What are Investment Mortgages and How Do They Work? 

real estate investment mortgage
Moshe Farber
30, Mar 2022

It’s tempting to jump full force into the world of real estate investing after hearing about others’ positive experiences. After all, investing in real estate is a fantastic way to gain ownership of a tangible asset that yields income in the form of rentals or via house flipping. However, buying property isn’t easy or cheap. That is why many investors turn to investment property loans, also known as investment mortgages. Investment mortgages stand out as a way to make it easier for people to envision and pursue real estate investing goals so let’s learn a little bit more about them.

What are Investment Mortgages?

Investment property mortgages are loans that assist the buyer with purchasing homes to either flip and sell properties at a profit margin or rent them out for additional income. These mortgages are available for investment in assets like family homes, apartments, condos, manufactured homes, or rental properties.

Investment mortgages come with higher interest rates and have more rigid standards often including a higher down payment. However, higher down payments do present certain benefits for buyers. In most cases, the loan principal is decreased with a higher down payment, and so is the interest rate. 

How Big Are Down Payments for Investment Mortgages?

Compared to standard housing mortgages, investment property mortgages have higher loan rates. To qualify for investment property finances on a single-family home, you will require a 15-20% minimum down payment. You can be eligible for a lower down payment if you have good credit as per the lender’s discretion and guidelines. For a multi-family investment property loan, you should be prepared for a down payment of around 25-30%. 

Investment Mortgage Vs. Vacation Home Mortgage

Demand for vacation homes has risen sharply since the 2020 COVID-19 pandemic. Mortgages for investment properties are quite different than mortgages for a vacation home. Loans on vacation homes can work with down payments as low as 10%. Moreover, the cash reserve requirements for vacation homes can be two months, contrary to the minimum duration of six months required for investment mortgages. 

Financing Options

Conventional Investment Property Financing 

When it comes to buying an actual investment property, a conventional loan is your best bet. A property you wish to rent, flip, or do anything but live in qualifies for conventional investment property financing. These loans require 15-20% down payments and a higher credit score than government-backed loans and other financing options. These loans also offer you the flexibility to own your investment property without any requirements for residency. 

Alternative Financing 

If you wish to avoid an extensive application process, alternative financing can be a viable option. For alternative financing, you will need a reasonable down payment and an exceptional credit score. If you check all these boxes, you can get a debt-service ratio loan through a mortgage broker or a banker. However, you need to keep in mind that this is an alternative loan. It is likely to have a higher interest rate than other financing options. But the bright side of this option includes lower monthly payments and a more effortless loan application process. 

As discussed earlier, you will need a higher down payment of 20-30% for an alternative loan. You will also need documentation proving that your monthly rental income to be generated from the property is significantly higher than your monthly loan repayment. 

VA Multiunit Financing 

The U.S. Department of Veterans Affairs or V.A. offers loans that do not have a minimum credit score requirement or down payment needs. Active-duty service members, veterans, and their spouses who qualify for this loan can use V.A. loans for purchasing a property with about seven units along with one unit dedicated to business. An important point here is that the borrower must reside in one of the property units they buy. 

F.H.A. Multiunit Financing 

The Federal Housing Apartment or F.H.A. offers attractive loans that do not require substantial down payments or high credit scores. Individuals can qualify for F.H.A. multiunit financing even with a credit score below 620. However, for an F.H.A. multiunit financing loan, you need to reside at the property for a minimum duration of 12 months. 

Advantages of Investment Property Mortgages

A Great Return-on-Investment

Unlike the risky, highly speculative investment options available in the market, real estate investing can be a relatively safe bet. If you have your finances planned and qualify for investment property mortgages, you will be able to establish a great return on investment capital. After paying the monthly mortgage, you will be left with profits that provide you with a generous income. With a prompt repayment structure, you will end up repaying your loan, owning your property, and gaining substantial revenue from your investment property. 

Property Equity

If you decide to sell your property at any time, you can leverage the equity earned through payments to earn an attractive return on investment. As the borrower makes monthly mortgage payments, they head towards paying down the outstanding principal. This allows you to own more equity each month and to ultimately pay off the entire property. 

Disadvantages of Investment Property Mortgages

Property devaluation is an issue that you will have to handle throughout your mortgage repayment period. If your goal is to flip the property, there is always a possibility that the property’s value decreases due to various geographic or demographic factors before you can resell it. However, there are often favorable odds of making a profit as the current housing market tends towards growth over time. If you rent out the property devaluation is a bit less of a concern.

 As you step into the market to seek an investment property mortgage, you will find numerous options. It is advisable to do comprehensive research that takes into account available mortgage plans, repayment schedules, and your personal financial situation. You can always contact a professional consultant to guide you through the process. Investment property mortgages are a smart option for those who wish to build a great investment portfolio for their future.

Want to learn more about investment mortgages? Reach out to an Astar loan officer today! Email info@astarteam.com or call 888-ASTAR-11 (888-278-2711) to start the loan application process.

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