still need to be able to document your other sources of income.

So, before you begin shopping for a loan, it’s a good idea to gather all of your income documentation. It’s also worth having a contact number for someone (like your employer’s HR department) who can verify how long you’ve been at your job.

Even though asset-based lenders won’t consider your debts in the way conventional lenders will, debt reduction can boost your qualifications for any type of loan.

For conventional loans, debt reduction will improve your debt-to-income (DTI) ratio. Even if you’re already within your lender’s limit, a lower DTI can help you get better loan terms.

Debt reduction can raise your credit score, which, as we’ve discussed, will help your chances of approval and improve your loan terms with any type of lender. Unfortunately, there’s no way to know how much a specific amount of debt reduction or debt payoff will affect your score.

This is more of a factor when it comes to asset-based lenders. When you use one of these lenders to finance an investment property, the good news is that they generally don’t care about your debts, your income, or how long you’ve been with your employer. You won’t have to dig up your old tax returns or produce other income documentation.

The caveat is that because the loan is only based on the property, the property needs to be able to justify the loan and then some. In other words, the cash flow from the property needs to be more than sufficient to cover your mortgage payments, including taxes and insurance.

Many asset-based lenders use a metric known as the debt service coverage ratio or DSCR. This is the property’s expected income divided by your monthly expenses.

As a final tip, perhaps the most common mistake I see investors make when trying to finance a property is to apply for just one mortgage and accept whatever terms they’re given.

You might be shocked by the differences among interest rates and other loan terms you can get when you comparison shop. A lower origination fee can make a big difference in your property’s profitability, so this is an important step.

Plus, you don’t have to worry about too many mortgage applications hurting your credit score.

So, apply to at least a handful of lenders before deciding. This should include conventional lenders as well as asset-based lenders. The more the merrier.

If you have a down payment of 20% or more and a good credit score, it isn’t too difficult to find financing for an investment property. However, finding the best possible loan can make a big difference in your property’s cash flow, as well as your long-term equity. So take the time to make yourself the best applicant you can be and make sure you explore all of your options.

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