Let's start with the basic similarities. You will fill out an application. The application may be more comprehensive than the application you filled out when buying your home. Your lender will pull your credit. The lender will order an appraisal and open title. So what are some of the important differences?
Down payments typically are quite a bit larger on investment property loans. You should plan on 25% (but this will vary and depend on your credit score), compared to the 3% often necessary for a conventional mortgage.
Interest rates and fees typically are higher on investment property loans. You should expect them to be 100 to 400 basis points higher than on a conventional mortgage. A basis point is a hundredth of a percent. So, if a conventional mortgage is 4.5%, an investment property loan on the same property to the same borrower would be 5.5% or more.
You should expect to have to prove that you have liquid cash reserves equal to your down payment and closing costs plus 6-12 months of your monthly principal, interest, taxes, insurance, and any association dues. If you own more than one investment property, some lenders may require you to prove reserves on all of your financed investment properties. Conventional loans, on the other hand, require anywhere from 0-6 months on conventional loans.
For conventional loans, the lender likely was interested in your employment history and personal income. You likely were asked to provide pay stubs and your personal tax returns. Just prior to the close, the lender likely asked you to represent that you were still employed in the same job that you had when you began the loan process. For some types of investment property loans, you’ll be asked for all of this information and then some, particularly if you already own other investment properties. For other types of investment property loans, instead of focusing on your personal employment and income, the lender will focus on the investment property cash flow. This simplifies documentation greatly.
How to finance an investment property
For serious real estate investors looking to build an investment portfolio, there are essentially three rental property loan options: agency loans (Fannie/Freddie), local banks, or an alternative lender such as Visio Lending. Let’s look at all three options:
Alternative lenders, sometimes referred to as Non-QM lenders or DSCR (Debt-service coverage ratio) lenders, offer investment property loan programs specifically designed to help SFR investors grow their investment portfolios. Since alternative lenders are not confined to the rules set by bank regulators or GSEs (government-sponsored entities), they offer a lot more flexibility and appealing terms, such as 30-year terms.
Additionally, most alternative lenders underwrite their loans based on the cash flow of a property rather than personal income. That means they have low document requirements and do not review your employment history or tax returns. There are some drawbacks to alternative lending, yet most seasoned investors are comfortable with them:
Agency loans are the least expensive type of loan, yet the most complicated to obtain. Lenders typically underwrite agency loans based on a holistic review of an investor’s cash flow, including personal income from stable employment and net operating income from rental properties. These loans have some drawbacks for investors including:
Some real estate investors have success financing their investment properties with local or regional banks. Because banks plan to retain these loans rather than sell them, they can be more flexible on underwriting in exchange for higher rates and fees. Banks, however, cannot portfolio 30-year loans, so they typically write five-year or ten-year loans on 15, 20, or 25-year amortizations. Some of the drawbacks of working with a bank are:
When qualifying for an investment property loan, the lender will make sure both the property and the borrower meet loan qualifications.
Plan on a 25% down payment. If you have stellar credit, you might only need 15%. If you have less than stellar credit, you may need as much as 35%.
In addition to a more substantial down payment, plan on having 6-12 months of liquid cash reserves. This will help you in the event of hard times and make sure that you won’t immediately lose the property due to missed payments and foreclosure.
Lenders tend to vary pricing, terms, and conditions more on rental property loans than on owner-occupier loans. Do what you can to raise your credit score before applying. And, importantly, protect your credit score once you've applied so your loan closes smoothly.
If you're applying for an agency or bank loan, get your documents in order. You'll need pay stubs and tax returns with all of your tax return schedules. Get ready to answer questions about your tax returns for a year or two back. Also, make sure you have sufficient personal income, including any net operating income from your rental properties, to afford the monthly payment on your rental property.
Construction is financed separately from rental loans (usually in the form of fix and flip loans or hard money loans), so most lenders will check to make sure the property does not need any significant repairs.
Visio Lending is a leading provider of 30-year financing to investors in single-family (1-4 unit) residential rental properties, including vacation rentals. Visio underwrites its flagship product, the Rental360, based on property level cash flow and borrower credit, rather than the borrower’s personal income. As a result, the Rental360 is an ideal financing product for the self-employed investor or the investor that is building a portfolio of rental properties.
Key advantages of Visio’s Rental360 program over conventional loans include:
No personal debt-to-income calculation: Visio uses either in place or market rents when estimating the property level cash flow
Low documentation requirements: Visio does not require tax returns or employment verification
Legal protections: Visio allows a customer to finance their investment properties in LLCs and corporations to shield their other personal assets from potential liability
Scalable: With proven experience and payment performance, there is no hard limit to how many properties an investor can finance with the Rental360 program
Laser-focus: Visio Lending's laser-like focus and investment property loan expertise simply cannot be matched.
Eliminating Cross-Default Provisions: Choosing a specialized rental lender instead of financing all of your investment properties, such as fix and flip projects, through one lender could avoid cross-default provisions. Essentially, through a cross-default provision, if a borrower fails to pay interest or principal on time for one loan, the lender has the right to default the borrower on all of their loans. Fix and flip projects are risky investments, even for the best investors, so it is a good practice to keep your rentals elsewhere.
Common-sense underwriting of your short-term rents: Visio Lending has mastered financing for vacation rentals.
Visio provides purchase and refinance financing up to 80% LTV. Commonly a customer obtains a cash-out refinance from Visio to purchase or improve another rental property. Since late 2015, Visio has financed more than $2.1 billion in Rental360 loans.
Visio Lending is the nation's premier lender for buy and hold investors offering, long-term loans for SFR and commercial rental properties, including vacation rentals.