When it comes to buying investment property, financing can be a great challenge, especially for people purchasing their first rental property. Most lenders require real estate investors to put down a substantial down payment before closing on a property. Here are a few different types of home loans available for investors along with the average down payment for each:
- Conventional mortgages – Depending on your credit and income, you can finance your real estate investments with a traditional mortgage, with the payments spread out over 15 to 30 years. Such loans are available via online lenders, credit unions, and banks. The down payment could be as much as 20% of the purchase price. The down payment for investment property for this financing option could even go up to 25% for multi-family homes.
- Hard money lenders – Such lenders are more concerned with the viability of your real estate deal than your credit or income. This option works best for investors that are planning to refinance or sell the property quickly. However, the down payment can be high depending on the lender. It can range anywhere from 10%-25%. Some hard money lenders won’t require a down payment but, in this case, they will take your credit score into consideration.
- Private money lenders – Some wealthy friends or family members might be willing to offer you a loan for buying an investment property. However, the down payment is unpredictable in this case as it depends on who you turn to. But if you’re turning to private institutions, it may range from 10%-20%.
For the average American, saving for a 20% or more down payment can be a very long and painstaking process. The good news is that there are lenders that offer investment property loans with low down payment.
So, where can property buyers find investment property loans with low down payment? Here are some options available for real estate investing:
1. VA Loans
This no-money-down loan is guaranteed by the U.S. Department of Veteran Affairs. VA loans are offered to active members of the U.S. military, as well as those honorably discharged from service. Individuals that have served for at least 6 years in the National Guard or Reserves also qualify. So do spouses of personnel killed in the line of duty. Here are some of the advantages of a VA loan:
- Mortgage insurance is not required
- Buyers may use intermittent occupancy
- Bad credit and bankruptcy don’t disqualify you immediately
2. Federal Housing Administration (FHA) Loans
The Federal Housing Administration does not give loans; rather, it is an insurer of loans. The FHA has some guidelines for the loans that are eligible for insurance. When a lender funds a loan that satisfies these requirements, the FHA accepts to insure that mortgage against loss. Also referred to as 203b mortgage loans, FHA loans require a down payment of only 3.5%. However, real estate investors have to live in one unit of the rental property to qualify for this low down payment. This is referred to as house hacking or the owner-occupied multi-family real estate strategy. FHA interest rates are much lower compared to traditional mortgage loans, and borrowers can qualify even with a credit score below 600.
3. The HomeReady Mortgage
Backed by Fannie Mae, HomeReady mortgages are home loans that are designed to help moderate- and low-income borrowers refinance or buy property. These loans come with reduced mortgage insurance costs, low mortgage rates, and innovative underwriting. They are also flexible about accepting contributions from other people. Borrowers can use the income of everyone living under the same roof to get approved for a mortgage. For instance, if a property owner lives with their spouse and children who earn an income, he or she can use their earnings to help qualify for a loan. HomeReady loans are investment property loans with low down payment of 3%. However, real estate investors of multi-family homes will need to house hack to qualify for this loan.
Investors that want to refinance or buy with HomeReady must fulfill the following financial requirements:
- Minimum credit score of 620
- Participation in homeownership education
- Income equal to or less than the area median income (AMI)
You can check Fannie Mae’s HomeReady eligibility page to find out the AMI of your home address.
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4. The ‘Piggyback Loan’
Also referred to as the 80/10/10 loan, the ‘piggyback loan’ is, in reality, two loans designed to offer property buyers lower overall payments and added flexibility. With its 80/10/10 structure, buyers first bring a down payment of 10%. The remaining 90% is split into two parts; 80% is a traditional loan via Freddie Mac or Fannie Mae, while the other 10% is a home equity line of credit (HELOC) or home equity loan (HELOAN). HELOCs are more preferable since they offer flexibility in the long term. However, the loan structure can be adjusted to help borrowers access the best pricing available.
Besides expenses such as title insurance, lender appraisal, and home inspection, the down payment is the biggest closing cost in property ownership. The financing tips above can come in very handy for anyone that wants to know how to invest in real estate with little money. However, even though investment property loans with low down payment can be very helpful, such loans can water down your offer. Some sellers are reluctant to sell when buyers come backed by some of the loans listed above. Sellers usually prefer traditional 20% down payment offers to lower down payments. Keep this in mind as you explore your options.
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