Investment Property Loans: What They Are & How They Work

If you’ve ever thought about purchasing investment properties, you have undoubtedly tried to figure out how to secure the financing. A traditional loan may not do, so you need to explore investment property loans. Perhaps it seemed too big a venture to make, too much money upfront or too risky a move for you. You need to fully understand the types of investment property loans available, the qualifications required and the alternative options you have. Then you can make an informed decision for your next investment property.

What is an Investment Property Loan?

An investment property loan is a loan taken by an investor or developer with the intent to purchase an investment property. It may be to purchase a multifamily property to live in and rent, a fixer-upper to flip and sell or a single-family property to lease for long-term passive income. Regardless of what type of investment property you choose to diversify your portfolio, all types of loans should be considered. 

How Do Investment Property Loans Differ From Traditional Property Loans?

The main difference between investment property loans and traditional real estate loans is the assets required to get approved. An investment property almost always require at least 20% or more down. With a traditional home loan, you can purchase with as little as 3% to 5% down, depending on the type of loan. However, you have options for coming up with that down payment and getting approved for an investment property loan. 

Types of Loans for an Investment Property

While there are many types of investment property loans, below are a few of the most commonly used:

Conventional Bank Loan

It is possible to secure financing for an investment property through a conventional bank loan. Just keep in mind that a bank may require up to 30% down and will not factor future rental income into debt-to-income (DTI) calculations.

Hard-Money Loan

This is a great option if your intention is to flip a property quickly. Hard-money loans are short-term loans (usually one to three years) with higher interest rates. However, funding can be secured quickly and the after-repair-value (ARV) can be factored in for loan approval.

Private-Money Loan

Terms and interest rates on private-money loans can vary drastically because this type of loan is from one individual to another. It could be a family member or friend or a real estate investor from a club or network willing to sign a contract with you and lend you the money.

Home-Equity Loans

If you have equity in your primary home, you may have some options. You can look into a home-equity line of credit (HELOC), a traditional home equity loan or even a cash-out refinance. 

Who Needs Investment Property Loans?

Any investor interested in purchasing an investment property can apply for a loan. Even if you have the cash to purchase a property outright, you may not want to tie it all up in one investment. Check your options and what would work best for the property you are pursuing and the overall short-term and long-term impacts of the investment.

Best Investment Property Loan Providers

To help you decide the best route to take for your investment, take a look at three popular investment property loan providers to see the mortgage loan options each has to offer.

1. Angel Oak Home Loans

Angel Oak Home Loans is a full-service mortgage lender offering traditional and portfolio Non-QM mortgage loans. Their Investor Cash Flow loan specifically for real estate investors is one of their most utilized loan products. This investor cash flow product does not require income, tax returns or employment information. It qualifies on the expected rent or cash flow of the property. 

• Loans from $75,000 to $1.5 million
• No income or employment information required
• Short-term rentals allowed (Airbnb, VRBO)
• Properties can be in LLC’s name
• No limit on number of properties
• Non-warrantable condos allowed
• Purchase, cash-out or rate-term refinance
• Borrower must own primary residence
• 40 year fixed interest-only available*

2. CrossCountry Mortgage

CrossCountry Mortgage has a variety of solutions for any investing goal, including traditional and nontraditional options for investors and self-employed borrowers. Some of its best options include:

• Investor cash-flow home loans: These loans will calculate your expected cash flow from a rental property into your total loan qualification. 
• Condo loans: Loans to purchase and refinance condos are obtainable through CrossCountry Mortgage, while hard to find at other major mortgage companies.
• Asset qualifier loans: This option allows you to use verification from investment accounts, retirement accounts and bank accounts to qualify for a loan, regardless of your income and employment status. 

Financing is available through CrossCountry Mortgage for one-to four-unit investment properties, while offering aggressive pricing and rates and top-notch customer service. CrossCountry Mortgage also works with borrowers with lower credit scores (as low as 580) and has a variety of mortgage products. The only downfall is this provider is only available in 29 states. 

3. Rocket Mortgage

This well-known mortgage company is popular with first-time homebuyers and homeowners looking to refinance. It prides itself for having a quick and easy home-loan application and easy-to-navigate online tools that will help you through the entire loan process. 

Its sister company Quicken Loans has several options for investment loans while still keeping the process quick, easy and completely online with its industry-leading tools. It specializes in mortgage options such as:

• Home-equity loans: You may be eligible to borrow 80% to 89% of your home value through Quicken Loans. It is, however, a second mortgage, which means it will likely carry a higher interest rate than your primary mortgage, but the interest may be tax-deductible. A home equity loan allows you to borrow a certain amount of money for a set term, like a first mortgage. Your rate may be fixed or adjustable. The downfall is you will have two mortgages.
• Cash-out refinance: Depending on your equity and credit score, this option typically allows you to borrow up to 80% of your equity — or up to 100% with a Veterans Affairs (VA) loan. It is a new primary mortgage, so your interest rate is lower with this type of loan than a home equity loan because it’s not a second mortgage. You can continue to focus on one mortgage while also having cash on hand for investing.

4. New American Funding

This is another great lender for investment property loans. It covers all types of loans you may be interested in exploring. Here are a few more options:

• Conventional mortgages: This can be a fixed-rate or an adjustable-rate mortgage. New American Funding has specific guidelines for conventional loans when it comes to an investment property. A large down payment and a higher credit score (at least 620) are your best bet with conventional mortgages. 
• Nonqualified mortgages (NON-QM): With flexible requirements, this type of loan is ideal for self-employed borrowers. Qualifications can come from proof of assets, personal or business tax returns or bank statements. 

While New American Funding does have a lot of great educational tools, many types of loans, and useful resources for managing your loan online, its business is not offered in New York or Hawaii. 

Finding the Right Investment Property Mortgage

 finding the right investment property mortgage is crucial for real estate investors. It allows them to secure the necessary funding to purchase properties and maximize their returns. By considering factors such as interest rates, loan terms, and lender requirements, investors can make informed decisions and choose a mortgage that aligns with their investment goals.

Additionally, conducting thorough research, comparing multiple lenders, and seeking professional advice can help investors navigate the complex process of obtaining an investment property mortgage. Ultimately, finding the right mortgage can make a significant difference in the success of an investment property venture.

Frequently Asked Questions