Loans for Investment Properties
Conventional financing for investment properties includes fixed-rate financing. The interest rate stays fixed for the entire term of the loan. A loan term is the length of time the loan is amortized. The most common is 30 years. 25-, 20-, 15- and 10-year terms are also available. Fixed-rate programs are offered on all property types and are the most popular of the available loan types.
A conventional loan, or conforming loan, is a loan that follows guidelines and conditions set by government-sponsored entities Freddie Mac and Fannie Mae. It’s a loan that isn’t guaranteed by a government agency, such as FHA or VA. Conforming loans are limited to $417,000 and can be fixed loans, ARMs or balloons programs.
A conventional loan can be obtained on an investment property with 20% down, but many lenders require 25% or more depending on the loan you choose.
Adjustable Rate Mortgage
Adjustable rate mortgages (ARMs) for investment properties aren’t available for government insured (FHA) loans. ARMs have an interest rate that adjusts based on a published index. Many ARMs have a fixed rate for a portion of the term and make adjustments after that period. An example is a 5/1 LIBOR ARM. This program has a fixed interest rate for 5 years. After 5 years, the rate adjusts annually based on the London Interbank Offered Rate (LIBOR). There are many ARM programs available to choose from when investing in property.
Balloon Loans aren’t available for government insured loans (FHA). Balloons are amortized over a 30-year term, but are due in full at the end of the program. An example is a 7-year balloon. This loan would be amortized over 30 years, but due in full at the close of 7 years, either as a cash payoff, sale or refinance of the property. Property types available for this program include all 1 to 4 unit residences (multifamily residences), condos and planned unit developments (PUDs).
Consider a construction loan if building your own investment property.
There are two types of construction loans.:
- A one-time close construction loan is a combination of a long-term loan, lot loan and a construction loan with one closing. The long term loan is closed before construction can begin. A Construction Rider is attached to the Security Instrument and Note during the construction phase, which states the terms of the construction loan. At the end of the construction term, this Construction Rider dissolves and the mortgage becomes a fully amortizing loan.
- A two-time close construction loan involves a closing prior to construction and a second to refinance your construction loan into permanent financing.
Be sure to investigate thoroughly to decide which program best suits your needs.
There are two types of lot loans:
- Loans for unimproved land or raw land—unimproved or raw land has no added improvement—no sewers, utilities, streets, curb or gutter. Loans for unimproved or raw land typically require a higher down payment and interest rate.
- Loans for improved land—improved land is zoned for your intended use and has or is getting improvements. It can be easier to finance loans for improved land. Loans usually carry a 10 to 15 year term and require 20 to 50% down.