Getting a loan for your investment property can be tricky but it doesn’t have to be impossible. Read our blog for a simple guide on how to get your investment loan.
Concept of loan with icons on wooden cubes
Obtaining a loan to invest in real estate isn’t too different from seeking a loan for a property you plan to live in. There are a few different things to consider and some additional avenues to explore. Investing in property can prove extremely fruitful, but it can also be very risky, and you can lose out if you don’t play it smart.
Below is a basic guide to understanding what it takes to get a loan to invest in real estate.
Different loans to consider
When considering a real estate investment there are a few different loan options for you to consider, including:
Conventional bank loans
You’re probably familiar with this option, especially if you’ve secured an owner-occupied property. Going down the route of more conventional financing can make life easier, but it’s important to know that a down payment of 20% is the expected amount for the purchase of a home. If it’s an investment property, the lender may need 30% of the price as a down payment. (1)
Your ability to get approved, and the kind of interest rates that apply, will depend on your personal credit score and history. Most lenders will also review your income and assets. You also need to be able to show you can afford any existing mortgages and monthly loan payments for the investment property.
Real estate agent and customers shaking hands together celebrating finished contract after about home insurance and investment loan, handshake and successful deal.
Hard money loans
Another type of loan you can look into is a “hard money loan.” Hard money loans are short-term loans that investors can use to purchase, build or renovate a property. These are offered by private lenders as opposed to traditional bank. One of the many benefits of hard money loans is their flexibility, as they depend on the discretion of the agreement made between you and the lender.
Factors for getting a loan
There are several things you need to consider to make sure you can obtain a loan. You want to make sure you have all your ducks in a row so that either a bank or private lender won’t hesitate to provide you with the help you need.
Saving for a deposit
Saving for a deposit might take more time, but it’s the simplest way to obtain a loan for a house. Essentially this money can help secure a property for you. The more money you have for a deposit, the fewer hoops you’ll have to jump through.
If you don’t have the money for a deposit—or don’t have the time or means to save up for one—you can get around this is if you already own a home with substantial equity. You can use part of this equity, or all of it, as a deposit for your investment property.
How much equity you have is calculated by subtracting the value of your remaining mortgage debt from the market value of the property. As of 2020 the value of homeowner equity in the U.S. was around USD$21.2 trillion. (2)
It should be remembered that when you use the equity from another property, the principal you have to repay will increase. You need to be able to take on that extra load and make those loan repayments, or increase the amount you are repaying, before making this decision.
You can also choose to use a guarantor on your investment property loan. This is usually done by asking a close family member to use a part of their own equity to secure a loan for you. The guarantor needs to be 21 years old, have good credit history, financial stability and it also helps if they are a homeowner. (3)
Many investors or buyers who wish to speed up the process of obtaining a property take this option. There are risks that both the buyer and the guarantor should be aware of; if the borrower is unable to make their repayments, the guarantor will be required to repay the portion of the loan they helped to secure.
Ability to make repayments
Anyone—whether they use a private lender or a bank—needs to show that they are ready and able to make repayments. This is a crucial aspect of any lending process. Most lenders and banks will look at the following:
- Your income
- Your employment history
- Bank statements
- Spending history
- Any assets you own or anything you owe
- Your credit history.
There are quite a few things to consider when looking into obtaining loans for investing in real estate. First, you need to decide what loan you need based on your circumstances and where you are going to get your loan from. Second, you need to the process in order to obtain a loan.
This simple guide offers some first steps to take. If you read through, and follow the advice given above, you’ll be well on your way to investing in real estate.
- “The Complete Guide to Financing an Investment Property,” Source: https://www.investopedia.com/articles/investing/021016/complete-guide-financing-investment-property.asp
- “Value of U.S. homeowner equity 2020,” Source: https://www.statista.com/statistics/375865/value-of-homeowner-equity-usa/
- “Being a Guarantor | Who Can Be One & What It Means,” Source: https://www.experian.co.uk/consumer/guides/being-a-guarantor.html