Investment property loans: What to know
This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer home equity loans. Any information described in this article may vary by lender.
Quick insights
- Investment property loans allow you to purchase an investment property, which hopefully generates income or profit through either rental income, appreciation in value or both.
- Some ways to finance an investment property purchase include tapping into your home equity, private loans and hard money loans.
- For investors willing to occupy a unit within a property of up to four units, an FHA loan or VA loan might be a good option.
Purchasing an investment property potentially presents an opportunity to build a strong financial future. But if you don’t have all of the funds to purchase an investment property in cash, investment property loans may offer a worthwhile solution.
Investment property loans come in many forms. This guide explores these options and maps out how to get an investment property loan.
What are investment property loans?
An investment property loan gives you the capital required to obtain an income-producing property. Rental properties are a common type of investment property. But another popular option involves investors buying, renovating and selling a property for a higher price.
For the purposes of this guide, we’ll focus on investment properties within residential real estate. However, some investors choose to focus on commercial real estate properties.
Types of mortgage loans for an investment property
When seeking a loan for an investment property, investors have many choices. Some of these mortgage loan options include:
- Federal Housing Administration (FHA) loans: FHA loans allow you to purchase properties of one to four units. The owner must occupy one of the units. Buying a multi-family property with this loan could make sense if you plan to live in one of the units.
- U.S. Department of Veterans Affairs (VA) loans: Multi-family VA loans allow for a borrower to use the loan to purchase a property with one to four units. But you must live in one of the units as your primary residence.
- Conventional loans: With no occupancy requirement, this is a standard way of purchasing an investment property.
Alternative financing options for an investment property
Opting for a mortgage loan isn’t the only possibility. For some investors, the following alternative financing solutions could make sense:
- Home equity loan: If you currently have equity in a property, tapping into it through a home equity loan could provide the necessary capital for your investment property purchase.
- Home equity line of credit (HELOC): Similar to a home equity loan, a HELOC allows you to pull out some of the equity you’ve built in a property you already own. Unlike a home equity loan, HELOCs allow you to lean on the funds as needed during the draw period.
- Cash-out refinance: A cash-out refinance allows you to pull out cash from your home’s equity and replace your current mortgage with a larger balance. You’ll end up with a single payment and a lump sum of cash to potentially spend on an investment property.,
- Hard money loan: Hard money loans offer a short-term loan that can be used to obtain an investment property.
- Private loans: Private loans can come in many different styles. For example, seller financing involves the seller providing a loan to the buyer.
What type of loan is best for an investment property
The right type of loan for an investment property varies based on your unique situation and goals.
For example, investors seeking to buy a multi-family property and live in one of the units might find attractive opportunities through the FHA or VA loan programs. But if you already own a home with significant equity, tapping into that value through a home equity loan or cash-out refinance to purchase an investment property could make sense.
Consider the loan requirements
When exploring your investment property loan options, considering the requirements across different loan types can help point you in the right direction. Generally, lenders will evaluate your credit score, debt-to-income ratio, income and down payment.,,
For borrowers with an excellent credit score, a large down payment and a low debt-to-income (DTI) ratio, most of the loan options are on the table. But for borrowers with a limited down payment, opting for a government-backed loan, like the FHA loan or VA loan, could make more sense. ,
If you plan to tap into your home equity to get the funds you seek, you’ll need sufficient equity in your existing property. You’ll often need at least 15% to 20% equity in your home to pursue a home-equity-based loan. Additionally, you’ll need to have enough cash on hand to cover closing costs for this loan style.
Digging into the details of the different loan options available can help you eliminate anything you won’t qualify for. As you narrow down your choices, you may find the option for your specific situation.
How to get a loan for an investment property
If you want to get a loan for an investment property, the process may follow the steps below:
- Explore your loan options: Start by considering what types of loans might work for your situation and goals. For example, an eligible veteran willing to occupy one unit of a property might find what they need through a VA loan. But an equity-rich homeowner might opt for a cash-out refinance or home equity loan instead.
- Find the right lender: Look at different lenders offering the loan you have in mind. Seek lenders offering relatively low rates and attractive fee structures.
- Gather your documents: You’ll need to provide the lender with proof of income, employment verification, bank statements and more.,, If you’re tapping into your home equity, you’ll likely need to provide information about your current home and mortgage.
- Apply for the loan: With your documents ready, applying for the loan should be fairly straightforward. From there, you’ll await the lender’s decision.
FAQs
Is it difficult to get an investment property loan?
In general, lenders consider an investment property loan a higher risk, which may lead to more stringent financing requirements. But whether it’s difficult to get an investment property loan varies based on your situation.
Can I put less than 20% down on an investment property?
In some situations, it’s possible to put less than 20% down on an investment property purchase., For example, if you qualify for a VA home loan, you might be able to put down zero down on a property. Or if you qualify for an FHA loan, your down payment requirement might be 3.5%.
In summary
When buying an investment property, you have many loan options to consider. Take the time to weigh your options before pursuing a particular loan type for your investment property purchase.
