Three Steps To Investment Property Financing

It's no secret that real estate prices throughout much of the United States have fallen steeply compared to their highs in the middle of the last decade. When you couple that with the tightening of the credit markets and stricter lending guidelines, now may be a good time to take a second look at purchasing rental properties. If you are fortunate to be able to qualify for financing, there are some great opportunities to capitalize upon. Below are some steps to take to prepare for your financing:

1. Choose a Mortgage Company - Unless you plan on paying for the investment property in cash, you'll need to seek financing assistance in the form of a mortgage. Most mortgage companies in the United States offer investment property loan programs, though their underwriting guidelines will vary from lender to lender. Certain mortgage companies broker loans. This means that they act as middlemen and shop between lenders to find the solution that benefits the consumers (and often themselves). Brokers get compensated by the borrower in the form of origination fees or by the lender (typically as yield spread premium) for helping to place the loan. Other companies are direct or correspondent lenders and they either portfolio loans (hold onto them themselves) or they sell the loans to agencies such as Fannie Mae or Freddie Mac, or other large lenders. When weighing offers from competing mortgage companies, be sure focus your attention on the 800 section of the Good Faith Estimate where the lenders and/or brokers fees are disclosed. There can be benefits to working with both types of entities. With a broker, they may have greater flexibility to shop between lenders for competitive pricing but they may face more limitations on streamlining the underwriting process as underwriters are typically not in the broker's physical location. A lender on the other hand may not have the product flexibility of a broker but your lending professional may be able to walk down the hall to speak directly with the person reviewing the file.

2. Select a Rental Property Loan Program - In today's market it is not uncommon for lenders to ask for a 20-30% down payment to finance a purchase of an investment property. This requirement may become even larger with higher loan amounts, low credit scores, types of properties (i.e. a condo) or multiple other variables. Mortgage programs typically include fixed rate and adjustable rate loans with the lionshare being fixed rate mortgages. Investment property pricing adjustments for ARM (adjustable rate mortgage) products can make these loans a tough sell for many buyers as they may need to pay more points upfront in order to qualify for lower interest rates which make the additional risk of an ARM worthwhile. Be sure to consult with a licensed mortgage professional to explore all of your options and to weigh the pros and cons of the various financing products.

3. Find the Right Real Estate Professional - There are plenty of real estate professionals in most markets to choose from. The task is finding one that understands that you want to own a rental property to generate income and/or build equity. It's an investment and business decision and there are some real estate agents who have more experience evaluating the numbers and finding properties with the best potential for meeting your investment goals. It's easy to feel "dreamy" over a nice looking two bedroom single family home in a quiet neighborhood. But is it a better investment than the triplex a block from the college that's a little rough around the edges? Work with your agent to define your goals before you walk out of their office to look at properties.

About the author:
Jared Cooper is a marketing professional who helps consumers connect with web sites offering home finance information including on resources on rental property financing.