How Likely Is It That I'll Get an Investment Property Loan?

Real estate can be a great addition to your portfolio if you’re hoping to diversify and create passive income. And investment property loans can make it easier to purchase property if you’re interested in owning real estate directly. However, qualifying for an investment property loan is a little different from getting a mortgage to buy a home that you plan to live in. It helps to know what to expect and what’s required before wading in. Here’s what you need to know.

You can also talk to a financial advisor about the pros and cons of borrowing to purchase an investment property.

Understanding Investment Property Loans

Investment property loans are loans that you can use to buy a property that you plan to generate income from. You would do that by leasing it to one or more tenants who pay rent back to you on a monthly basis.

Generally speaking, you can use an investment property loan to buy a property that has between one and four units. The types of properties you may be able to buy include:

• Single-family homes

• Multi-family homes, such as a duplex or triplex

• Condominiums or townhomes

• Manufactured homes

There are also investment property loans for investors interested in flipping real estate. Rather than generating a steady stream of passive income, flippers aim to purchase a property at a low price and renovate it, then resell it at a higher price to turn a profit.

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Investment Property Loan Requirements

Is it easier to get an investment property loan versus a mortgage to buy a primary home? Not necessarily, as lenders typically impose more requirements for investment property loans.

Compared to a traditional purchase loan for a home, loans for investment properties may require you to have:

• Higher credit scores

• More cash in reserves

• A larger down payment

• Evidence of past experience with managing investment properties

You may also need to provide additional details about the property itself. This includes information about the neighborhood where it’s located, how much rental income it’s currently generating and estimates of how much income you expect it to produce once you own it.

Why is getting a loan for an investment property more challenging? One simple reason: These loans can pose a greater risk to lenders.

Let’s say that you have a main home that you live in, which has a mortgage. And you have a second home as an investment property. If your renters don’t pay up or you can’t keep the second home rented long-term, that could put you in the position of having to stop making the mortgage payment in order to keep up with the loan on your primary home.

Once the loan goes unpaid long enough, it goes into default which can lead to other consequences, including foreclosure. Lenders don’t want borrowers to default on investment property loans, which is why they can make it harder to qualify.

Types of Investment Property Loans

If you’re interested in getting a loan to buy an investment property, you have more than one option. Banks, credit unions and online lenders can offer investment property loans.

The range of loans you have to choose from can depend on the lender, while the loan terms that you’re able to qualify for can hinge largely on your credit score, income and the specifics of the property.

The main types of investment property loans include:

Conventional Loans

A conventional loan may be your first choice if you’re planning to buy a single-family home as an investment property. Conventional loans can offer fixed rates and longer loan terms, but you’ll likely need a higher credit score to get the lowest rates.

FHA Loans

The Federal Housing Administration (FHA) allows you to use FHA loans to buy investment properties with multi-family homes with up to four units. There is one requirement: You’ll need to live in one of the units for at least 12 months to qualify.

VA Loans

Veterans and military service members can use the VA loan program to purchase investment properties with as many as seven units, with no money down. Similar to FHA loans, borrowers must live in one of the units to qualify.

Owner Financing

A less traditional option for buying an investment property is owner financing. With this type of arrangement, you borrow from the seller and make payments back on a set schedule. This type of loan agreement may require you to make one large balloon payment at the end of the term.

Home Equity Loans

If you own a home and have a significant amount of equity, you could borrow against it to buy an investment property. A home equity loan provides you with a lump of money that you might use to buy a second home to rent out. Similar to first mortgage loans, home equity loans can offer fixed rates and lengthy terms.

Hard Money Loans

Hard money loans or bridge loans are more commonly used to purchase fix and flip properties. With these loans, you can get the money you need to buy the property and renovate it, but you typically have to pay it back within 12 to 18 months.

When searching for an investment property loan, it’s important to check the minimum qualification requirements first. That can help you weed out loan options that aren’t a good fit. Once you’ve narrowed down the list, you can take a second look to compare interest rates, down payment requirements, fees and loan terms.

How to Get an Investment Property Loan

Getting an investment property loan is something of a process and you may need a little patience to get through it. Here are the main steps involved in getting loans for investment property:

Find a Lender

The first thing you’ll need to do is find a lender that offers investment property loans. You can start with your bank. Then branch out to other banks, credit unions and online lenders to see what options are available.

Apply for a Loan

Next, you’ll need to apply for the type of loan you’re interested in getting to purchase an investment property. At a minimum, you’ll need to provide your personal information along with some details about the type of property you want to buy and the loan amount you’re seeking.

Provide Documentation

Any time you’re applying for a mortgage, the lender will ask for certain financial documents, including tax returns and bank statements. You’ll also need to share any information you have on the property, including its current rental income if available.

Get the Property Appraised

The appraisal determines how much an investment property is worth. A thorough appraisal should also provide you with details of comparable rental properties in the area and the income they generate.

Close on the Loan

Assuming that you’ve checked off all the lender’s boxes, the final step is closing on the loan. At this stage, you’ll need to review and sign the loan paperwork, transfer your down payment to the lender and pay any closing costs due.

Bottom Line

Investment property loans can help you get a step closer to your financial goals if they include owning real estate for passive income. Before applying for a loan, it’s important to understand what’s required to qualify, as well as what you might pay in interest and fees.

Investing Tips

• Real estate can be a great investment though owning rental property isn’t necessarily right for everyone. Talking to your financial advisor can help you weigh the pros and cons if you’re unsure whether property ownership is a good move. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get personalized advisor recommendations just by answering a few simple questions. Get started now.

• While the upfront cost might be your main focus when getting an investment property loan, it’s important to consider the longer-term cost of owning rental property. In addition to mortgage payments, you’ll be responsible for maintenance and upkeep, repairs, property taxes and insurance. All of those things can affect your profits when renting property, so remember to look at the bigger financial picture before you buy.

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