5 Tips for Deciding Which Investment Loan Is the Best Fit (2024)

The right type of investment loan for you depends on the property you want to buy as well as your personal goals and financial standing.

Investing in real estate is an expensive undertaking. Even experienced investors take out loans when purchasing an investment property.

An investment loan is any loan borrowed to cover the costs of an investment property. Although the right investment loan for you may be a traditional 15- to 30-year mortgage, it could also be different from the mortgage you used to invest in your first home. For example, investment loans also include short-term mortgages for investors who want to buy and flip property.

Investment property loans may need to be more flexible than a traditional home mortgage because some real estate investors take on additional lines of credit to give themselves increased financial freedom. Using rotating lines of credit, however, could end up costing more in interest than long-term home loans.

Financing your investment correctly will determine your return. Start by understanding what you need from an investment loan and compare that to your current financial standing. Once you have an idea of the type of loan you’ll need, look for lenders who specialize in that area of real estate investment. Research third-party lender reviews and consult with a trusted adviser, such as your real estate agent.

Here are five tips to find the right loan for your investment property.

1. Understand Your Investment Loan Options

Borrowers should understand their options as they begin to consider properties and investment loans. The type of loan investors qualify for will impact their ability to turn a profit from a real estate investment. Take inventory of your desired loan terms, paying special attention to the following:

• Loan coverage area. Does the loan cover the region where an investor wants to purchase a property?
• Loan amount. How much will an investor be able to borrow?
• Loan type. Most real estate investors use conventional loans, but some consider Federal Housing Administration (FHA) loans because of their low down-payment options.
• Loan term. How long will an investor have to pay back the loan?
• Interest rate. Is the rate fixed or variable?

Experienced real estate investors should also consider the specific costs they need the loan to cover. For example, a real estate investor who wants to buy an apartment building may be able to take out a different type of loan for a larger amount.

2. Determine Whether You Qualify for Special Programs

Special loan programs can help you save on upfront costs for your investment property and make it more lucrative in the long run. These loan programs can take the form of credits or reduced interest rates.

The federal government offers special loan programs through the office of Veterans Affairs for U.S. military veterans, active duty service members, and surviving spouses. The U.S. Department of Agriculture also offers special programs for low- to middle-income borrowers located in rural areas.

Many states also offer loan assistance programs for first-time homebuyers and other incentives to encourage investment. Research these local programs to see if you qualify for assistance that will ease the cash burden of financing your investment property.

3. Examine Your Personal Finances

Your personal finances will determine your loan eligibility and what kind of investment property you can afford. Consider the following factors before applying for a loan to expand your real estate investment portfolio:

• Your household income
• Your debt-to-income ratio
• Your on-hand cash for a down payment, closing costs, and other expenses
• Your credit score

What other expenses are you expecting for this investment? Will you need mortgage insurance? Will you pay full commission to your real estate agent?

Evaluating your personal finances will make it easier to narrow down your search for a loan provider once you’ve chosen a property to invest in.

4. Narrow Your List of Potential Loan Vendors

When you’re ready to start evaluating lenders, consider how your personal finances measure up to the types of loans and interest rates offered. Some lenders will only offer specific loans, and others won’t accept borrowers without a certain amount of cash or a certain credit score.

If you have cash on hand but a low credit score, start by looking at FHA loan providers who lend to borrowers building credit.

Consider your short- and long-term financial plans before gathering estimates from potential lenders. Thinking about your financial goals holistically will help you avoid wading through estimates for loans that may not suit your needs.

An experienced real estate agent can also weigh in on the loan process. Your agent may not be a financial expert, but he or she may be able to recommend a lender or offer guidance on what type of loan could suit your needs.

5. Compare Loan Estimates

The final step in the loan evaluation process is to compare estimates you’ve received online or from lending agents. These estimates aren’t final offers, but they are tools you can use to evaluate loan terms side by side before making a decision.

Read reviews of lending institutions as you decide on a type of loan and lender. Third-party reviews can help you judge the lender’s customer service approach and alert you of any operational red flags.

Finally, consider your desired working relationship with your lender. If you want a more traditional borrowing experience that takes more time to close, a conventional lender may be your best option. If you want a faster flow of cash, private lenders may be a better fit.