One of the greatest advantages of investing in real estate is the wide range of financing options that are available to property buyers. Unlike other ventures, investment in real estate can be done with little to no startup capital and the loan terms are generally conducive to generating a healthy profit. While most real estate investors are familiar with conventional investment property financing, few are aware of non conforming loans and the benefits that they offer. So what is a non conventional loan? And what are some of the best non conventional mortgage options for buying an investment property? This blog will answer these questions and introduce you to 6 non conventional home loans.
What Is a Non Conventional Loan?
«Non conventional loan» is a broad classification that includes any type of financing that does not abide by traditional loan regulations. Unlike conventional financing, some non conventional loans don’t have a set of strict rules for eligibility and loan amounts. Others simply have a different set of rules.
There are several benefits to opting for non traditional financing when investing in real estate. Here are the main ones:
- Most of these loans have looser down payment requirements.
- Obtaining non conforming loans is possible even for a real estate investor with less than ideal credit.
- Non conventional loan lenders are more flexible with regard to the maximum amount that they can offer.
- Certain non conventional mortgage loans enable you to invest in multiple income properties.
- You can get non conforming loans for types of investment property that are not eligible for conventional financing.
Now that we have gone over a basic definition of non conventional loans, let’s delve into 6 options that are worth your consideration.
Related: What is an Escrow Waiver, and How Does it Work?
The 6 Non Conventional Loans That You Should Consider When Investing in Real Estate
Like we mentioned above, there are several types of loans that fall under the «non conventional» umbrella. These non traditional mortgage options vary widely in terms of their requirements and flexibility and each one has its own set of advantages. Let’s take a deeper look at these non conventional real estate financing options.
1- FHA loans
The most common type of non conventional loans is FHA loans. This loan is insured by the Federal Housing Administration and is designed to accommodate first time buyers who can’t afford a large down payment or are unable to meet the credit requirements for a traditional mortgage for investment property. Furthermore, FHA loans allow for a broader range of income and credit history. Here are the minimum requirements for these loans:
- The borrower has to make a minimum down payment of 3.5%
- The investment property should become the investor’s primary residence (you will have to buy a 2-4 unit multi-family home and live in one unit)
- Mortgage insurance is required
- The borrower should be employed and have a steady income
- The investor’s debt to income ratio should be below 43%
Related: Can You Use FHA Loan for Investment Property Financing?
2- USDA loans
These loans are offered by the United States Department of Agriculture with the aim of providing a stimulus to rural and peripheral areas. Although real estate investors are not eligible for traditional USDA loans, multi-family homes can receive financing through the Multi-Family Housing Direct Loan program. The best thing about these non conventional loans is the fact that they don’t require any down payment. Moreover, the cost of mortgage insurance is significantly lower than the premiums you have to pay for an FHA loan. The requirements for USDA loans include that you apply under an LLC and that the purpose of the real estate investment be to increase affordable rental housing in the area. USDA loans are limited to properties that are located in the eligible areas.
3- Jumbo loans
Jumbo loans have become a popular rental property financing method for experienced real estate investors. The most notable feature of these loans is their very high loan limits. In fact, investors can borrow as much as $3 million from certain lenders. More importantly, the rates for these loans are more or less the same as conventional investment property mortgage rates. Due to the high loan amount that these non traditional mortgage lenders offer, their requirements are quite strict.
- Your credit score should be higher than 700
- You need to have decent cash reserves
- The down payment should be in the 10-20% range
- You will have to provide extensive documentation to prove your financial stability
To learn more about property financing and other aspects of real estate investing, check out Mashvisor’s blog.
4- Hard money loans
A hard money loan is a creative financing method that is often used by real estate developers and investors who are planning to implement a fix and flip strategy. These private money loans are a short-term financing solution that allows the borrower to acquire an investment property with very little money of their own. These loans are offered by private lenders and are backed by the property itself rather than the borrower’s credit score. Since banks and other traditional lenders are often hesitant to lend on risky properties, hard money loans can be a viable option when investing in a distressed property.
Related: What You Need to Know About Hard Money Lenders
5- Portfolio financing
Portfolio financing refers to loans that are used to finance the acquisition of multiple investment properties. Generally speaking, these non conventional loans allow for the financing of up to five properties. Real estate investors who are looking to generate a diversified stream of rental income prefer this method because of the lax approval process and flexible terms. Since these loans are kept on the balance sheet, each lender has its own requirements and the borrower can always negotiate for more favorable terms.
Related: How to Finance Multiple Rental Properties (Yes, It’s Possible!)
6- Seller financing
As the name suggests, seller financing is an agreement in which the property seller assumes the role of the lender. In other words, the buyer signs a loan agreement with the seller and agrees to make monthly payments to service the debt. Needless to say, every aspect of these loans is negotiable since no bank or lending institution is involved in the deal. For the property owner, seller financing can be a great way to offload a property in a cold market. For buyers, these non conventional loans allow them to bypass most lending requirements and gives them the chance to negotiate an ideal repayment structure.
The Bottom Line
Exploring all available financing options is paramount for every real estate investor. This is especially the case if you are planning on implementing a creative real estate investing strategy. Make sure to check multiple online mortgage lenders to get a better idea of the range of loans that are available to you.
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