Loan for an Investment Property: How to Score One in 3 Steps

To get a commercial loan for an investment property, you must know the fundamentals of how loan application and approval work. Here, we’ll break down the basics of investment property loans, step-by-step, so you can understand the process. To learn more, look below.

Main Takeaways

• The 4 types of investment property loans are government-subsidized ones, home equity loans, hard money loans, and private loans.
• To qualify, you should consider your credit score, save for a down payment, show concrete, actionable plans, have a valuable property, and good DTI and LTV ratio.
• Loan rates vary based on your loan type, such as traditional vs. hard money loans.
• To apply, you need to find a lender, apply, gather your documents, get a property appraisal, and close on the loan.

Table of Contents

• Knowing the Various Types of Loans for Real Estate
• Qualifying for a Commercial Loan for an Investment Property (And Getting Better Rates!)
• Applying for Your Loan

Knowing the Types of Loans for Real Estate

Many people assume the only way to fund real estate is through conventional mortgage loans. Although that is an option, our Baltimore hard money loan providers know about other alternatives at your disposal. Here are some of them:

Government Insured Loans for Real Estate

The government backs some loans for real estate investors, like FHA and VA loans. They have fewer requirements than traditional mortgage loans. In general, they are only available for owner-occupied properties.

Pros of Government-Insured Loans

• Lower or no down payments, requiring less funds to invest in real estate
• Low interest rates, typically lower than conventional mortgage loan rates
• Fewer requirements, which lets investors purchase real estate even if their credit score is in the high 500s

Cons of Government-Insured Loans

• Must be used on your primary residence, which vastly limits how you can use these loans.
• Many lending institutions require a minimum credit score and down payment to secure a government-backed loan.
• Some types have more modest loan sizes, which can limit your ability to buy your target property.

Home Equity Loans for Real Estate

Another option you have for funding your investment property is a home equity line of credit (HELOC). HELOCs are exclusively available to homeowners who want to use their existing home equity to finance their new investment property purchase.

However, HELOCs are typically more logistically complex than other loan options and can have more stringent requirements.

Pros of Home Equity Loans

• Long repayment period, typically through 10 to 20 years
• No down payment is needed, since you’re using your own equity
• It may be possible for investors to deduct the HELOC interest costs on their tax returns

Cons of Home Equity Loans

• To be eligible for a HELOC, you must own a residential property of your own
• Interest rates are not fixed, so as the market fluctuates, they could, too
• HELOCs typically require annual costs, such as maintenance, transaction, and other fees

Hard Money Loans for Real Estate

Hard money loans are short-term loans funded by private individuals or companies. Unlike traditional lenders, hard money lenders don’t use your credit score and history as collateral. Rather, they use what you already have on hand, your investment property.

Pros of Hard Money Loans

• Flexible down payment, credit score, and other criteria
• Shorter time commitment than conventional mortgage loans
• Quick loan approval, typically within a few days or weeks

Cons of Hard Money Loans

• To offset expedited loan delivery costs and other lender liabilities, lenders can charge higher interest rates and down payment requirements than other loan options
• Instead of your credit score and other financial factors, your investment property is used as collateral. So, if you cannot organize your finances together to pay the loan, you’ll lose your investment.

Private Money Loans for Real Estate

A private money loan for a commercial investment property works similarly to hard money loans. The key difference is that private loans don’t usually come from professional, registered lenders. Rather, private money loans for real estate are often funded by your fellow individual investors. Because of this, they are known for their flexibility.

Pros of Private Money Loans

• Has very loose structuring, so comes with very flexible terms
• Eligibility requirements are loose, so investors with poor credit can still buy real estate
• Qualification lies with your investment property, rather than your credit score or other financial status

Cons of Private Money Loans

• Vastly higher down payments and interest rates than conventional mortgage loans
• Very short loan term duration
• High-risk loans are more appropriate for experienced investors with a high rental income to fall back on

Qualifying for a Commercial Loan for an Investment Property (And Getting Better Rates!)

