Financing real estate investments can be tricky. There are several types of lenders that 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 terribly 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.
5 tips to get the best loan possible
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 possibly get.
To do that, you need to be the most attractive applicant possible in the eyes of lenders. With that in mind, here are five suggestions to help you find the best loan for your next investment property.
1. Work on your credit score
Whether you’re applying for a conventional mortgage for your investment property or for a commercial asset-based loan, you can be sure that your credit score will come into play. Lenders generally check your FICO credit score from all three major credit bureaus and use your middle score to determine your eligibility, your down payment requirement, and your interest rate.
The average American has a FICO® Score of about 700. Scores range from 300 to 850, and higher scores are better. If you aren’t familiar with how your FICO® Score works, our sister website The Ascent has an excellent guide to FICO scores that's definitely worth a read.
Here’s the point: You can get an investment property mortgage with a credit score in the low-to-mid 600s. However, you may be asked to put more money down than you want to, and your interest rate might be significantly above average.
You may also be surprised by the difference a seemingly small change in interest rate, or APR can make. For example, let’s say that a lender is offering 30-year investment property mortgages with fixed 4.50% APRs to the most qualified borrowers. However, because your credit score is good but not great, they offer you a rate of 5.25%. On a $250,000 mortgage, you would pay nearly $41,000 in additional interest over the life of the loan when compared with a top-notch borrower.
A FICO® Score of 740 or higher will generally qualify you for a lender’s best terms, so working on your credit score can be an extremely smart move.
2. Get your income and employment documentation in order
There are asset-based lenders who don’t care about your personal 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. This includes your last couple of tax returns, W-2s and/or 1099s, and a few recent pay stubs won’t hurt. 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.