An investment property can give you the benefit of extra income. If you’ve decided that you want to try your hand at being a landlord, it’s best to explore your options and obtain the right mortgage for your particular needs. Soliciting the assistance of others with experience in the industry like Flagship Financial Group will help to make the process go smoothly.
Owning rental properties is a great way to make money without having to work outside the home. However, since the real estate market crash in early 2009 that left many lenders absorbing a painful loss in profits, banks are now requiring a lot more from would-be investors. There are two types of loans available for investment properties. There is a residential and commercial loan. While you can secure these from almost any bank, it gets a bit trickier if you are looking to pursue a government-backed loan such as an FHA or VA. Having the proper guidance from a company such as Flagship Financial can help you to make an educated decision.
The first of the two, the residential, has a limit of four units to remain in the classification. This can include a single-family dwelling, small apartment house or a duplex. The loan requirements pretty much mirror that of a residential loan. You’ll need a good credit score preferably 720 or higher, allowing you to get the best interest rate. Also, you’ll need a low debt-to-income ratio and loan-to-value on the investment property. In addition, you will also need to show that you have a savings account with at least six months of payments in reserve. Not having any experience, as a landlord should not affect the outcome but it can help when dealing with a bank on matters considered a higher risk.
The second type, the commercial loan, applies to an apartment building that has over four units and non-residential properties such as an office building or shopping center. Unlike the residential that offers up to thirty years for financing, you will need to pay this type loan back within just 5 to 7 years. This loan also has more stringent guidelines. It’s almost impossible to get this loan without at least a 720 credit score. A bank expects a commercial investor to have a handle on money matters. The lender will also take into consideration the type of business and its ability to generate a substantiated cash flow. Also, the loan-to-value approval rate is much lower, capping out at only 70 percent. This, again, is another way for a lender to have some equity available should you foreclose.
Government-backed loans will not put their stamp on an investment property. However, as mentioned earlier, there are ways that you can still get one. If you or your spouse will occupy the property then the bank considers treats it the same as a residence. For instance, if you apply for a mortgage on a four-unit building where you will occupy one, you can get an approval. There are many benefits to these loans. The down payment is far less; the required credit score can be as low as 580 and you will likely have far less closing costs.