Types of Rental Property Loans and How Each Works

Buying a house can be expensive, especially if there’s a garden lying around somewhere. 

If you don’t have enough cash, your dream of having “something to call your own” would be nearly impossible. 

Or, so we used to think a few years ago.

Now, you can simply take a rental property loan to buy or rent a house without going through any hassle at all, though be sure to budget correctly to ensure you can pay your loan back safely and don’t default. 

How Does A Rental Property Loan Work?

In essence, a loan for a residential rental house usually comes with a higher interest rate. In addition, you have to provide a larger down payment as well. 

Nonetheless, you can pay the whole amount for quite a long period (i.e., 30 years). Thus, putting up an accurate and exact pro-forma for your cash flow will be much easier.

But why does the interest rate tend to be higher in this aspect?

Well, if we’re being honest, most lenders tend to view the prospect of investing in a property as a risky business. That’s because in case the investment doesn’t go as planned, the person who borrowed the money will lose everything.

When you’re taking out a property loan, you’ll typically need to –

  • Have a credit score (minimum) of 620.
  • Have a maximum DTI ratio of 36%.
  • Provide a down payment of at least 25%.
  • Deal with a loan fee and interest rate that’s slightly higher than usual.

Finally, you may also need to have an adequate amount of money to cover your mortgage payment for at least six months.

Categories Of Rental Property Loans

When categorizing the aspects of a rental property loan, we can divide it into six different parts. Here’s what you need to know about them.

Option – 1: Conventional Loan

Also known as a conforming loan, a conventional loan is usually offered by a traditional cash lender or a mortgage broker. It has the lowest amount of fee deduction and interest rate if you have an excellent credit score (above 620).

The overall down payment requirement of the same will be somewhere between 15% to 25%. You can also use it to pay around ten mortgages.

Option – 2: VA Multi-Unit Financing 

A VA multi-unit financing plan is usually offered by the Veterans Affairs Department of the USA. But, you can get it from both a traditional lender and a mortgage broker. And, it can definitely be acquired by a veteran, an active-duty service member, and their eligible spouse.

In this case, you don’t have to offer any certification of your credit score or down payment. Also, with it, you can purchase around seven horses and reside in one of them.

Option – 3: FHA Multi-Unit Financing 

A multi-family loan, in essence, is backed by the FHA or Federal Housing Administration. Again, you can acquire it from both a conventional money lender and a mortgage broker. It’s excellent for construction, making purchases, and doing property rehabilitation.

The credit score requirement and the down payment of the financing will be much lower than a conventional loan procedure. But, you must reside in at least one house in this aspect, again.

Option – 4: Portfolio Loan

With a portfolio loan, you’ll have to finance a single or more than one rental property with a single lender. The loan amount will be held by the lender and, therefore, can be an excellent option for creative financing.

It’s a lot more flexible, too, as you can customize the interest rate, credit score, and loan term to fit your requirement. However, it may lead to offering a high amount of fee and balloon payments and prepayment penalties.

Option – 5: Private Money Loan

A private money loan, as the name implies, will be provided by a private investor or hard money lender. It can be an excellent source of funding on the basis of your property’s performance. The fees and the loan terms can be customized individually for each investor. Hard money loans in particular offer extremely fast turnaround times.

In some cases, a private lender can also partake in the project in exchange for a small amount of fee or interest rate.

Choose The Right Option!

Does the prospect of choosing the right option seem too challenging to you? We understand. After all, there are too many alternatives available out there. 

You simply cannot choose one of them blindly. You have to weigh their benefits properly and then select the most suitable option for you.

However, if you’re unable to do so, make sure to let us know in the comment section below. We’ll help you out in any way we can.

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