One of the first things you’ll want to do when investing in a new real estate project is to choose a lender. Unless you have enough cash saved up to fund your project, you’ll have to consider available lenders, fees, and lending requirements. Check out this guide to help you choose the right real estate investment loan based on your financial goals.
To obtain lending to finance your real estate investment project, you’ll need to meet the lender’s requirements. You can expect certain requirements from both the specific loan type and the lender. For example, in general, conventional loans require a minimum credit score of at least 620 and a down payment of somewhere between 3% and 5%. You can also expect variations in loan requirements between lenders. One lender may require a minimum of a 620 credit score, whereas another requires a 650.
Debt-to-income ratio is another common requirement among lenders. Debt-to-income ratio refers to how much debt, in comparison to your income, a lender allows you to have to obtain funding with them. Calculating your debt-to-income requires that you show proof of stable employment and income to be approved for the loan.
Other lending options may be available if you plan on using the money earned from a real estate investment project to fund the purchase itself. While a conventional loan may not factor in this income, other non-traditional loans, like investment property loans, may allow you to.
It’s also important to consider what any loans you’re considering allow and don’t allow to ensure you’re within their requirements. For example, Federal Housing Administration (FHA) loans typically don’t allow you to buy a real estate investment property since the loans are designed for first-time homeowners.
Debt-service coverage ratio (DSCR) is an alternative loan that factors in an investor’s potential income from a property rather than their current income. While a DSCR loan is a great way to obtain funding for real estate projects, it also doesn’t allow certain purchase types. A DSCR loan typically isn’t meant for rural properties, tiny homes, condotels, or manufactured housing.
It’s always a good idea to understand the eligible purchase types before choosing a loan type.
Other loan types to consider include conventional, adjustable rate, and jumbo loans.
Fees are what you pay to borrow money for your purchase. Some fees you may acquire with a mortgage include lender and origination fees, points, closing costs, taxes, government fees, and filing costs. Some of these costs are consistent across all lenders, including taxes and government fees. Others, however, may vary between loan providers, such as interest rates or origination fees.
Interest rates are one of the costliest expenses you’ll pay when taking out a loan. It’s always a good idea to price shop loans to determine what interest rate each offers you. As long as you apply for loans with lenders within the same time period, it should only count as a single credit inquiry. Lenders calculate interest rates based on your credit score, payment history, and desired loan amount. The current economy and inflation levels also affect interest rates. Improving your credit score and paying down debt can help you qualify for a better interest rate.
Another thing to consider when choosing the best loan for your real estate project is whether or not the interest rate changes. An adjustable-rate mortgage means your interest rate may change based on a pre-set schedule. You may pay a lower interest rate now and then a higher one later. A fixed-rate mortgage means that you’ll pay the same interest rate for the life of the loan unless you refinance.
Different loan providers also offer different repayment periods. The repayment period refers to how long you have to pay off the loan in full. The most common loan periods are 15 and 30-year mortgages. Your payments will be cheaper with a 30-year mortgage, but you’ll pay more interest over the life of the loan. With a 15-year mortgage, you can expect higher monthly payments, but you’ll be free and clear of the loan much sooner. Loan repayment periods may also vary when you get into non-traditional loans, like ones you’ll use for investment or vacation properties.
It’s also a good idea to review whether the lender penalizes you for paying off the loan early. If you’re purchasing an investment property, you may decide to pay it off sooner rather than later to open up the funding for other projects.
The lender you choose to fund your real estate investment project affects how much you pay in interest rates and lending fees. Carefully review your options to ensure you choose the right loan for your investment strategy.