How To Get A Loan For Investing In Real Estate

Beth McCandry

Getting a loan on your investment property can be difficult, but it doesn’t have to be impossible. Check out our blog for a simple guide on how to get your investment loan.

Concept of loan with icons on wooden cubes

Getting a loan to invest in real estate is not much different from finding a loan on a property that you want to live in. There are a few different things to consider and some additional options to explore. Investing in real estate can prove extremely fruitful, but it can also be very risky and you can lose if you don’t play smart.

Below is a basic guide to understanding what it takes to get a loan for real estate investment.

Different loans to consider

When considering a real estate investment, there are several loan options you should consider including:

Conventional bank loans

You’re likely familiar with this option, especially if you’ve secured a condo. The more conventional financing route can make life easier, but it’s important to know that a 20% down payment is the expected amount to be paid on a home purchase. If it is an investment property, the lender may require 30% of the price as a down payment. (1)

Your ability to be approved and the type of interest rates that apply will depend on your personal credit history and history. Most lenders also check your income and assets. You will also need to be able to demonstrate that you can afford existing mortgages and monthly loan payments on the investment property.

Real estate agents and customers shake hands together and celebrate the concluded contract after home insurance and investment loan, handshake and successful business.

Hard cash loans

Another type of loan that you can consider is a “hard cash” loan. Hard cash loans are short-term loans that investors can use to buy, build, or renovate a property. These are offered by private lenders as opposed to traditional banks. One of the many advantages of hard money loans is their flexibility as they depend on the discretion of the agreement made between you and the lender.

Factors in Getting a Loan

There are several things that you need to take into account to make sure that you can get a loan. You want to make sure you have all of your ducks in a row so that either a bank or a private lender is not hesitant to give you the help you need.

Save for a deposit

Saving for a security deposit may take more time, but it’s the easiest way to get a loan on a home. Essentially, this money can go to help secure a property for you. The more cash you have to deposit, the fewer hoops you have to jump through.

Home equity

If you don’t have the money to make a deposit, or don’t have the time or resources to save on a deposit, if you already own a home with significant equity, you can get around this. You can use some or all of the equity as a contribution to your investment property.

How much equity you have is calculated by subtracting the value of your remaining mortgage debt from the market value of the property. As of 2020, the homeowner’s value in the US was around $ 21.2 trillion. (2)

It should be noted that if you use the equity of another property, the amount of principal you need to repay will increase. You need to be able to take on that extra burden and make these loan repayments or increase the amount you are repaying before making this decision.

Guarantor

You can also use a guarantor for your investment home loan. It usually does this by asking a close family member to use some of their equity to secure a loan for you. The surety must be 21 years old, have good credit and financial stability and it helps if he is a homeowner too. (3)

Many investors or buyers who want to expedite the acquisition of a property use this option. There are risks that both the buyer and the guarantor should be aware of; If the borrower is unable to make their repayments, the surety must repay the portion of the loan that they helped secure.

Ability to repay

Everyone – whether they use a private lender or a bank – must show that they are willing and able to make repayments. This is a crucial aspect of any lending process. Most lenders and banks will check the following:

  • Your income
  • Your employment history
  • Bank statements
  • Issue history
  • Any assets you own or owe
  • Your credit rating.

In summary

There are a few things to consider when looking for loans for real estate investment. First of all, you need to decide which loan you need based on your circumstances and where you are getting your loan from. Second, you need to go through the process to get a loan.

This simple guide provides some initial steps. If you read and follow the advice above, you will be well on your way to investing in real estate.

References

  1. “The Complete Guide to Financing an Investment Property”, source: https://www.investopedia.com/articles/investing/021016/complete-guide-financing-investment-property.asp
  2. “Value of US Homeowners Equity 2020”, source: https://www.statista.com/statistics/375865/value-of-homeowner-equity-usa/
  3. “Be a guarantor | Who can be and what does it mean? “Source: https://www.experian.co.uk/consumer/guides/being-a-guarantor.html