How do you finance the purchasing of an investment property? What kind of mortgage or loan should I get when I buy an investment property? Is it hard to finance the purchase of a rental property or is it just like buying a home? These are common questions for new investors, let's try to answer them:
Purchasing an investment property is not like buying new television or even a new car. This is a huge decision that can impact your real estate career – not to mention your bank account and credit score – and in debilitating ways if you’re not careful.
First, (and I know this will sound like we’re pestering you by now!) you’ll need to evaluate your interests and motives, then formulate an investing plan that you can start working towards. In the meantime, you should be saving enough money for a down payment on the piece of property that you want to buy.
Then, you need to consider what kind of a loan you’ll need. There are several types to choose from, many of which vary according to the goals and interests you’ve established in your investment plan. Take a look at some of the loan options listed below:
• Assumable Loan/Assumption of Mortgage – These are loans that can be transferred from the seller to the buyer. The buyer receives the title of a property and agrees to take, or “assume,” responsibility for paying the mortgage and for all deficiencies if a foreclosure sale were to occur.
• Subject to Mortgage - This is similar to an assumable loan, but the buyer does not assume liability on the mortgage. When a mortgage is taken “subject to,” the buyer can abandon the mortgage and not lose anything except for the home’s equity.
• Wraparounds – As the name suggests, a wraparound mortgage “wraps around” an existing mortgage. Basically, it allows you to refinance an existing loan at an interest rate between the original loan rate and the current market rate. Payments are sent to either the second lender or the previous homeowner, and are then sent to the first lender after the additional amounts have been removed. The interest rates achieved here are lower than those typically received in a second mortgage.
• Lease Options – This is a finance option that allows people to lease a home with the opportunity to buy it. Not only will each month’s rent include the normal rental fees, but also an extra sum that can be applied to the purchase of the property. The price of the property is already preset, and quite often tenants are required to buy the home within a specific timeframe.
• Contract for Deed/Land Contract – Also referred to as conditional sales contract or installment contract. This is when the title or deed of the property is not handed over to the buyer until all or part of the payments has been made.
• Seller Mortgage/Seller Financing – A seller mortgage is when the owner of a property lends money to the buyer to cover part or all of the sales price. You can usually negotiate a better interest rate or avoid administrative fees from various lending agencies. Also, if you can’t qualify for a loan, these are especially attractive. But even better than that: you’ll avoid mortgage insurance.
• Cash-Out Financing – You can draw on your house’s equity to acquire money for another piece of property.
• Owner Occupancy financing - this is where you live in the property as your primary residence for two years before you sell the property
• FHA Loans – The Federal Housing Administration (FHA) is a federal agency that ensures first mortgages granted by FHA-approved lenders. As a result, lenders can loan a high percentage of the sale price and demand low down payments.
• VA Loans – The Veterans Administration (VA) is an agency of the federal government. These loans are eligible to veterans who have served more than 120 days of active duty in the armed forces. Also, there’s no down payment.
• FHW 203 (k) (improve run down property)
TIP: Verify the value of a piece of property through an appraisal or by getting another professional opinion. Don’t agree to overpay on a property, that's just absurd, do a thorough check and appraisal of the entire yard and property.
Most loans will require this of course. Also consider the community and the neighborhood itself, what plans are in place for the area, whether that's a new store, park or improvements in the surrounding roads and highways that take you downtown or main business areas of the city.
Read more...Money to Put Down