What You Should Know About Investment Property Mortgages
Investment Property Private Mortgages & Conventional Loan Options
The mortgage industry is a complex, ever-changing series of companies and offerings, each with benefits and shortcomings for real estate investors.
Most people know what mortgages are and how to buy a home by using one. However, real estate investing intensifies the need for a deeper understanding of the mortgage industry. New investors find the industry confusing, making them struggle to understand how they can leverage money to grow as a real estate investor.
In this article, we have brought together information on the different types of loans offered in the mortgage industry. More importantly, we are going to discuss investment property private mortgages.
Keep reading because we promise you will gain a better understanding of the different mortgage offerings as well as how our own company can help. We want real estate investor to understand how we can help and the options available to them. Who knows, we may even spark some interest from would-be real estate investors.
For this article, you should be thinking about rental properties, fix-and-flips, property rehabilitation, and building commercial properties, rental properties, or spec homes.
Conventional or Government-Backed Home Loans
Government-backed and conventional home loans are typically in the form of mortgages that are secured by owner-occupied primary residences. They are usually a single-family home located on a piece of property but can also be a multi-unit property. They can also be part of a broader community of connected homes such as in the case of patio homes or condominiums. There are several types of conventional and government-backed mortgages to be aware of so you can decide if one is right for you.
FHA and VA Government-backed loans are overseen and managed by the government agencies know as either FHA or VA. They provide lending requirements that mortgage lenders must follow. Their goal is to assist home buyers with low cost and low down payment loans. These loans are especially suited for first-time home buyers and those who want to buy a home but have little or no money to put down. High loan-to-value, otherwise known as LTV, implies risk, and when there is little or no equity, the risk of default becomes higher. Without the support of government-backing, mortgage lenders would have less incentive to issue loans. Government backing motivates lenders to issue qualified loans because the government will assume some of the risks.
Fannie Mae and Freddie Mac are known as government-sponsored entities, and they responsible for most conventional loans. As government-sponsored entities, they are considered publicly chartered, private corporations.
Fannie and Freddie both have set limits on the maximum size for the loans they will guarantee. The maximum amount is known as the conforming loan limit. The Office of Federal Housing Enterprise Oversight (OFHEO) sets the conforming loan limit and regulates both companies. They will review and reset the conforming-loan limit annually based on mean changes to regional home prices.
Conventional and FHA loans will likely require private mortgage insurance, depending on the equity position of the borrower. Mortgages with loans higher than 80% of the value of a home will typically require private mortgage insurance. Private mortgage insurance is quite costly. Although the borrower must pay the monthly premium, it in no way protects the borrower. The insurance effectively guarantees a percentage of the loan for the lender in case the borrower defaults. This insurance allows lenders to approve more loans and assume slightly more risk.
Conventional Loan Down Payment Requirements
If you continue down the path seeking conventional loans for rental properties, you will experience additional restrictions and guidelines. As an example, you will likely be required to bring a minimum down payment of 20 to 25 percent. The down payment is higher since private mortgage insurance is not available for investment properties.
Being a new landlord and what Conventional Lenders Require
The general requirements of Fannie Mae and Freddie Mac will also require investors to have experience as a landlord to receive conforming loans. You could try to circumvent this by hiring a property manager. Some lenders may consider a property manager, but there is nothing definite in the guidelines.
How Many Properties Can I Own And Still Get A Conventional Loan?
Fannie Mae and Freddie Mac will likely restrict the total number of properties you can finance. Most programs will cap you off at either two or four financed properties. There are programs for more than four properties, but they will have extremely stringent requirements.
Investment Property Private Mortgages Can Help!
There is good news for investors! Successful investors and investment companies have found a thriving private lending base. The investment-based private mortgage lenders we are discussing use their funds, versus funds from a bank, and they are ready to finance real estate investors. Seasoned investors have quickly figured these lenders out and are using them for a variety of reasons. Loan flexibility and speed are unmatched within the conventional banking or mortgage industry. Therefore, most successful investors align themselves with a private lender to gain steady access to quick and easy cash. Once an investor aligns with a private lender, the lender will know them.
