June 11, 2021

Getting a loan for an investment property can be tricky but it doesn’t have to be. Obtaining a loan to invest in real estate isn’t too different from seeking a loan for a primary residence. There are, however, several different things to consider and some additional avenues to explore. Investing in real estate can turn out to be quite beneficial, but can also be risky, and you can lose dearly if you don’t know how to play the game smart. Below is a list of basics to understanding what it takes to get a loan to invest in real estate.

When considering acquiring a loan for real estate there are a few different loan options for you to consider, including:

Traditional bank loans

You’ve probably had some familiarity with this option, especially if you’ve secured an owner-occupied property in the past. Securing more traditional financing can make the process simpler, but it’s important to know that most banks expect a down payment of 20% for the purchase of a home. If you’re obtaining a loan for an investment property, many institutions may require 30% of the value up front as a down payment. Your ability to get approved, and the kind of interest rates offered, will depend on your individual credit score and history. Most lenders will also review your income and assets before making a determination on whether or not to approve you for a loan. For traditional bank loans you will also need to be able to show you can afford any existing mortgages and monthly loan payments for the investment property.

Hard money loans

Another loan option you should research is a “hard money loan.” Hard money loans are basically short-term loans that investors can use to purchase, renovate or build a property. These are typically offered by private lenders as opposed to traditional bank. One of the many benefits of hard money loans is their flexibility, as they depend on the discretion of the agreement made between you and the lender.

Factors for getting a loan

There are several factors you should consider to help you in the process of obtaining a loan. You definitely want to ensure you are well organized and prepared ahead of time so that either banks or private lenders will be willing to take a risk on lending you money.

Saving for a down payment

Saving for a down payment usually takes some time, but it’s the easiest way to secure a loan for a property. The money saved for a down payment can be used to secure a property. The more money you have for a deposit, the fewer hurdles you’ll have to jump through.

Home equity

If you don’t have the money saved for a down payment, or the necessary time or means to save up for one, you can potentially avoid this is if you already own a home with positive equity. You can use part or all of this equity as a down payment for your investment property.  How much equity you have is calculated by subtracting the value of your remaining mortgage debt from the market value of the property. Keep in mind that when you use the equity from another property, the principal you have to repay will increase. It’s important to make sure you can handle taking on that extra load and also make the required loan payments, or increase the overall amount you are repaying, before making the decision to tap into your home equity.

Guarantor

You can also choose to use a guarantor on your investment property loan. This is usually done by asking a close family member to use a part of their own equity to secure a loan for you. The guarantor must be at least 21 years of age, have a good credit history, financial stability and it also helps if they own their own home.  This is a common option for many investors wishing to speed up the process of obtaining a property. Like with all things, however, there are risks that both the buyer and the guarantor should be aware of before moving forward.  Mainly, if the borrower is unable to repay the loan, the guarantor will be liable to repay the portion of the loan they agreed to secure.

Ability to make repayments

Everyone, regardless of whether they use a private lender or bank, needs to prove that they are able to make payments in a timely manner. This is the most important aspect of any lending process so most lenders and banks will look at the following: Your income, employment history, previous bank statements, spending history, any assets you own as well as your credit history.

Summary

There are quite a few things to consider when looking into obtaining loans for investing in real estate. First, you need to decide what loan you need based on your circumstances and where you are going to get your loan from. Second, you need to go through the process in order to obtain a loan. Use the above options as a guide on the necessary steps to take. If you follow the recommendations listed above, you should be on your way to obtaining the necessary funds to invest in real estate.