Investing in the real estate market has once again become the “it” thing to do. Long gone are the days of the great market crash and home prices have once again regained their stability. This stable housing market has brought out both the long seasoned real estate investor looking to add to their portfolio and a crop of new investors who are looking to invest in the market.
Investing in real estate is not easy. You have to find a good investment property and then you have to finance it. In this article, we are going to assume you have already found a great property to use as a rental. So, how do you finance it? Are you being offered a great rate? And do you even know what constitutes a great loan?
Loans programs for a primary residence are everywhere. Rates are as low as 3% on some primary residence programs but what about on investment property? How can I make sure I am getting the best rate possible when financing my rental home? Take a look at the 5 tips below, see how many of the boxes you check out of the five so that your experience obtaining the best mortgage rates on your next or first investment property loan meets your expectations.
Tip # 1 – Make a Sizeable Down Payment on Investment Property
Making a large down payment helps you get a better rate on any mortgage loan. This is especially true on a loan for an investment property.
Most lenders require a minimum of twenty percent down in order to purchase an investment property and a minimum of twenty-five percent of the equity in order to refinance. There are ways around this minimum by using seller financing or gift funds or even gift equity from a family member.
However, if you are looking to get the best rates, it’s best that the funds are all yours and that you have at least thirty percent down. This will likely keep your interest rates in the mid to high 4% range. Having more than thirty percent down is even more ideal in that rates can be in the low 4% and sometimes high 3% range depending on your credit history.
Tip # 2 – Constantly Review and Maintain Great Credit
One of the most important conditions for obtaining a great interest rate with any type of loan is having great credit. Investment property loans are no different. Sure we can get you qualified for a loan with credit scores as low as 580 but if a great rate is what you are looking for then it’s best to have at least a 740 fico score.
Sign up for a free credit monitoring service and constantly review and monitor your credit. Report any discrepancies or imperfections immediately. Pay all of your creditors on time and make sure any credit card balances stay under thirty percent utilization.
Maintaining a great credit history is vital if you want to have a rate in the 3-4% range for your investment property.
Tip # 3 – Own or Buy a Great Rental Property
A great investment property is a property that generates positive cash flow in a good area with as least of a vacant period as possible.
Being in a good area close to schools and retail shops always helps with finding good renters and lowering vacancy periods but this is more helpful for you as being the landlord and not as relevant as a cash flow when trying to get a low-interest rate on your rental property loan.
Lenders love when your property generates cash flow. Cash flow is the positive cash left over from your rent collection compared to the costs and loan payment associated with your rental. For example, if your renter pays $2,000 per month and your loan payment and monthly upkeep expenses are at $1,500 per month, then your property cash flows at $500 per month.
A lender may even ease up on their FICO score requirements if a property shows great positive flow numbers. With rental property any positive cash flow is good. On rental property breaking even just covering your mortgage payment and expenses is pretty good because it’s someone else (your renter) paying off a mortgage loan for your investment property. Eventually, after 15, 20 or 30 years of paying, your rental property will be paid for and all of the rental proceeds will be yours.
But in the quest to get the best rates the higher the positive cash flow, the better. The irony here is that many times, the lower the interest rate you have the more cash flow your rental will generate because your monthly payment is lower. That’s another reason to secure the best rate possible on your loan so that your property cash flows. You can use the extra funds to supplement your income or even pay extra on the mortgage to pay off the loan even quicker.
Tip # 4 – Consider Using a Bank Statement Loan
Over the last few years, many lenders have released bank statement loan programs to the market. These bank statement loans allow self-employed or career real estate investors to use 12 or 24 months of bank statements showing enough deposits to make consistent mortgage payments.
These loans help borrowers who have numerous deductions notated on their tax returns that normally cause the borrower to not qualify for a conventional investment home loan. This forces such a borrower into a stated income loan program that carries much higher interest rates in order to obtain funding. With a bank statement program that the same borrower can supply the bank statements instead of any IRS or tax documentation.
Bank statement loans are one of the best investment programs available. Second only to programs in which a borrower must show the lender a full doc package. A full doc loan program is where a borrower submits two years of tax returns showing enough income to qualify. These loan programs will ultimately land you the best rates on the market. Current full doc rates for investment property are in the mid 3% range. In contrast, using a bank statement program will still get you in the low 4% range and you won’t have to show an IRS or tax return documentation.
Tip # 5 – Try Different Investment Property Lenders
Tip number five is to price your loan with at least three different lenders. Try to have at least one or two of these lenders be a local mortgage broker and the other one can be your local bank or whomever you have bank accounts with.
The local bank or a bank you have a relationship with will generally have good rates. The drawback to them is that they usually have only one loan program and very few have loan programs for an investment property. With the loan broker or brokers, each broker will have a few different loan options to choose from. It’s a good idea to get pricing from each broker along with guidelines on their available programs. Each broker will usually differ a bit in rates and fees so comparing them will give you an idea of what is available and allow you to choose which loan broker or lender provided you with the best deal.
Bottom Line for Getting the Best Mortgage Rates
Obtaining the best rate for an investment property requires you to be a stellar borrower. You have to show the lender that your credit history is strong and you have a good down payment. Many times a broker can help with this because they know what an underwriter is looking for when they approve a loan. They can help with choosing the right loan program based on your needs as a borrower and try to get you in a good position so that your investment property generates as much cash flow as possible.
We as a broker have access to over 20 investor loan programs that all carry different terms and rates. This gives you the advantage of speaking and dealing with one person but getting the opportunity to choose from a number of loan options so you find the right fit for you. We can also help you by going over what it takes to get the best rates available. Maybe you read through these tips and found that you are lacking a bit in a particular area and you feel that it will hinder you in your quest for financing? Give us a call and we can go over your scenario to help you get to where you want to be.
Are you ready to invest in your first rental property or just looking to add to your investment portfolio? Give us a call now to go over your situation.