Are you ready to start your career as a real estate investor? Congratulations! Making that decision is the first step in a lucrative income. Before you can start, though, you have to figure out how you will finance the homes. Unfortunately, houses don’t come cheap. Unless you are among the few fortunate people that can pay cash for the home, you’ll need to find financing that is suitable for investors.
Keep reading to learn which options you have at your disposal.
The least expensive option when financing real estate as an investor is conventional loans. These are the loans sold to Fannie Mae and Freddie Mac. Luckily, they both allow financing for investors. But, they do have rather strict requirements. In general, you can expect the following:
- 15% down payment on a one unit property and a 25% down payment on a 2-4 unit property
- Minimum 680 credit score with less than 25% down on a one-unit property and a DTI less than 36%
- Minimum 700 credit score with less than 25% down on a one-unit property and a DTI between 36% and 45%
- Six months of liquid reserves on hand
These guidelines could vary by lender, which is why it’s important to shop around with different lenders to see what they offer.
Technically, FHA loans are for owner-occupied properties only. FHA loans do have a use for investors though, when you purchase a 2-4 unit property. While the FHA does require that you live in the property that you use FHA financing on, with a 2-4 unit property, you can live in one unit and rent out the others.
This gives you access to much more flexible underwriting guidelines and allows you to get started on your real estate career. You won’t have to live in the unit you live in forever, either. After 12 months, you are free to move without the risk of violating the owner occupancy rules on the FHA loan.
FHA loans typically require:
- 580 minimum credit score
- 5% down payment with at least a 580 credit score
- If you have a credit score between 500 and 580 and 10% down, you may still qualify
- 31% maximum housing ratio
- 43% maximum total debt ratio (some lenders will allow a higher ratio though)
Keep in mind with FHA loans, you will pay mortgage insurance for the life of the loan. you don’t get to cancel the insurance once you owe less than 80% of the home’s value. FHA insurance remains in place until you pay the loan off in full.
Portfolio Lender Loans for Real Estate Investors
Where many borrowers have luck with real estate investment loans is portfolio lenders. You may know them as subprime lenders. They aren’t just for ‘bad borrowers,’ though. Portfolio lenders make their own guidelines because they fund their own loans. They don’t sell them to anyone on the secondary market, so they make the rules.
This can benefit you as an investor because you may find more flexible guidelines. Many lenders cater to real estate investors because of the large pool of investors that are out there today. It may benefit you to use a portfolio lender that is experienced in real estate investment as they may have programs that you would not find anywhere else, giving you access to more homes and greater profits in the end.
Don’t discount the value of private loans too, especially as you just get started. Private loans are those offered by individuals. There are many investors out there that would rather take a risk on your real estate investment rather than the volatile stock market.
Again, it’s important that you shop around. In this case, it’s also important that you have an attorney look over the terms of the loan to make sure everything is fair. You don’t want to get taken advantage of with the terms of the loan or put the home at risk of foreclosure under unfair terms.
Private loans often have higher interest rates but much looser guidelines making it easier to get approved.
As a new real estate investor, you have options available to you. It takes time to get all of the pieces together. Just as you would do with your owner-occupied property, take your time and shop around. Find the loan that offers the best terms but also gives you what you need to get you started on your journey in real estate investing.Click to See the Latest Mortgage Rates»