Investment property loans are used in the acquisition of properties to be used for income. This means that when a borrower plans to purchase a property and not live on it and instead has the intention of earning an income through renting it out, selling it in the future, or operating a business. The properties may include one-to-four residential units, apartments, and commercial buildings.
So, how do investment property loans differ from residential ones? First, investment property loans have shorter repayment terms which range from one to twenty years. For example, a lender may take an investment property loan with an amortization period of 20 years, he may opt to make the payments in five years and then make a one-time payment at the end. There might be some risks though since credit markets are volatile. But lenders may also prepare a backup plan like applying for a Flex-Perm loan with Marques Direct, which is amortized for up to 30 years.
Another difference is the loan-to-value (LTV) ratios. The LTV refers to the ratio between the value of your property and the amount you’ve mortgaged it in. Residential properties are allowed with up to 100 percent in their LTVs, on the other hand, investment property loans fall into the 60-80 percent range. Having a lower LTV equates to a lower interest rate.
Investment property loans are more concerned with a property’s value and how it can generate income. With this, there will be lesser personal financial requirements a borrower will submit before being approved. This then is perfect for self-employed and small business owners who plan to invest but find it difficult to meet the requirement otherwise needed for a residential property loan.
Different lenders process investment property loans differently. Banks and wholesale lenders, issue loans and then sell them to a third party like Fannie Mae, Freddie Mac, or the FHA. To have their loans purchased or guaranteed by these companies, lenders must adhere to their tight underwriting requirements. Furthermore, the Federal Reserve imposes lending concentration limitations on banks, limiting their exposure to investment property loans. Banks respond by offering investment property loans only to their most valuable customers.
Direct portfolio lenders, on the other hand, keep, maintain, and service their portfolio of investment property loans rather than selling them in the secondary mortgage market. They generate money from the interest between their interest-earning assets and interest paid to their mortgage portfolios. With this, their restrictions are not as strict as compared to banks and they can set their criteria as to who can qualify or not.
The bottom line is that in investment property loans, an investor purchases a property and leases it out. They earn from the rent paid by tenants and earn their ROI also when they decide to sell it in the future. As the basis for approval, lenders usually look at the value of the property and if it has an income-generating potential, add to that the creditworthiness of the applicant. Since banks have limitations, direct portfolio lenders offer more advantages as their requirements are not as stringent and they offer more flexibility.