Earning big from real estate investment is not as easy as it looks from outside. Or you can say the road to becoming rich by investing in real estate property is full of obstacles and challenges. Investment properties are known as some of the profitable ventures in the real estate industry, as investors can secure rental income or make profits by reselling them.
The purchase of an investment property requires a lump sum amount. In most cases, investors prefer to seek financial assistance from financial institutions like banks and mortgage brokers to make the purchase successful.
Mortgages for investment property are a form of financial assistance given to an investor to facilitate the purchase of rental properties.
If you are interested in investing in real estate properties with financial external financial assistance, you must be aware of investment property mortgages, which can play an influential role in your purchasing spree.
In this blog, we will talk about investment property mortgages and how does it work in detail.
A Brief Description of Investment Property Mortgages
When we talk about mortgages, the first thing that comes to our mind is a simple loan given to an investor who wants to purchase a property. Although there are some rules and regulations to follow to secure the deal, it is the money that you borrow from one or multiple lenders.
Here, we must say that there are some differences between an income property mortgage and primary property mortgages, as financial institutions and states set different guidelines for these types of loans. If you are planning to purchase an income or rental property, you have to apply for investment property mortgages.
For an investor, qualifying for investment propertymortgage loans is a little bit tougher than conventional private mortgages.
What Makes Income Property Mortgage Different?
If you are a seasoned investor, you might have gone through the process of getting qualified for an investment or income property mortgage. In the case of investment property mortgage loans, you will come across a different set of rules for a credit score, down payment, repayment schedule, debt-to-income ratio, etc.
Unlike conventional mortgage loans given against primary properties, income property mortgage loans are hard-to-get, and you will find lenders more challenging in this landscape. However, there are some valid reasons for which lenders become stringent when it comes to approving loans for income property.
When an investor applies for a mortgage for an investment property, he/she creates a risk factor for the lenders, because he/she is seeking financial assistance for a property, which they don’t use. It is relatively more comfortable for an investor to walk away from an income property than a property for primary use.
It is the reason why a primary house owner can get a mortgage with as little as a 3% deposit, while an income property owner needs to pay at least 20% as a down payment for the proposed mortgage against an investment property.
Private Mortgage Insurance Does Not Cover Income Property Mortgages
It is another critical reason why lenders become more challenging for income property mortgages. Private mortgage insurance does not cover income or investment properties. The insurance policy acts as collateral for the lenders. If a borrower fails to repay the mortgage within the assured timeframe, the lenders obtain some funds through the insurance policy.
Hence, whenever you seek financial assistance from a direct lender or mortgage brokers, you will have to deposit at least 20% of the value of the target property.
Higher Interest Rates
Although your interest rates, monthly payment and terms will depend on factors like your credit score, down payment, income history, etc. you will have to pay from 0.25 to 1.00% more than mortgage loans for primary residences. This minor difference can influence the overall amount you will pay as interest and capital.
How Does an Investment Property Mortgage Work?
Loans and mortgages are some of the most common terms for investors associated with the real estate industry. However, all forms of loans provide monetary assistance with some terms and conditions, the guidelines for mortgage loans for investment properties a little bit different than traditional home loans.
In case of income property or investment property, lenders like banks, commercial hard-money lenders, mortgage brokers provide financial assistance to an investor to buy or rehabilitate a property. Here, the applicant’s loan-to-value requirements determine the loan amount.
If you have approached a hard-money lender, you will qualify to obtain 60%-80% of your property’s after-repair value. However, in traditional banks, your loan or mortgage amount will depend on the current market value of your property.
Mortgage for Rehabilitation
In this transaction, an investor request a lender to finance the purchase of a property that requires repair or maintenance works. It can be a condominium unit, a single-family house, a commercial builder or a multi-family dwelling. Before approving the loan amount, the lender will determine the asking price of the property and evaluate how much money the borrower will spend on repairing the unit.
Following the evaluation or all the factors, the lender will provide a loan to the investor and describe the rate of interest, repay period and associated terms. According to the terms and conditions attached to the loan, lender will have a lien on the unit along with the power to seize it in case default.
If it is a fix and flip property, the borrower can sell it to repay the loan or mortgage. If the investor decided to rent the property out, there would be opportunities to convert the short-term loan into a flexible long-term mortgage with a satisfactory interest rate.
Factors to Consider When Applying for Investment Property Mortgage Loans
Investment property mortgages are different than conventional home loans, and you need to take care of a few factors in mind when approaching a lender.
- Eligibility: Every borrower comes with different investment strategies and goals in mind. Hence, make sure that the guidelines and terms and conditions set by your lender suit your plan.
- Interest Rates: Whether it is a conventional home loan or investment property mortgage, the rate of interest will have a more significant impact on your repayment. Hence, talk to more than one lender or mortgage brokers to seal a flexible deal.
- Benefits: As an investor, you can be eligible to enjoy some benefits by obtaining investment property mortgages. Talk to your financial advisor and see is there is any way to maximize the tax benefits. Borrowers who prefer fix-and-flip loans have a better chance to enjoy tax benefits.
- Repayment Procedure: This is one of the essential parts you need to be careful about. Make sure the lender has set a flexible repayment schedule for you. If you have preferred short-term mortgage, your monthly instalment will be higher than those who prefer long-term repayment schedule. However, you will pay more in interest if you choose a long-term repayment schedule.
- Other Expenses: Along with the down payment, you have to pay fees for some legal and official procedures. You may have to pay fees for application, appraisal and legal policies. It is better to consult an expert or trustable mortgage brokers and learn more about this kind of additional expense.
It is how an investment property mortgage works. If you are a first-time investor, you must research to learn more about the income property loans or mortgages. The process of obtaining an investment property mortgage may look complicated from the outside. Still, if you come with excellent credit score, clean loan history, good debt-to-income ratio, you will find the procedure fast and straightforward. If you live in Canada, you will not find it tough to make a list of lenders offering income property mortgages at favourable terms and conditions. You can also consult mortgage brokers to make the process hassle-free and profitable for your long-term investment goals.