How to Finance Investment Property
Pull together a down payment., Consider a neighborhood bank., Gather necessary paperwork., Work with a mortgage broker., Compare loans., Seek pre-approval., Don’t forget other team members.
Step-by-Step Guide
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Step 1: Pull together a down payment.
You can’t rely on mortgage insurance to cover your investment property.
Accordingly, you will need a sizeable down payment, around 20-25%., Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect.
Local banks also may have a stronger interest in lending for local investment, so they are a good option.You might not know anything about smaller lenders, so you should do as much research as possible.
Ask people that you know whether they have ever done business with the bank.
You can also check online.
Look for reviews. , Before approaching a lender, you should pull together required paperwork.
Doing so ahead of time will speed up the process.
Get the following:two months of bank statements prior two months’ statements for investment accounts and retirement accounts last two pay stubs information about self-employed income, such as last two year’s tax returns or business financial statements driver’s license Social Security card papers related to bankruptcy, divorce, or separation (if applicable) , A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates.
The broker can also try to negotiate better terms for you.
Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.Mortgage brokers don’t work for free.
You typically will pay about 1% of the loan amount.
For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.
You can ask other investors or a real estate agent for a referral to a broker.
Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer. , If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing.
You might be an experienced pro who has borrowed before.
However, if you haven’t, then remember to consider the following when comparing loans:
Interest rates.
An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money.
Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.
Discount points.
For some loans, you can pay points, which will lower your interest rate.
Loan term.
This is the length of the loan.
A shorter loan will cost more each month, but you will pay it off sooner and with less interest.
Origination charge.
This amount of money covers document preparation, fees, and the costs of underwriting the loan. , You should try to get pre-approved for a loan before searching for properties.
Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved., Purchasing investment property requires the expertise of many different professionals.
You should begin assembling your team early—even before you get financing.
You will probably need the help of the following people:
An accountant who can help you understand investment tax strategies.
A realtor who can help you sign an appropriate real estate contract.
An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.
An insurance agent. -
Step 2: Consider a neighborhood bank.
-
Step 3: Gather necessary paperwork.
-
Step 4: Work with a mortgage broker.
-
Step 5: Compare loans.
-
Step 6: Seek pre-approval.
-
Step 7: Don’t forget other team members.
Detailed Guide
You can’t rely on mortgage insurance to cover your investment property.
Accordingly, you will need a sizeable down payment, around 20-25%., Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect.
Local banks also may have a stronger interest in lending for local investment, so they are a good option.You might not know anything about smaller lenders, so you should do as much research as possible.
Ask people that you know whether they have ever done business with the bank.
You can also check online.
Look for reviews. , Before approaching a lender, you should pull together required paperwork.
Doing so ahead of time will speed up the process.
Get the following:two months of bank statements prior two months’ statements for investment accounts and retirement accounts last two pay stubs information about self-employed income, such as last two year’s tax returns or business financial statements driver’s license Social Security card papers related to bankruptcy, divorce, or separation (if applicable) , A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates.
The broker can also try to negotiate better terms for you.
Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.Mortgage brokers don’t work for free.
You typically will pay about 1% of the loan amount.
For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.
You can ask other investors or a real estate agent for a referral to a broker.
Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer. , If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing.
You might be an experienced pro who has borrowed before.
However, if you haven’t, then remember to consider the following when comparing loans:
Interest rates.
An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money.
Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.
Discount points.
For some loans, you can pay points, which will lower your interest rate.
Loan term.
This is the length of the loan.
A shorter loan will cost more each month, but you will pay it off sooner and with less interest.
Origination charge.
This amount of money covers document preparation, fees, and the costs of underwriting the loan. , You should try to get pre-approved for a loan before searching for properties.
Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved., Purchasing investment property requires the expertise of many different professionals.
You should begin assembling your team early—even before you get financing.
You will probably need the help of the following people:
An accountant who can help you understand investment tax strategies.
A realtor who can help you sign an appropriate real estate contract.
An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.
An insurance agent.
About the Author
Lori Murphy
With a background in lifestyle and practical guides, Lori Murphy brings 10 years of hands-on experience to every article. Lori believes in making complex topics accessible to everyone.
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