There are some ways you can plan before you apply to increase your chances for loan approval.

Consider Your Credit Score

For traditional loans, your credit score is paramount. It’s the primary factor in deciding your approval. For other loans, like hard money loans, it plays a role, but it’s not as critical. There are ways to get hard money loans, even with a poor credit score.

For instance, traditional lenders will need mid-600 numbers. Otherwise, hard money lenders generally want to see lower scores than traditional lenders do. If your score is around a decent 600 range, you may be good to go.

Either way, it could up your chances of approval and get good rates if you iron out your numbers.

Save for Your Down Payment

Most providers of loans for real estate seek a sizable down payment. As such, it’s a good idea to have prepared as much money as possible for a down payment. To give you an idea, some lenders will ask for around 10% to 30% of your loan amount as the down payment. This varies widely from lender to lender, of course.

As a tip, the more you pay upfront, the lower your interest rates will be later. As such, it may be a good idea to provide a higher down payment at the start.

Have a Solid Plan for Your Loan

Before lenders decide to approve you, they’ll want to know that you have a clear path forward for your investment. So, you should show your lender your plans for your property and how they’ll earn an ROI for investing in it. Plus, the more financially promising your plans are, the better your rates could be.

Have a High-Quality Target Property

This particularly applies to hard money loans. Since hard money loans are asset-based, you can’t get a loan if you don’t have a property asset as collateral in the first place. So, be sure that you at least have one in mind, and make sure it’s one with potential for profits.

On a basic level, too, they will need to use your eyed property’s value (or expected future value, in the case of repairs) to calculate the right loan terms and other features.

Most of the time, hard money lenders use the expected after-repair value of a property to help calculate interest rates and loan terms. So, finding a great property deal is one of the first steps to securing financing.

Debt-to-Income Ratio

Lenders won’t want to lend you money if you don’t have a means to pay it back. As such, your lender may request proof of income before handing you over the loan. With this, they can make sure your income is high enough to cover your monthly debt payment—or, in other words, calculate the debt-to-income ratio.

By “proof of income,” we’re referring to documents such as tax returns, pay stubs, W2 forms, and bank statements. With this, lenders can more quickly surmise whether you will be able to repay your monthly loan.

Show a Good Loan-to-Value Ratio

Lenders often put high stakes in your loan-to-value (LTV) ratio, which can serve as a blueprint for their level of risk in lending to you. As the name implies, the LTV ratio measures how much your property’s value stacks against the loan amount. The lower your LTV ratio is, the more risk-resistant your investment will be for hard money lenders.

Applying for Your Loan

Below are actionable steps you can take to jumpstart your process as an informed borrower of loans for real estate.

1. Find a Lender: First things first, you must find a lender that offers a commercial loan for an investment property.
2. Apply: For your next phase, it’s time to apply for the loan for real estate you need. The lender could request your personal information as a background check. In addition, they may ask for details about your desired property and loan amount, so they have a better idea of your plans.
3. Gather Your Documents: Next, your lender may want various financial documents, such as tax returns and bank statements. Furthermore, they may need extra information you have regarding the property, such as its current rental income.
4. Get the Property Appraised Your property appraisal will establish your investment property’s value amount. In addition, appraisals should clarify the typical income of similar properties in your area.
5. Close on the Loan Finally, once you’ve done your due diligence, you just have the most exciting part left: closing on your loan for real estate and getting to use it. Now, you must pore over and sign the loan paperwork, hand over your down payment to the lender, and take care of closing costs.

Get a Commercial Loan for an Investment Property with MHML

To get a commercial loan for an investment property, you will need to choose your loan type, qualify for them, get a feel for the various loan rates, and finally, apply.

If you need a lender with experience and expertise, that’s where we come in. We provide hard money loans for real estate with terms specially tailored towards your needs as a real estate investor. Furthermore, many of us on our team have been on your side of the fence before. Because of that, we know just how important and sensitive your project’s situation is. Call us today for the unparalleled customer service you need while investing.