What Are the Best Investment Property Loans And How To Navigate Them

What Are the Best Investment Property Loans And How To Navigate Them


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As an aspiring investor, you’ve probably been keeping an eye on the market and and asked yourself “What are the best investment property loans?” However, it may be confusing to choose which loan is the best for what type of investment property.

Perhaps you’ve even wondered whether there are specific loans that you should prioritize above others depending on the property.

Even though there are rigorous standards investors must meet to be approved for an investment property loan, there are a vast variety of programs available to accommodate the demands and circumstances of almost any investor.

What Is an Investment Property Loan?

You’ve chosen a property that meets your criteria and want to finance it with a loan, but you’re unsure which kind would be the most beneficial for you. Investment property mortgages vary significantly from conventional mortgages in many key respects.

Most noticeably, investment property mortgage rates are often higher than rates for primary residences as property owners are more likely to default on a loan that isn’t their primary residence. Additionally, investment property mortgages typically have stricter qualifying conditions. So, is it even worth it?

Choosing the right type of loan will also vastly depend on your real estate goals and your plans for the property.

Conventional loans have less stringent qualifying standards and are frequently considerably cheaper than investment property loans. However, you still can’t utilize the latter since investment properties are meant to generate money, whether via rental income or by being flipped for a profit.

Short-term hard money investor loans are another option, which allows you to buy properties, fix them up, and then sell.

What Are the Most Common Investment Property Loans?

Several loan options are available, but only three are used to finance investment property: conforming loans, jumbo loans, and government-backed loans.

Conforming loans are the most common types as they are conventional mortgages and conform to lending rules under Fannie Mae and Freddie Mac. Lending rules are similar to traditional mortgages as you’ll need a 680 credit score and a 15% down payment, yet with a 25% down payment, you may be able to be accepted with a 620 credit score.

Jumbo loans are utilized when the loan amount exceeds the conforming loan limit, such as a mortgage between $647,200 and $3 million.

To qualify for a government-backed loan, such as an FHA, VA, or USDA loan, the borrower can purchase a multifamily property and rent out units. However, the property must meet program standards and it must be owner-occupied.

Other less popular investment property loans:

Portfolio lenders often make their own rules for investment property loans, which can be advantageous in many ways depending on your goals. The advantages of portfolio loans are that they often require a lower downpayment or allow you to finance a higher number of properties. These advantages sometimes come with substantial costs, such as much higher interest rates.

Alternatively, hard money loans are a less common option for investors since short-term loans serve as a bridge to other types of financing. Weigh your options before deciding on this type of loan since the benefits of being able to close on properties quickly come with the expense of high-interest rates and fees.

Commercial loans are available for multi-unit properties of four or more units, which may be of interest to those interested in buying commercial investment properties. Although complex, these loans are secured by the value of the property you intend to use as collateral so approval could depend on its value. Commercial investment loans have several drawbacks, including the high costs and complexity of setting them up, as well as the need of having to establish a bankruptcy remote entity, which prevents you from keeping rental revenue without paying the mortgage.

Although, if you’re a business owner, you may qualify for business investment property loans depending on your goals.

Are SBA Loans Suitable for Rental Property?

SBA 504 and SBA 7 (a) are two of the SBA’s small-business lending programs for real estate purchases; however, neither may be used for speculation, rental investment properties, or investment holding.

Small and medium-sized enterprises (SMEs) with a net worth of less than $15 million may take advantage of SBA 504’s long-term, fixed-rate financing to make large investments in infrastructure (such as an owner-occupied building or improving an existing facility) and create or retain jobs.

On the other hand, small business owners looking to acquire real estate as part of their organization might benefit from the SBA 7 (a) loan since it offers both short-term and long-term working capital. The maximum loan amount is $5 million, and the loans are to acquire real estate, construct new structures, remodel existing buildings, buy a new business, or expand an existing one.

To sum up, an SBA loan cannot be used to purchase a rental property, but it may be used to purchase the other types of investment properties mentioned above.

Is It Hard to Get a Loan for an Investment Property?

Investment property loans are generally considered more difficult to qualify for as investment properties are a greater risk for lenders. This means that lenders have to use stricter guidelines to ensure the loans will be repaid and not go into default. This usually consists of:

  • Higher credit scores – A credit score of 620 will get you approved for a conventional loan, but you’ll need a score of at least 700 or more to qualify for an investment property loan.
  • Good debt-to-income (DTI) ratio – While a low credit score indicates your ability to repay debt, a high DTI ratio suggests you don’t make enough to pay off your current debts, let alone take on more. You should also limit the number of mortgages you have unless you can comfortably afford them and can prove your ability to repay them. Here, a DTI ratio of 43% is typical for conventional loans, but it will be significantly lower for a loan on an investment property.
  • Higher down payment – Investor loans often need a larger down payment than primary residence loans, with 20% being the norm, while conventional loans often accept down payments as low as 3%. On the other hand, investment loans and foreclosures carry a higher degree of risk for lenders, and a bigger downpayment can help mitigate this risk to some extent.
  • Too many mortgages – Investment loans have higher requirements in several aspects, including the number of properties you currently have on your credit. You may need to go through Fannie Mae’s unique method if you have more than four mortgages, and even then, your application could be denied because of your high property total.
  • Perceived higher risk – If lenders discover that you have a history of losing money on investment property loans and that you also have other debts, they may see you as a high-risk borrower. Suppose you’re having trouble making your mortgage payments. In that case, your lender may worry that you’ll pile on other debts, like your vehicle loan or primary residence mortgage, before paying off your investment mortgage.

