The Pros and Cons of Investment Property Mortgages

By: , Contributor

Published on: Oct 26, 2019 | Updated on: Nov 23, 2019

Investment property mortgages are one of the many ways you can finance your next real estate purchase. Make sure you know the pros and cons before using one.

Investment property loans are just one of the many financing options you can utilize as a real estate investor. Designed specifically with investment purchases in mind, these loans typically allow for higher loan balances than traditional mortgage loans, and they also don’t have a primary residence requirement like FHA loans do. This means you’re not required to live on the property in order to qualify for the loan.You can also use multiple investment property loans if you’re working on building out a portfolio. With FHA and other loan programs, you’re typically limited to just one financed property at a time.

Cons of investment property mortgages

On the downside, investment property mortgages are also harder to come by. They require a higher credit score than other loan options, and they usually require a larger down payment too. In most cases, you can expect to put at least 25% to 30% down when using one of these loans.You’ll also need a lower debt-to-income ratio and more cash reserves to qualify for an investment property mortgage. Though these requirements vary by lender, you’ll likely need a minimum of six to 12 months of projected mortgage payments in the bank in order to be approved. Finally, investment property loans also come with higher interest rates. This is due to the greater risk of foreclosure they present to the lender.

Pros Cons
High loan balances Higher credit score and cash reserve requirements
Flexibility in size and type of real estate you can purchase Lower debt-to-income ratios required
Ability to finance multiple properties Higher interest rates

Other options for financing your investment

Investment property mortgages aren’t your only option if you’re looking to finance a real estate purchase. You can also look into:

  • Government-backed mortgages if you’re buying a property that’s four units or less and able to live there for the first year,
  • A HELOC or home equity loan if you already have a few properties to your name, or
  • Commercial or portfolio loans if you’ve got your eyes set on a large portfolio.

Make sure you consider all your options before choosing which type of loan to use for your investment.

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