Investment properties can provide a nice boost to your portfolio if managed properly. However, if you’ve reached the point where it’s time to expand your portfolio, you’ll likely need financing if you can’t afford to pay cash.
Mortgage products are readily available through traditional banks, credit unions and online lenders. However, you’ll generally need to look beyond those options if you want a loan with flexible eligibility guidelines or that will allow you to use rental income to qualify for financing.
That’s where investor loans from private lenders come in. In this guide, you’ll learn more about how they work, what makes them different from traditional loans and what you’ll need to be eligible for a loan. You’ll also discover the key benefits and drawbacks associated with investor loans and where to look if you’re ready to apply and level up your real estate portfolio.
What are Investor Loans?
As the name implies, an investor loan is a type of mortgage that’s used to acquire an investment property. Investors use these loans to steer clear of the red tape that comes with traditional mortgages and expand their portfolio of income-producing properties.
How Are They Different from Traditional Loans?
Both types of mortgages require you to formally apply with a lender, submit the requested documentation and undergo a credit check to be considered for financing. However, there are some key differences between investor loans and conventional home loans. These include:
- Interest rates: It’s not uncommon for interest rates on investor loans to be higher than what you’d get with a conventional mortgage. The average variance is between one hundred and four hundred basis points or 1 percent. To illustrate, if you apply for a conventional loan and are offered a rate of 6.9 percent, you’d likely get a rate between 7.9 percent and 10.9 percent on an investor loan.
- Loan-to-value limits: The loan-to-value (LTV) on a home is computed by dividing the loan amount by the current appraised value of the property. Most lenders offering investor loans prefer an LTV of no more than 75 percent. So, if you plan to buy a property that’s worth $500,000, the amount you borrow should not exceed $375,000.
- Down payment: You can secure a conventional loan with a down payment as low as 3 percent. However, you’ll generally need at least 25 percent down to qualify for an investor loan.
- Documentation: When you apply for a conventional loan, the lender will request information and documentation regarding your employment and finances. Prepare to provide recent paystubs, W2 forms, 1099 forms (if self-employment), bank statements and tax returns. In most instances, you will also need to prove you’ve had consistent employment with the same employer or in the same industry and a verifiable source of income for the past two years. The documentation requirements aren’t quite the same for investor loans, though. Some investor loans focus on your employment history and income from that employer, but others are more concerned with the projected cash flow from the property you’re looking to purchase.
- Required reserves: The amount of reserves you’ll need with a conventional loan varies but can be between 0 and six months’ worth of mortgage payments (including principal, interest, property taxes, homeowners insurance and association dues). You’ll also need the funds on hand for closing costs. However, investor loans require between six and 12 months of reserves and closing costs.
Who Qualifies for an Investor Loan?
Before you apply for an investor loan, familiarize yourself with the general eligibility guidelines. For starters, it helps if you have some experience as an investor. However, the eligibility guidelines vary greatly by lender and the type of investor loan you’re seeking, but the criteria listed below are an ideal starting point:
- Credit score: The minimum credit score is 640, with most lenders. However, 700 or higher is preferred for the most competitive loan terms. Also, be mindful that excellent credit may be required for investors looking to purchase multi-family properties.
- Down payment: A down payment of 25 percent or higher is likely needed. This amount could increase to 35 percent with a lower credit score. (Quick note: Monetary gifts from relatives and friends are not permitted for investor loans).
- Income: It depends on the type of loan you select. Traditional loans require income verification from an employer. However, non-conforming loans let you use rental income as long as it’s sufficient and can comfortably cover the monthly mortgage payments.
- Property status: The investment property should be in good condition and ready to rent (assuming it’s not currently occupied by tenants). But if it needs repairs or other improvements to make it move-in ready, the lender may not be willing to rent to you.
- Reserves: Prepare to have at least six to 12 months of reserves equal to your monthly mortgage payment to be eligible for a loan. You should also have funds available to cover closing costs.
- Property management history: Some lenders require investors to have property management experience to qualify for an investor loan. It’s also possible that you’ll have to provide a written explanation or tax returns to substantiate your claim.
Advantages of Investor Loans
Investor loans come with several benefits that make them an attractive option:
- Accessibility: There are loan options available to investors that don’t require income or employment verification, like traditional mortgages. Instead, you can qualify based on the cash flow of the investment property you plan to purchase.
- Limited documentation requirements: If you choose an Investor Cash Flow loan, you can skip loads of paperwork that you’ll need for traditional mortgages. This includes paystubs, bank statements, W2s, 1099s and tax returns, as the lender will be more interested in the documentation related to the earnings from the investment property.
- Consider rental income: An investor loan is unique as it allows you to use rental income in lieu of income from traditional employment or self-employment to get a mortgage.
