Different Types of Rental Property Loans – Financing a rental property through a mortgage loan can be a good way to increase your income through real estate investment. You want to make sure that you are knowledgeable of the mortgage loans available for rental properties so that you can accurately and conservatively assess the balance of risk and reward with taking out a loan for a rental property.
Here are some of the different types of Rental Property Loans
Conventional loans
A conventional loan is also referred to as a conforming loan and this is the most common type of loan for purchasing a home for any type of property. This is the loan that most people are familiar with when they look to purchase a personal property as a primary residence. These are most widely offered by traditional lenders most often banks and credit unions.
Interest rates on conventional loans are usually lower than other options because they are backed up by the entities of Fannie Mae and Freddie Mac as they fit inside the guidelines that these two mortgage giants have set. However, these guidelines can sometimes make it tough for an investor to qualify.
Cash flow loan
This type of loan uses the rental income potential to verify the real estate investor’s ability to repay the loan. This is a good option for rental investors that may not be able to qualify for a loan using the traditional standard of tax returns as with a conventional loan. A cash flow loan is increasing in popularity amongst those searching to purchase rental investment properties. It allows you to qualify on the basis of the profit that the property in question is expected to generate.
Related: How to Get a Home Loan without Tax Returns
FHA
These are federal housing administration loans offered through traditional lenders and mortgage brokers. There are credit score requirements and down payments are most usually lower as compared to a conventional conforming loan. In some cases, income from an existing rental property can be used to help you qualify for an FHA loan.
Some investors like to use FHA loans for multifamily properties hoping to purchase a new rental, new construction, or to help renovate an existing rental property. An FHA multifamily loan requires that the investor use one unit as their primary residence for at least one year.
Blanket
A blanket loan is often used by real estate investors hoping to purchase several rental properties and finance them all under one single mortgage loan or what is known as a refinance portfolio of existing rental homes. The best way to find a blanket loan is to work with a private lender or a mortgage broker to find the best blanket mortgage product.
Blanket loans for rental properties usually cross-collateralize the properties in the loan meaning that each individual property acts as collateral for the others. You can ask for a release clause that allows you to sell one or more of the group of properties under the loan without needing to get an entirely new blanket mortgage for the other properties.
VA
The letters Vand A stand for veterans affairs and these loans are most often used on multifamily properties. These loans are offered through banks, credit unions, and mortgage brokers. These are mortgages that are backed by the US Department of Veterans Affairs and are available to active-duty service members, veterans, or their eligible spouses.
Being able to use a VA loan for a rental property comes with several benefits if you meet the qualifications. Some of these benefits include that there is no minimum down payment and no minimum credit score. A borrower can purchase up to seven units. One of these units needs to be the borrower’s primary residence, however.
Portfolio loan
Portfolio loans are mortgages for smaller rental properties in the form of single-family homes or multifamily properties like duplexes. Each property carries its own loan but they are all lent out through the same lender. With this type of loan, the lender may offer a group discount for multiple properties/multiple loans.
Terms for portfolio loans like the interest rate, down payment, credit score, and loan length can be adjusted to fit the specific needs of the real estate investor/borrower. Portfolio loans can be easier to qualify for when an investor is purchasing multiple rental properties. Because of the increased risk, however, there could also be higher fees and prepayment penalties.
For more information on Rental Property Loans options in Mission Viejo and California please contact me anytime.
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