Real Estate Investors: 6 Mortgage Options to Consider

Dated: July 16 2020

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calculator on pile of money

When it comes to real estate loans, several options are available for investors. However, you have to read through the various loans to understand the best option for your investment. With the right loan in place, you can achieve your investment dreams easily without putting yourself in stressful situations. At the beginning of real estate investments, you may experience a shortage of funds, but if you are really interested in investing in the property, then you have to source for funds. Compared to the homeowner’s loan, loans for investment properties are quite different.

Below, we have highlighted some suitable mortgage options for rental properties; simply peruse them to understand an option that would suit your potential investments.

1. Conventional Bank Loans

Fannie Mae guidelines are used for the conventional mortgage; something which most homeowners are aware of. The guidelines determine who can get the loans and how much can be given. While the system helps to include several people for market expansion, it doesn’t apply to the rental properties. Down payment is the first significant difference. Those who are willing to purchase a home will have to part with at least 20% of the purchase cost to get their mortgage – a different condition is found with rental properties. Considering that higher risk is involved in rental properties and the impending rental income doesn’t apply in the calculation, lenders tend to demand 30% of the cost of purchase. Also, when it comes to traditional loans, the lender usually considers six months of savings reserved to cover a rental property’s mortgage.

2. Home Equity Loans

Using home equity to secure loan grant comes with its benefits and drawbacks. People who already have homes usually use this option for long-term rentals. Possibly, you can use 80% of the home’s value to buy another home. This method often attracts people, most notably because only interest may be involved in the monthly payments. However, the drawback is that the prime rate does fluctuate, which means that the interest rate may change during the period of the mortgage. Since it is not certain that the interest rate won’t rise significantly, you may end up paying much more than you took.

3. Fix and Flip Loans

The investor becoming a landlord doesn’t always have to be the end-result of real estate investments. Some people invest by renovating houses (flipping) since the ROI on flipping may exceed the cost of renovations once the home is sold. Considering that the house is expected to return to the market quickly, fix and flip loans are considered as a short-term option. It is quite easy to get this kind of loan because the loan is granted based on the property – not the credit score. However, fix, and flip loans are not cheap to achieve; hence, most investors usually consider other alternatives. A rise in interest rates for fix and flip loans often differ among various lenders, and also, it depends on the time needed to complete the renovation. Also, it may rise to the closing costs, and consequently, reduces the actual profit of the investors. Advisably, endeavor to consider the cost of mortgage alternatives through online research before settling for fix and flip loans. While initially, it may appear as an exciting offer, failure to perform necessary research may lead to a huge loss of money in the end.

4. Government-supported Loans

There are mortgage options which are designed for people who are willing to invest in properties with multi-rental units. Government-supported loans are usually utilized by investors who wish to become landlords. The reason is that this kind of loan comes with extremely low down payments; consequently, it is easy to cover the monthly payment. However, the downside of this option is that it often has strict credit score requirements. Also, regardless of the amount borrowed, you will have to pay a monthly mortgage insurance premium. Within a short time, the premium will add up quickly, and as a result, low down payment doesn’t seem much of big advantage to some investors.

5. Portfolio Loans

Compared to other lenders, portfolio lenders take a different route. You would come across different demands with different companies because the lenders set their own rules. However, these companies are often clients-considerate as they accept low down payment and release more money. As a result, many people tend to choose portfolio loans. Since lenders design their specific documentations without government controls, their cost of loans is usually low. Nevertheless, the inexpensive upfront costs and flexibility offered often trigger some issues. For instance, charges such as prepayment penalty (a fee set for those who pays their loan before the stipulated time of payment) may apply. Also, since the borrowers are not required to provide conventional paperwork, it may result in higher costs as a higher risk is associated with the lenders releasing funds.

6. Commercial Loans

This sort of loan is advisable for those who are willing to invest in properties with more than four units. A commercial loan is mostly used for residential properties which are expected to occupy several people and bring about more risk. However, a commercial loan grant doesn’t come out quickly. While they are mostly used to cover operational costs – an urgent issue – it doesn’t necessarily mean that it will be released instantly. After submitting your application, there is a need to post collateral.

Afterwards, the company will determine your interest rate by checking the current state of the prime lending rate. Then, you will be required to present what exactly the money will be used for and how you intend to repay the funds. Once you have completed those demands, the lender will assess the paperwork, and this may take a long time. However, if your application is submitted and reviewed prior to when you need the funds, you may benefit significantly from considerable cash flow to execute your project by the time you need it.

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