Securing an investment loan can be overwhelming, given the many available options and their varying requirements. In this article, we will look at the various investment property loans to help you determine which one suits you best.
Investment Property Loan Defined
An Investment property loan is one you borrow to buy property for income generation.
Best Investment Property Loans
Below are the recommended investment property loans in 2024:
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Debt Service Coverage Ratio (DSCR) is a metric that lenders use to gauge if a borrower can repay a mortgage through income generated by their property. When the DSCR ratio is determined as 1, it would mean that the borrower’s property will generate enough revenue to offset monthly loan repayments. On the other hand, if the DSCR ratio is below 1, it would suggest that the borrower’s property won’t generate enough income to make monthly repayments.
Requirements for Securing a DSCR Loan
- A DSCR ratio of 1 or more is required.
- The loan amount must not exceed 80% of the borrower’s property value.
- A borrower must have a credit score of 630 or higher to secure a DSCR loan.
- A borrower is required to have the ability to pay a down payment of 25% on the property.
- Lenders of DSCR loans only focus on the property’s revenue and not the borrower’s income. This allows loans to be processed quickly.
- Since the borrower’s income is not considered, one can secure multiple DSCR loans as long the properties’ revenue can cover monthly loan repayments.
- DSCR loans attract higher interest rates than most loans.
This type of loan is usually obtained after a borrower uses their assets like inventory, real estate, equipment, and accounts receivable as collateral. In most cases, individuals or companies with significant assets at their disposal secure asset-based loans.
Requirements for Securing an Asset-Backed Loan
- A borrower must commit substantial assets as collateral. Moreover, lenders of asset-based loans may require borrowers to hold certain insurance policies like liability or property insurance to safeguard collateral.
- Borrowers should have a good credit score.
- Borrower must have the ability to make a 25% down payment.
- Asset-based loans are easier to secure than most traditional loans.
- Such loans are approved quickly since collateral acts as a guarantee for the mortgage.
- If a borrower defaults, the lender sells the collateral.
- Sometimes lenders require borrowers to obtain insurance policies to shield collateral against damage or loss.
- Asset-based loans have high interest rates.
These are the most popular investment property loans among real estate investors who have enough money to make down payments. When looking to secure a conventional mortgage, you need to compare multiple lenders to get the best loan terms.
Requirements for Securing a Conventional Mortgage
- A borrower’s credit score should be 620 or more to be considered for a conventional mortgage.
- A 10%-20% down payment must be made to secure this loan.
- If you have a credit score of more than 740, you are likely to obtain a Conventional loan at favorable terms, including a low interest rate.
- Conventional loans come with varying repayment periods, which allows borrowers to select what suits them best.
- Lenders of conventional mortgages impose strict requirements for credit score, income, and debt-to-income, making it difficult for many to qualify.
Lenders of no-doc loans don’t require borrowers to submit documents containing details like employment history, assets, and income. They only assess a borrower’s creditworthiness using bank statements.
Requirements for Securing a No-Doc Mortgages
- A borrower’s credit score must be 700 or higher to obtain a no-doc loan.
- The borrower is required to make a down payment of 35%.
- A no-doc loan is ideal for real estate investors without enough documentation to secure other loans.
- Lenders impose a high down payment requirement.
- The interest rates charged on no-doc loans are considerably higher than most loans.
- Most borrowers may fail to obtain the loan due to the high credit score required.