- Faster approvals and closing times: These loans are originated by private lenders and often feature faster approvals and closing times than you’ll get with a traditional lender.
- Flexibility: Investor Cash Flow loans can be used to purchase or refinance investment properties. For the latter, both rate-term and cash-out refinancing are options.
Disadvantages of Investor Loans
Unfortunately, there are also drawbacks to consider before applying for a loan:
- Stringent credit guidelines: Investor loans are typically aren’t available to credit-challenged borrowers. You’ll need good or excellent credit to qualify for funding.
- High-interest rates: Borrowing costs, including interest rates and fees, are often higher on investor loans. Furthermore, a credit score that’s at the lower end of the “good” spectrum usually comes with a higher interest rate than you’d get with an exceptional credit history.
- Steep down payment requirements: The down payment requirement on investor loans is also on the higher end. In some instances, the lender will request a down payment of 30 percent or higher.
- Hefty reserves: Six to twelve months of reserves can also stretch your finances thin, particularly if you are a relatively new investor or have funds tied up in several other properties.
- Investment experience: Some lenders have reservations when considering loans from newbie investors. So, if you have minimal industry experience, you may have to look elsewhere for funding opportunities.
What Are Other Requirements for an Investor Loan?
It depends on the lender you’re considering. Before applying, reach out to learn more about lending criteria and documentation requirements to avoid any surprises.
What Credit Score Do You Need for an Investor Loan?
As mentioned above, investor loans are ideal for borrowers with good or excellent credit. You could be eligible for financing with a credit score as low as 640. That said, the best rates are reserved for borrowers with credit scores of 700 or higher.
What Types of Loans Can You Use as an Investor?
A popular option used by investors to expand their portfolios is the Investor Cash Flow Loan. It lets you secure a mortgage without providing proof of employment or income to qualify. Instead, your eligibility for funding is based on the cash flow of the investment property you’re looking to purchase.
If you’re unable to qualify for this option or if it doesn’t quite work for you, there are other alternatives. You can use a conventional bank loan, hard money loan, private money loan or home equity loan to get the funds you need.
1. Conventional Bank Loans
Conventional bank loans are a popular, cost-effective way to purchase an investment property. However, you’ll need to conform to the standards set forth by the Federal Housing Finance Agency and provide a sizable amount of income documentation and reserves to qualify for funding. The lender will also assess your debt-to-income ratio and creditworthiness to determine your eligibility, and the down payment requirement will depend on the number of mortgaged properties currently in your portfolio.
2. Hard Money Loans
Hard money loans are ideal for investors who prefer to fix and flip properties to turn a profit. However, they generally come with steep interest rates and short loan terms. Plus, you’ll need to make a larger down payment to get a hard money loan. On the other hand, hard money loans can also be used to acquire rental properties you plan to pay off or refinance in the near future since most have loan terms that don’t span beyond two years.
3. Private Money Loans
These loans are offered by private lenders, like friends, relatives or private organizations, who feature more flexible lending options. Private money loans are popular amongst real estate investors who wouldn’t have much luck qualifying for mortgages to expand their portfolio elsewhere.
4. Home Equity Loans
You can pull equity from other homes you own to acquire investment properties. Home equity loans are disbursed in a lump sum and payable over a set period of time. But if you choose a home equity line of credit (HELOC), you’ll get access to a pool of cash that you can withdraw from during what’s referred to as the draw period. HELOCs are a form of revolving debt and operate like credit cards, which means you can continue to pull from the pot of funds as you make payments. But once the draw period ends, the outstanding balance is converted to an installment loan.
Where Can You Get an Investor Cash Flow Loan?
It can be difficult to find an Investor Cash Flow Loan. Luckily, Angel Oak Mortgage Solutions has you covered with a unique product that lets you level up your real estate portfolio.
You could be eligible for an Investor Cash Flow Loan between $75,000 and $1.5 million if you have a credit score of at least 680 and own your own primary residence.
There’s no limit on the number of properties you can acquire or refinance, and Angel Oak Mortgage Solutions allows you to purchase short-term rentals. Even better, the investment properties can be listed in your LLC’s name, and you won’t be required to provide employment or income information. Instead, the cash flow of the investment property is used to determine if you’re approved for a loan.
Inquire about this innovative mortgage solution that’s designed just for investors by submitting an online inquiry. A licensed mortgage professional will connect with you to discuss your unique lending needs and other solutions that could work for you.
Frequently Asked Questions (FAQs)
Here are some frequently asked questions about investor loans:
Yes. Most lenders will allow you to purchase as many investment properties as you can afford with an investor loan.
No, there isn’t a limit on the number of investment properties you can have in your portfolio. However, be mindful that conventional loans have a 10-property limit if this is your preferred method of financing.
It depends on the lender. That said, a down payment of at least 20 percent is best to have the strongest approval odds and qualify for the best loan terms.
