You’ve decided to pursue real estate investing, but are a little unclear about the best path to find financing. Below is a brief overview of the main types of lenders for financing real estate investments. The one that’s best suited to you and your situation depends on your qualifications and other aspects of your personal situation.
Any one of these can be a great partner under the right conditions. Ultimately, their goal is the same as yours: to acquire a reliable real estate asset in a strong market.
So, to help you determine which avenue to look at to purchase your first investment property, read more about these four different lenders for financing real estate investments.
Traditional Mortgage Companies
These are government-sponsored entities (Fannie Mae and Freddie Mac) that buy and guarantee mortgages issued by lenders. They offer a variety of programs, but you are limited to 10 loans under your name and the qualifications change as you acquire more properties. Also, homes financed through a traditional mortgage company usually must be in habitable condition. General qualifications for financing through traditional mortgage companies include:
- 640 minimum credit score (620 in certain cases)
- Debt-to-income ratio of 36% to 43% (credit and down payment dependent)
- Down payment of 3% (with mortgage insurance) to 20% (without mortgage insurance)
- Housing debt-to-income ratio under $35,000
- No recent bankruptcies, repossessions, foreclosures, or short sales
- Verifiable income through two years of W-2 and tax returns
- Cash reserves
- Loan limits of $424,100 to $625,500 (exceptions may be granted in high-cost areas)
Commercial and Portfolio Lenders
In terms of investment properties, national and local banks offer financing that’s great for original buy-hold purchases and refinancing. However, due to higher closing costs and prepayment penalties, it’s not well suited to flipping or other short-term investment strategies. Commercial lenders generally look at three areas:
- Whether you have business credit and what your score is, and other aspects of your business finances
- Your personal credit history
- Property and investment characteristics, including Loan to Value (LTV) of 65% to 75%, strong cash reserves, and number of exit strategies
Hard Money Lenders
This alternative to traditional mortgage lenders can be a good option for people or properties that don’t qualify for the above types of lenders for financing real estate investments. It’s also typically a much faster approval process than with a more traditional lender, and it offers flexible financing options. The key to a hard money loan is simply collateral. Hard money lenders typically look for:
- Down payment/equity of 25% to 30% for residential properties; 30% to 40% for commercial properties
- Strong cash reserves to cover the holding costs for 3 to 12 months
- A track record of performance (consider partnering with someone who has a track record in the beginning)
- One or ideally more exit strategies
Private Money Lenders
These can be anyone, from a wealthy family member to a successful investor. It’s a flexible option, as there are no bank rules to deal with, though many professional private money lenders underwrite as strictly as hard money lenders. This option can work well for short-term and long-term real estate investment strategies. These loans don’t appear on your credit report, so there’s no limit to the number you can take out.