The sooner you identify your potential risk factors, the faster you can work your way towards increasing your chances of getting approved. However, there are programs that you may be eligible for despite having risk factors.

Increase Chances Of Getting Approved For Investment Property Loan

Investment property loans, like any other kind of loan, have several conditions that must be met before the lender will release the funds. With stricter standards for investment loans, it’s crucial to identify possible dealbreakers early so you can take preventative measures to increase your chances of approval.

Here are some ideas:

  • Formalized investment strategy – Some creditors worry that borrowers won’t be as dedicated after the novelty of their new investments wears off and they fall behind on payments. A structured investment plan is one way to show lenders your dedication. For instance, if you want to purchase a fixer-upper, having a plan for how much it will cost, how long the repairs will take, and how quickly you can resell it can help.
  • Track record – A strong track record or portfolio of previously sold identical properties might help convince lenders of you if your credit score or DTI ratio is worse than what they need to be.
  • Improving your credit score – Paying down debt, making payments on schedule, and resolving old collection debt are all great ways to boost your credit score. Proactively working on improving your debt can make a difference in the lender’s eyes to grant you a loan.
  • Decrease your DTI ratio – Just like improving your credit score, taking steps to reduce your DTI ratio below 30% by paying off debt or seeking better prospects for a higher income can help.
  • Higher cash savings accounts – Lenders favor borrowers who have substantial liquid assets (as cash is always king). The ability to show that you can afford a down payment and the first six months of mortgage payments may go a long way toward easing the concerns of lenders that you’re at high risk – especially when it comes to fixer-uppers.

Can I Put 10% Down On An Investment Property?

After learning about the distinctions between investment property loans and qualifying factors, you may ask whether you can put down less than 20% or even 10% on an investment property loan. With the majority of lenders requiring as much as 30% as a down payment, it seems to be an unattainable task – or does it?

Aside from the traditional investment loans, there are additional programs like HomeReady and Home Possible, both run by government-backed programs Fannie Mae and Freddie Mac, that allow you to purchase an investment property with 10% or less down, albeit they too have stringent qualifying standards.

Here are the requirements to use these programs:

  • High credit score
  • High cash savings
  • Living on the property for one year
  • Show enough proof of income to qualify for the loan but under the local median income

Fannie Mae’s HomeReady Loan Program

Investors often overlook this government-backed loan, which was established to assist middle- and lower-class borrowers in achieving the American goal of house ownership. Fannie Mae’s lending program enables investors to purchase investment homes with as little as 3% down as long as they have a high credit score and high cash assets. This lending option may be especially useful if you want to purchase a multi-family unit and live in one of the apartments while the rent pays your mortgage.

This program is unique in that it permits you to qualify using revenue from “accessory units and borders,” which means you may utilize the rent from the property to meet income criteria.

Freddie Mac’s Home Possible Loan Program

Investors may utilize the 3% down payment option provided by the Freddie Mac financing program, albeit they will be required to occupy one of the units in the building if they are purchasing an apartment building. A larger down payment may be required if your credit is less than excellent, but it’s still possible to qualify. Instead of paying only 3% down, you may have to pay 5% down, which is still lower than the standard.

Rent payments can also be included in your income to meet Freddie Mac’s DTI ratio qualification standards. However, you must provide evidence that your tenant has occupied the property for at least a year and is committed to remaining there.

How Do I Shop for Current Investment Property Mortgage Rates?

Many investors find it challenging to identify suitable investment properties. Once a lending program has been identified, the next challenge is determining which mortgage rates to pursue. Many online tools and calculators allow you to pick the sort of loan you have and compare various rates, all within minutes from the comfort of your home.

Fill out one of the several investment property loan preapproval tools to view a personalized quote. Credit reports are only retrieved once and then utilized again within a certain period, so shopping around for preapproval letters from other lenders won’t hurt your score.

How To Compare Investment Property Loan Rates

The only way to ensure you get the best loan rate is to compare different lenders and their rates and fees. After filling out the forms and getting preapproved, you will receive a loan estimate from each lender that lets you compare each aspect of the loan side by side, including all costs.

Though, with rates changing daily and based on economic and noneconomic factors, it can be hard to get the perfect rate.

Interest rates for a 30-year fixed-rate mortgage are now averaging at 5.55% while investment property rates are at least 0.5% to 0.75% higher. You must also have a credit score of at least 740 and put down at least 25-30% to finance an investment property.

Many new investors focus just on interest rates but quickly learn about other fees associated with the process, such as the origination fee, closing costs, title costs, and more.

Can a Home Equity Loan Finance an Investment Property Loan?

Suppose you currently own a primary residence that is either paid off or has sufficient equity. In that case, you may wonder if you can acquire an investment property loan based on your equity. As a homeowner, you may finance an investment property through cash-out refinancing, home equity loans, or a home equity line of credit.

A second mortgage on your primary residence may yield enough cash for a downpayment on your next investment, however, you’d be limited to the amount of equity you have on your current property.

How We Chose the Best Investment Property Loans

So what are the best investment property loans? The easiest way to find the most beneficial investment property loans is to compare the terms offered by several lenders. The expenses connected with each sort of loan can quickly pile up, which many aspiring investors overlook as they navigate the space.

While the conditions for alternative loans are sometimes more rigorous than those for conventional loans, you may find a way around this by applying for a loan via a program tailored to your unique situation.

If you’ve been looking to enter the real estate investment sector, New Western can help you find suitable, off-market properties. We’re proud of our hassle-free investing opportunities, cutting-edge investment ideas, and streamlined closing procedure.

Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.