Choosing The Right Lender & Being Prepared For Your Home Buying Experience
When making the leap into the world of rental property ownership, choosing the right lender for your home is a highly important aspect.
There are multiple lender-avenues one can venture down, but your best bet is to do your research right away. Shop around online with credit unions, with banks, ask friends who have recently purchased. You might even consider hiring a real estate agent to do the heavy lifting and digging for you. To assist in your preparation and research, below are three types of loans for non-owner occupied real estate loans to consider.
Conventional loans, also called conforming loans, are mortgages that are guaranteed by a government-sponsored enterprise (GSE) — namely Fannie Mae or Freddie Mac. Conventional loans often feature the lowest interest rates and fees available when you want to finance an investment property that you don’t plan to live in personally.
You’ll need to supply a down payment of at least 20% on conventional loans to avoid paying mortgage insurance. Fannie Mae and Freddie Mac guidelines allow real estate investors up to 10 mortgages (restrictions apply). However, many lenders won’t approve you for an additional mortgage loan once you already have four of them.
Another way to potentially secure financing as a real estate investor is to consider cross-collateralization. If you want to take out multiple rental property loans at once, a cross-collateralized blanket mortgage might help.
With a blanket mortgage, you finance multiple investment properties under a single loan. Developers commonly use blanket mortgages, for example, when they want to purchase a large property and build multiple homes. Blanket mortgages often appeal to house flippers as well. If you’re considering a blanket mortgage, be aware of the following benefits and risks:
The properties serve as collateral for each other. This may reduce the bank’s risk while increasing yours. If you default on the loan, you could lose multiple properties. Ideally, you should look for a blanket mortgage with a release clause. This may allow you to sell individual properties separately when you’re ready to do so. You might be able to refinance existing properties you own under a blanket mortgage. This could serve as a cash-out refinance if you need to free up funds for other investments. Blanket mortgages are usually short-term loans. Often, you’ll need to pay off the loan or refinance within one to five years.
While conventional loans are sold to investors and therefore have to meet GSE guidelines, portfolio loans are held by the lender who issues them. As a result, portfolio lenders approve or deny your mortgage application based on its own approval criteria, and it’s often not as strict. A portfolio loan might be a good fit if you’re not able to qualify for a conventional mortgage to buy an investment property. However, because the loan guidelines are looser, there’s usually a cost. Ultimately, you might have to pay more for a portfolio loan.
Whichever route you choose to take when it comes to finding a lender for your property, it’s never too early or too difficult to start preparing! Get your finances sorted out (debt-to-income ratio, etc.), gather pay stubs, and gather W-2’s. Most lenders will ask for these items no matter who/where you go to. And don’t forget to be excited!
Congratulations for embarking on the journey of rental-property ownership!