When you decide to get into real estate investing, securing the right financing is a crucial step towards achieving success. The availability of various loan options can be overwhelming, especially for first time real estate investors. Choosing the right loan tailored to your specific needs and financial situation is essential. Among the myriad of options, there are three that are often compared my investors: conventional loans, bank statement loans, and cash flow investor loans.
We can help you decide which is the right fit for you, based on your financial situation, your goals, and other factors unique to you. Reach out to one of our loan officers any time to apply and learn what the rates and terms of different options might be.
Below, we will explore the distinctive features of each loan type to help you make an informed decision that aligns with your investment goals and will help you become an experienced real estate investor.
Mortgages for Real Estate Investors
Conventional loans are the most common type of mortgage even for real estate investors; they are probably what you think of when you imagine a mortgage. These loans are ideal for investors with a stable income, good credit score, and a substantial down payment. Key features of conventional loans include:
Credit Requirements: Conventional loans typically require a higher credit score compared to other loan types. We look for a credit score of 620 or higher. A strong credit history is essential for securing the best interest rates.
Down Payment: While conventional loans generally demand a larger down payment—usually 20% or more—this upfront investment can lead to lower monthly payments and overall interest costs over the life of the loan.
Loan Limits: Conventional loans may have loan limits imposed by government-sponsored entities like Fannie Mae and Freddie Mac. These limits vary by location and are subject to change, so contact us if you need update information.
Fixed or Adjustable Rate: Conventional loans offer both fixed-rate and adjustable-rate options. A fixed-rate mortgage provides stable monthly payments, while an adjustable-rate mortgage may start with lower rates but carries the risk of fluctuating interest rates over time.
A conventional loan is ideal for real estate investors with a strong financial profile, a steady income, and the ability to make a significant down payment. If you have an excellent credit score and plan to hold onto the property for an extended period, a conventional loan may offer stability and predictability in your mortgage payments.
Bank statement loans cater to self-employed individuals or those with non-traditional income sources. Unlike conventional loans that rely on tax returns and W-2 forms, bank statement loans consider bank statements to verify income. This is a great non-QM option if you are self employed and are interesed in becoming a real estate investor to build a real estate portfolio.
Key features of bank statement loans include:
Income Verification: Bank statement loans focus on bank statements, typically covering the past 12 to 24 months, to assess an applicant’s income. This flexibility is advantageous for self-employed individuals with variable income.
Credit Requirements: While credit requirements may be more lenient compared to conventional loans, a solid credit history is still essential. Lenders may look for a credit score of 580 or higher.
Down Payment: Down payment requirements can vary, but bank statement loans often require a higher down payment compared to conventional loans. The specific amount will depend on factors such as credit score and the overall financial profile.
Interest Rates: Interest rates for bank statement loans may be higher than those for conventional loans, reflecting the increased risk associated with self-employed borrowers.
Bank statement loans are ideal for real estate investors with irregular income streams or those who struggle to provide traditional income documentation. If you are self-employed and can demonstrate a consistent cash flow through bank statements, this type of loan may offer a viable financing solution when you thought you may not yet qualify.
Cash flow real estate investor loans are tailored for real estate investors focused on generating rental income. These loans prioritize the property’s cash flow potential rather than relying solely on the borrower’s personal financial situation. Key features of cash flow investor loans include:
Property Cash Flow Analysis: We will assess the property’s potential to generate rental income as a primary factor in the loan approval process. This involves evaluating the property’s location, rental market conditions, and projected cash flow.
Credit Requirements: While credit history is considered, cash flow investor loans place more emphasis on the property’s income potential. Investors with average credit scores may still qualify if the property’s cash flow meets the lender’s criteria.
Loan-to-Value (LTV) Ratio: LTV ratios for cash flow investor loans are generally lower than those for conventional loans. Lenders may finance a percentage of the property’s value, with the expectation that the rental income will cover the mortgage.
Interest Rates: Interest rates for cash flow investor loans may be slightly higher than conventional loans, reflecting the perceived risk associated with investment properties.
Cash flow investor loans are ideal for investors seeking to maximize rental income from their properties. If you prioritize the potential cash flow of a property and are willing to navigate the intricacies of real estate investing, this loan type may align with your investment strategy.
Ready to learn more about financing as a real estate investor or are you ready to talk with us about choosing the right fit? Contact us any time.