Investment property mortgage lenders are the first people you are going todeal with when investing in real estate. Therefore, here is what you need to know about them before getting into the business.
A mortgage is one of the most common investment property financing options in real estate. However, dealing with investment property mortgage lenders goes beyond the money itself. Here are the most important things to take into consideration when applying for a mortgage:
Related: Is Mortgage the Best Way to Finance Rental Property?
#1. Investment property mortgage lenders: The mortgage type matters
Yes, that is right. In fact, there are different types of mortgages that you could get to finance real estate properties. The first one is a second-home mortgage. This type of mortgage is for those who want to have a second home for family or friends. However, beware that this type does not allow you to rent out the property at all. The second investment property financing option is the owner-occupied mortgage. With this one, you will have to live in the property for at least a year before you can choose to rent it out. Moreover, you will have 60 days after closing the mortgage deal during which you have to move to live in the house. The third type is the traditional mortgage or the non-owner occupied mortgage. This is, in fact, the most popular rental property financing strategy. It is intended for residential real estate investors. You simply buy a property and rent it out right away.
The reason we brought this up is that for investment property mortgage lenders, the mortgage type matters. If you are a real estate investor, you might want to go with the third type, which is the traditional mortgage, or the non-owner occupied. However, if you are buying your first rental property, you might want to start with an owner-occupied mortgage.
This leaves us with the first mortgage type which is the second-home mortgage. This one is definitely not for financing an investment property. If you choose this mortgage type for rental property financing, then you are violating the rules. This could cost you a lot in terms of your business.
#2. Investment property mortgage lenders: Down payment
The down payment is a huge part of investment property mortgages. When applying for a mortgage, your investment property mortgage lender will require a down payment. You should expect it to be at least 20% of the total property value. Of course, the more you put in down payment, the more equity you build on the rental property. So, that actually can be a better option for you. Also, the faster you pay out the mortgage, the more equity you get on your property.
Note that there are investment property mortgage lenders who require less for a down payment. For that, you will have to do proper shopping for a mortgage lender. Ask real estate investors you know about the best investment property financing options. Most of them have gone through the process and know exactly where to find the best mortgage deals.
Related: Breaking Down Real Estate Fees: What Are the Types of Closing Costs of Investing?
#3. Investment property mortgage lenders: Mortgage rates
Applying for a mortgage comes with interest rates. You must understand that financing an investment property is different from financing a home you want to live in. Therefore, investment property mortgage lenders will charge you higher interest rates.
Keep in mind that the more you put in down payment, the better interest rates they offer you. Unless you pay down 30%, you will not be offered any good deals on the mortgage.
#4. Investment property mortgage lenders: The verification process
When you apply for a mortgage, you will have to fill out an application with all your information. However, this does not mean that your investment property mortgage lenders will approve the loan it right away. There is still the verification process which is very important. At this point, your mortgage lender is looking for a guarantees to be able to give you the money. During this process, the mortgage lender is going to run a background check on you as a real estate investor. They will also check the rental property you want to invest in. After all, they only care about the money they are going to lend you.
#5. Investment property mortgage lenders: A foreclosure is an option
The worst part about investment property mortgage lenders is that a foreclosure is not a problem for them. If and when you fail to repay the mortgage, they will take legal action. Of course, it does not happen right away. There are notices and other actions that come first. But in case you still fail to pay the mortgage, they will take over the property and sell it as a foreclosure. This basically means that they will take it over and list it for auction selling for a cheaper price to retrieve their money.
Related: Short Sale vs. Foreclosure: Why Opt for Short Sales in Real Estate Investing?
#6. Investment property mortgage lenders: A broker is not a lender
Many beginner real estate investors confuse a mortgage broker for the real investment property mortgage lender. These two are completely different. The mortgage broker is a middleman. In other words, a broker is a professional who does the mortgage shopping for you. He/she looks for the money lenders with the best mortgage deals and brings them to you. In return, you pay the broker a commission, which is considered part of your property expenses. However, we do not recommend that you go to a mortgage broker right away. You should look it up first, and ask other real estate investors. Only then you can decide whether you need a broker or not.
Moreover, investment property mortgage lenders are the direct source of financing. It is better that you deal with your lenders directly. In this way you can keep track of the process as well as cut on the commission costs.
Finally
The best way to get the best investment property financing options is to obtain knowledge. Your number one source on that should be Mashvisor. You will find all the information you need on investment property financing with us. You will also have access to the most profitable rental properties in real estate investing.