How to Finance Investment Property

1. How to Finance Investment Property

2. Pull together a down payment You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.

3. Consider a neighborhood bank • Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option. • You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank. • You can also check online. Look for reviews.

4. Gather necessary paperwork • Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following: • two months of bank statements • prior two months’ statements for investment accounts and retirement accounts • last two pay stubs • Information about self-employed income, such as last two year’s tax returns or business financial statements • Social Security card

5. Use the equity in your home • You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following: • You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. • You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. • Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.

6. Consider owner financing •  With owner financing, the owner lends you the money that you use to buy the property. You should analyze the pros and cons of owner financing. • A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. • Typically, the seller’s loan will be for a short period of time (such as five years). • You should analyze your credit to see if you can qualify for a conventional loan in the near future.

7. Analyzing Your Credit Score • Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report. • You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740 , then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. • Look for the following errors: • credit information from an ex-spouse • credit information from someone with a similar name, address, Social Security Number, etc. • Incorrect payment status (e.g., stating you are late when you aren’t) • a delinquent account reported more than once • old information that should have fallen off your credit report • an account inaccurately identified as closed by the lender • Failure to note when delinquencies have been remedied

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