You’ve done your research, found the perfect property, and are now ready to start generating income as a landlord. Congrats! As you know, one of the first steps in becoming a landlord is securing financing for your rental property. But what kind of loan should you get? Read on to learn about the different types of loans available for rental properties.
The first thing you need to consider is the type of rental property you want to purchase. There are many different types of properties, from single-family homes to condos The type of property you want to purchase will determine the type of loan you need.
Another important factor to consider is your personal finances. When you’re taking out a loan for a rental property, the lender is going to look at your financial history. They’ll want to see things like your credit score, your debt-to-income ratio, and your employment history. It’s important to have all of this information in order before you start shopping for loans.
Finally, you need to think about your goals for the property. Are you hoping to generate income right away? Are you planning on selling the property in the future? These are things to think about when you have your mortgage consultation.
1. Conventional Loans
A conventional loan is a loan that is not insured or guaranteed by any government agency. These loans are typically made by private lenders such as banks, credit unions, or mortgage companies. Conventional loans is the only type of loan that can be used to purchase almost any type of property—including single-family homes, multi-family homes, condos, and even some investment properties. For investment properties 25% down is typical.
2. FHA Loans
An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). The FHA is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans are popular among first-time homebuyers because they require a smaller down payment than a conventional loan—as little as 3.5%. They also have more flexible credit requirements than most other loans. However, FHA loans come with two caveats: first, they require both an upfront mortgage insurance premium (MIP) and an annual premium that’s paid as part of your monthly mortgage payment; and second, they can only be used to purchase primary residences—not investment properties or vacation homes. You can, however, buy a two- to four-unit home with an FHA loan and collect rent on the other units to qualify, as long as you live in one of the units for at least 12 months.
4. Non-QM Loans
If you don’t qualify for a traditional mortgage, you may be able to get financing through a Non-QM loan. These loans are based solely on the rental income received from the property, so they can be a great option for borrowers who don’t have a traditional income stream. However, they typically come with higher interest rates and down payment requirements, so it’s important to compare offers from multiple lenders before making a decision.
5. A Cash-Out Refi
A cash-out refinance is when you replace your current mortgage with a new loan that has a higher loan amount than what you currently owe. The difference between the two loans is given to you in cash. This cash can be used for any purpose, including investing in a rental property. A cash-out refinance has several benefits. First, it allows you to leverage your home equity to buy an investment property. Second, it can help you get a lower interest rate on your investment property loan. Third, it can provide tax deductions if the rental property is considered an income-producing property.
As you can see, there are several different types of loans available for financing investment or rental properties—each with its own set of pros and cons depending on your individual circumstances. working with a qualified mortgage lender who can help you compare different loan options and find the best one for you based on your needs and goals.
Ready to take the next step? I’d love to help! Send me an e-mail at edavis@guildmortgage.net and let’s get started!
