Rental Property Financing
Investing isn’t always easy. Since rental property loans are designed to finance investment real estate, the terms and restrictions are generally greater than a home mortgage. Most lenders require higher credit scores before considering loans. Some require cash reserves for property maintenance and repairs.
Ways to Finance Rental Property
There are more possibilities to finance rental property than a permanent residence. The following are some of the choices to finance rental property:
Active-duty military, spouses, and veterans can get VA multifamily loans. No credit score or down payment is required to obtain these loans. A VA loan can also be utilized to purchase 2- to 4-unit multifamily property, but one unit must be the borrower’s primary residence.
FHA-backed loans are for properties with 2-4 units and may be an excellent alternative for borrowers with low down payments or poor credit. To qualify for an FHA multifamily loan, a borrower must live in one unit for at least 12 months.
Banks and credit unions follow Freddie Mac and Fannie Mae’s conventional loan requirements. Down payments range from 15%-25%. Many lenders use the eligible rental income from the financed property when calculating a borrower’s debt-to-income ratio.
Portfolio lenders and small community banks do not sell their mortgage loans to Fannie Mae or Freddie Mac. They have flexible loan terms and conditions to fulfill both the borrower’s and lender’s needs. A rental property portfolio loan may be excellent for borrowers with lower credit scores and debt-to-income ratios.
Private lenders are real estate pros that prefer loans to equity. Instead of owning real estate, they help investors finance rental properties. A borrower seeking creative financing, such as buying a house to restore and rent, may want to chat with a private lender regarding approval standards and speedier funding timeframes.
Some investors avoid banks and incorporate an LP – limited partnership or LLC – limited liability company to invest in real estate. Instead of a borrower owning rental property, the LLC does, and investors are members. An LLC operating agreement can be structured to make monthly principal and interest payments like a conventional or private mortgage.
HELOC – Home Equity Line of Credit
A home equity line of credit can turn a borrower’s home equity into cash (HELOC). HELOCs are second mortgages that act like credit cards. Most HELOCs offer variable interest rates that are cheaper than home equity loans.
It’s possible that purchasing a home to rent can be a profitable strategy to bring in rental revenue each month while simultaneously developing equity over the long run. Nevertheless, just like taking on any other kind of debt, financing a rental property does include a certain degree of risk.