Investment Property Loans

Get Approved for Investment Property Loans

Investment property loans are, in some ways, just like home loans, wherein the borrower (the person) is lent money by the lender (usually a bank) to purchase real estate property. The loan amount accrues interest and the payments are made according to a pre-determined schedule, i.e. monthly, quarterly or annually.

The longer the term of the loan, the lower the monthly payments get, but this actually increases the payment amount, as the interest on the loan accrues annually. That being said, it is important to note that unlike a home that is primarily used as one’s residence, an investment property’s intended use is mainly for profit.

Investment property loans are taken out by individuals, already home owners, who want to own another piece of property but plan to pay the mortgage by renting or leasing out said property. Where the original home mortgage is being paid with one’s salary or main source of income, the investment property loans must be paid with the income generated through its use.

How to Apply for Investment Property Loans

While the concept may seem fairly simple –to borrow money so one can earn enough for the mortgage payments, and then eventually end up with another piece of owned property after several years, with the owner being free to sell it or do with the property as he pleases, – it is actually more difficult to obtain this investment property loans than most people think.

Here are a few tips that may help make the entire investment property loans application a success:

1) Business Plan vs. Pay Slip

During home loan application, proof of income is asked to be presented. This came in the form of pay slips. This establishes a borrower’s capacity to pay the mortgage, and how much he can shell out each month. Agreeing to pay the maximum one can possibly pay each month ensures that the loan term is kept short, therefore saving the borrower a great deal in accrued interest.

In the investment property loans application, however, the all-important pay slip is substituted with a formidable business plan. This carries the most weight in terms of how the loan officers decide on the investment property loans application. A business plan must be well thought out and well researched to show the property’s potential and income-generating ability. The business plan must show how feasible one’s investment property is in producing profit. This is the profit that will fund the mortgage payments. Banks highly scrutinize borrowers and their business plans in investment property loans applications to avoid foreclosures in the future.

For borrowers who have previously applied for investment property loans and already have investment properties, they will be required to present current rental receipts and net income statements that are associated with their current investment property. This determines profitability and the proportion between the generated income versus the investment property loans amount. Current income statements, when in good standing, will also ascertain a borrower’s business acumen, one that can help sway the vote of loan officers deciding on the investment property loans.

2) Bigger Down Payment = Lower Risk for Banks

A down payment is a borrower’s “contribution” to the cost of the property. Most banks require 20% down payment on both home and investment property loans, making the loan to value ratio 80%. Loan to value ratio or LTV is simply the size of the loan against the value of the property. The higher this ratio is, the higher the risk of the bank to approve the loan.

Therefore, an increase in the down payment or the borrower’s “contribution,” consequently decreases LTV and the bank’s risk. Even increasing the down payment by 5%, making it 25% of the total investment property loan value may decrease the interest rate.

However, not everyone can increase their down payment, or even have the necessary 20% to begin with. In this case, the best option is apply for the investment property loans at a neighborhood bank, instead of the huge financial institutions. The local banks, aside from being more flexible, will know the local market better and may be more interested in investing locally.

3) Keep Credit Score in Check

Credit score, a numerical value that represents a person’s credit worthiness, is based primarily on statistical analysis of one’s credit files. Surprisingly, income does not play a huge role in one’s credit score, because the main focus is the likelihood of a consumer to pay his debts.

In the United States, risk scores range from 300 to 850. The higher the credit score, the less the risk of a person going 90 days past due on a mortgage payment in the next 24 months. Accordingly, the higher the credit score, the bigger the chances of investment property loans being approved, and of interest rates being decreased.

In the likelihood that a borrower may have a less than impressive credit score, there are two options: First, should he still get the investment property loans approval, expect to be given a higher interest rate. Second, if the loan was denied or the higher interest rate was not exactly appealing, one can try to obtain the loan through the Federal Housing Authority.

The FHA is known to be more lenient with their credit requirements, and even borrowers with low credit scores or those without a current credit history may qualify for an FHA. However, this leniency comes with a catch. FHA only approves loans for residential use, not investment property loans. One way to work around this rule is that if the property is a duplex, one can live in one unit while leasing out the other. This way, no fraud is committed and even after the borrower moves out, the property is still considered FHA property and will still qualify for refinance.

Before applying for investment property loans, do the necessary research and legwork. At the end of the day, profitability and security are the foremost considerations. Work on these two and the investment property loans will most likely be approved.