You know there are numerous loan programs out there, but when you buy an investment property, your options are limited. Many loan programs require you to live in the home as your primary residence in order to use it.
Which loans can you use and which won’t work? Find out below.
Conventional Loans are the Answer
Conventional loans are one of the only loan programs you can use for an investment property. Fannie Mae and Freddie Mac don’t require that you live in the home to use their program. You can use the funds to buy a second home or home you plan to rent out.
If you need financing to buy an investment property, you’ll need great credit and a low debt ratio to qualify for conventional financing. Keep in mind that lenders look at the big picture. If you have a mortgage on your current home, they’ll include that in your debt ratio. That means your income must be high enough to cover both mortgage payments as well as your regular monthly expenses while meeting the conventional loan guidelines.
Can you Get a 30-Year Term on a Conventional Loan for an Investment Home?
Lenders do allow you to finance an investment property for 30 years. You can also opt for a shorter term, if your debt ratio allows it. The 30-year term will lower your monthly payments making it easier to qualify for the loan and afford the payments. Think about the worst-case scenario when you choose your term. What would happen if your tenants bailed on you? Tenants aren’t always reliable, so if they do stop making their payments, you’re stuck making the mortgage payment on your own. The 30-year term payment may provide the most affordable option.
What Down Payment do you Need for a Conventional Loan?
On average, conventional lenders require a 20% down payment to buy an investment property. But this does vary by lender – some may even require a down payment as large as 30%. If you do find a lender that allows a down payment of less than 20%, you will pay Private Mortgage Insurance until you owe less than 80% of the home’s value.
Subprime Loans are the Next Best Choice
If you can’t qualify for a conventional loan, your next best bet is the subprime loan. Subprime loans, otherwise known as alternative loans, are loans written by individual lenders that they keep on their books. There isn’t a government agency insuring the loan or an investor backing the mortgage. The bank is on their own with these programs.
Subprime loans do allow some flexibility as banks can create their own guidelines. They may offer a program that you otherwise wouldn’t find with a Fannie Mae or Freddie Mac program. For example, if you have a lower credit score than conventional loans allow, you may find an individual bank that will write a loan with a slightly higher interest rate for your investment home.
Government Loans Aren’t an Option
It’s important to know that any of the government loans aren’t an option for an investment home. FHA, VA, and USDA loans all require you to sign a statement agreeing that you’ll live in the property as your primary residence.
There is one exception to this rule, though. All of the loan programs are available on 1 – 4 unit properties. You can buy the property, live in one of the units, and rent the other 2 – 3 units out to tenants. While this is technically an investment property since you earn an income, since you live in one of the units, they count it as owner-occupied. Of course, before you do this, make sure you can afford the mortgage on the entire unit without the rental income.
Financing an investment pretty is harder than financing an owner-occupied property. Lenders put themselves at risk of default when helping you buy an investment property. Chances are that if you run into financial trouble, the first thing you’d stop paying is the investment property – not the home you live in. Because of the risk, you’ll often see higher interest rates and fees on investment property loans, but there are options out there.