Financing Options For Rental Property

Financing Options for Rental Property
Many investors are now finding that rental property can be an​ excellent way to​ create wealth .​
If you are considering getting involved in​ rental property investing, it​ is​ a​ good idea to​ educate yourself as​ much as​ possible .​
First, you need to​ find out what it​ takes to​ become qualified to​ purchase investment property because it​ is​ actually somewhat different than becoming qualified to​ purchase a​ regular home .​
One of​ the reasons for this is​ the fact that a​ significant number of​ investors either walked away from properties or​ declared bankruptcy during the early 1990s .​
While you should certainly not be punished for someone else’s problems, neither do lenders want to​ be left holding investment properties .​
Therefore, it​ is​ important to​ understand that the requirements for being approved for a​ mortgage on rental properties are somewhat different from what you may be accustomed to .​
While a​ home can often be purchased with a​ minimum down payment, especially if​ you are a​ first-time home buyer this is​ often not the case with rental property .​
Many lenders require a​ minimum down payment of​ 15% .​
There are many different sources you can tap into for possible financing .​
These options include:
• Mortgage broker
• Local savings and loan or​ bank
• Private lender
• FHA; Federal Housing Association
Regardless of​ which option you choose, you will find that most lenders will want to​ be assured that you will have a​ sufficient amount of​ rental income in​ order to​ cover not only the mortgage payment but also other expenses such as​ insurance, taxes and maintenance .​
Depending on the amount of​ income that will be provided from the property, some lenders may require a​ larger down payment .​
There are also different types of​ loans which you can use to​ finance the purchase of​ a​ rental property .​
One option would be a​ residential loan .​
This type of​ loan can be used to​ purchase from one to​ four units .​
The exact options that are open to​ you often depend on whether the property will be owner occupied .​
Another option would be a​ commercial loan .​
This is​ an​ option when the property is​ five units or​ more or​ it​ will be non-owner occupied .​
Due to​ the fact that it​ is​ a​ commercial loan, it​ is​ often far different from a​ residential loan in​ regards to​ terms and requirements .​
One of​ the main differences between a​ commercial loan and a​ residential loan is​ the fact that fees and rates are frequently higher on a​ commercial loan .​
a​ larger down payment is​ also often required .​
The down payment on a​ commercial loan typically runs between 25% and 35% .​
While there are some lenders who may be willing to​ agree to​ a​ higher loan to​ value ratio; the requirements for qualifying for such loans are usually more stringent .​
The lender will also carefully examine the ability of​ the property to​ generate a​ cash flow that will allow you to​ repay your loan .​
As a​ result, the lender will typically examine the property to​ ensure it​ can provide an​ income that will not only allow you to​ cover the mortgage payments and other expenses but also provide enough of​ a​ cash flow that you will have additional income to​ place into a​ reserve account .​
Private party lending is​ another option for many prospective investors .​
One option would be to​ approach the current owner about seller financing .​
With this option the owner carries back the loan for a​ down payment and fair interest rate .​
You may find that you can save lending fees with the options and may also be able to​ take advantage of​ making a​ smaller down payment .​
Another option would be what is​ known as​ a​ hard-money loan .​
This is​ a​ type of​ short-term financing where a​ third-party makes a​ loan to​ assist the investor with purchasing the property .​
Generally, this type of​ loan involves a​ higher interest rate due to​ the fact that the buyer has poor credit or​ because the property is​ in​ disrepair and requires extensive renovation .​
FHA programs are frequently offered through traditional lenders .​
Keep in​ mind; however, that FHS does not actually lend money .​
They do provide insurance for lenders; offering numerous loan programs .​
Regardless of​ which financing tool you choose, remember that there is​ always the option to​ refinance at​ some later point in​ order to​ obtain a​ better rate and terms .​

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