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Investment Property Financing

Behind all investment property loans there is one undeniable truth that makes getting approved for a loan a little more difficult than you would think: you are not looking for money to purchase your primary house; you are looking for money so that you can purchase something that is a bit more of a luxury.

In that sense, lenders can be a bit wary of loaning out money to help finance an investment property. Whether or not it's actually true, lenders see that particular investment as being somewhat of a danger; they're not sure if you'll make that payment a priority compared to other payments.

You'll need to go through many of the same practices you employ when you're applying for a normal home loan, but it will be even more necessary in this instance to illustrate the fact that you are in solid financial standing in every way imaginable. Late payments, credit issues, and other blemishes that show up will severely hinder your chances of getting approved for a loan.

One of the biggest things that can scare of lenders is having an unclear path of income. Self employed individuals and people who work on seasonal highs and lows don't look like attractive options for a loan because they may experience months where they can't meet the necessary payments. Along those lines, lenders will want to see that you are making enough to make mortgage payments if the investment property goes unrented for a month.

Always bear in mind that it will be difficult to receive a loan if you are a first time buyer of an investment property or you have less than two years experience renting out an investment property. The reason for the two years experience is because you'll need your past two tax returns in order to prove that you have good enough credit and are up enough on your finances to handle the burden.

Here are a few tips that may come in handy as you go about applying for a loan for your investment property.

  • Decide what you are buying.   Be 100% truthful with the lender.  If it's a second home or vacation home, call it that.  If you've got an eye on an making the property an investment property for rental, let them know.  Don't be convinced to mislead the lender that you'll be living there if you won't.  Don't be fooled into a "straw buyer" scam that can land you in real trouble.
  • Be aware of the numbers.  People buy investment properties for different reasons; rental property, rehab/flips, vacation homes or complete teardowns/rebuilds.  Take a hard look and make sure that you can make the mortgage payment if you don't find a tenant, or if you want to flip because you can't find a buyer.
  • Think about the down payment.  Underwriting for investment property loans has changed drastically since the mortgage crash.  You may be asked for a higher down payment, or you may be asked for cash.  In other cases, you can possibly use equity in the house as a sort of de facto down payment, or put up securities, brokerage funds or even a CD as a down payment.  Make sure all the cards are on the table when it's time to talk down payments on an investment property loan.
  • Gather your paperwork.  Pull together paperwork you might not even think you need (better to have it and not need it than the other way around).  Pay stubs, IRS returns, licenses, bank statements, statements on IRAs or other funds, driver's license, social security card, everything you can think of.
  • Gather a team together. Pull together people who are all well-versed in investment property financing.  A CPA, a realtor, an attorney, a mortgage professional and a financial advisor all come to mind.  You'll need all these people in your corner as you weigh options.
  • Get pre-approved.  Go through a mortgage broker and lender to make sure that you can roll on an investment property financing setup, and get that in writing.  This will help convince a seller that you're serious and that their property is not going to be tied during in your approval process (or that you're going to get cold feet).

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