Investment property private mortgages are not government regulated; therefore, there is no bank involved. Although new investors may find it easy to finance their first investment property, they usually get hung up beyond that. Many investors find it hard to get loans to buy, build, or fix up investment properties. The reason is that the conventional and government-backed mortgage industry has strict government guidelines related to what they can and cannot lend on.
Investment Property Mortgage Rates
Private lenders know that real estate investors are looking to make money for taking calculated risks in the real estate market. If loans are available that fit standard mortgage criteria, there would be no need for private lenders. For this reason, private lenders have carved out a place in real estate investing with risk-based short-term mortgages. Private mortgage lenders, like Abbey Mortgage and Investments, have unique business models. Their business is dependent on providing loans to investors who have an aptitude for real estate investing and a great deal of ambition.
Because of the associated risk, investors should not expect to see advertised home mortgage rates in association with investment property private mortgages. Real estate investment is rewarding and can make for a very lucrative venture. However, the default rate on investment properties versus standard home loans is around 30% higher. Private lenders require equity and fair compensation for taking that additional risk. Abbey Mortgage offers competitive rates, reasonable fees, and a mindset of helping you succeed.
Do Investment Property Private Mortgages Have Higher Interest Rates?
Of course, but investors should not let that scare them out of the market. Interest rates for private loans vary widely and depend on the type of property, amount of down payment, equity, loan repayment terms, and the strength of the investment or project. There is an ultimate balance in almost every market. In private lending, that balance is simple to understand. If lenders charge interest rates and fees that are too high, there would be no market.
Are There Up-front Fees
Fees are dependent on each deal, so there is no single answer. Keep in mind that conventional mortgages often carry significant upfront fees, usually paid at or before closing. When you consider all the considerations in mortgage lending, private lenders start to look more appealing.
The Abbey Mortgage Approach is Common Sense Lending
Abbey Mortgage and Investments offers many programs geared toward investment property private mortgages for investors. We are not as concerned about credit scores as a bank or mortgage broker may be. We will review your investment finance needs with a focus on the merits of the deal itself. For example, if we feel the property will likely net a profit at the sale, we will probably fund it. If it generates income to repay the mortgage over a set time, we will likely issue a loan against it.
Will Abbey Mortgage Lend Me Money For My Deal?
First, we do not have loan programs for people to buy a home. We are a private lender focused on real estate investors. Now that is out of the way, let’s talk about the types of loans we do offer. We specialize in providing fast cash to allow you to jump on a great investment opportunity.
As an example, one of our long-time clients recently came across an opportunity to buy a fully rented 6 unit apartment complex in southern Colorado. The current owner was facing personal hardships and needed to sell fast. The investor found the property without realtor involvement, so the equity was mostly hers.
Our investor client placed an offer of $575,000 on the property, which had a market value of $650,000 and a positive cash flow. The seller accepted her offer on the same day with the provision the deal would close in two weeks. Because she had previous experience working with us, she knew we could get her the money she needed. However, she had a lot of her own money tied up in several fix-and-flip deals. We reviewed the property and gave her loan approval within two days. She covered the closing costs, and within ten days, we funded her loan at $575,000 closed the deal.
The Bottom Line On Investment Property Private Mortgages
There are many different financing options available which can bring property investing in reach for a wide range of people. The point is that private lenders, like Abbey Mortgage and Investments, have a place in your investment strategy. Failing to understand this means you are missing opportunities to grow your investment business.
Small investors do not become millionaires by taking on one project per year. Investors looking to become wealthy are diverse, handling multiple projects at once. Our advice is, start small and we can help you get started. However, once you have developed your methods for investing, we want to be an ongoing part of your strategy.