• Investment property loan terms are primarily based on the borrower’s financial viability and the property’s performance
• Options include Non-QM Specialty Programs, DSCR Loans, Interest Only loans, Jumbo Non-QM loans, and Multifamily loans
• BRRRR method involves buying, rehabbing, renting, refinancing, and repeating to build wealth
• DSCR loans consider rental income to cover mortgage payments and expenses
• Financing an Airbnb: traditional mortgage loans or specialized non-QM financing

Investing in real estate can bring wealth and financial freedom. However, finding the right financing to help achieve this can be both challenging and time-consuming. Filtering through the mortgage programs and meeting strict lender requirements can be a daunting task. So, here’s how to find the best rates and loan types for your real estate investment, with insights and tips to help.

Is it Hard to Finance an Investment Property?

While it can be more difficult to qualify for a loan for an investment property compared to a primary residence, consider these factors to impact your loan terms for an investment property:

• Credit Score: Financing investment properties typically require a higher score to get the best rates, but, some lenders will accept scores below 600. A higher score equals better loan terms.
• Down Payment: Most lenders require 20% down, but this can go as low as 10% based on credit score, property type, and loan program.
• Debt-to-Income Ratio (DTI): Lenders assess qualifying income and revolving debts to ensure you can cover monthly mortgage payments. A DTI of 36% or less is recommended, but some allow up to 50%.
• Rental Income: Some specialty programs allow up to 100% of rental income as qualifying income, while conventional loans only count 75%.
• Cash Reserves: Expect to have at least six months’ worth of mortgage payments in cash reserves to cover unexpected expenses or vacancies.

Can I Put Less Than 20% Down on an Investment Property?

Investment property loans often require higher down payments than primary residences. However, there are loan programs available that allow for a lower down payment. Although they may come with slightly higher rates, they are still worth considering:

• Non-QM / Portfolio: Direct lenders use common sense underwriting for borrowers who don’t meet traditional loan guidelines.
• Business Purpose Loans: Designed for investors buying properties for rental income or investment.
• Multifamily Loans: Designed for investors buying properties with five or more units.
• Private Lending: Borrow money from an individual or company instead of a traditional lender.

What Type of Loan Should You Get for an Investment Property?

When evaluating loan options for investment properties, consider your personal finances, investment goals, and expected cash flow. Here are some types of loans to consider:

• Non-QM Specialty Programs: offer flexible underwriting standards, lower down payments, and different loan types (e.g., fix and flip, fix and hold, bank statement loans).
• DSCR Loans: suitable for investors focusing on cash flow, as these loans use current leases or expected rental income to qualify and don’t require borrower income verification.
• Interest Only: can lower monthly payments by paying only interest for a set period (typically 5 or 10 years).
• Jumbo Non-QM: ideal for high-value properties, offering flexible underwriting and cash-out refinancing.
• Multifamily: loans available for properties with 5-24 units, requiring 6 months of reserves and a minimum DSCR of 1.0.

Are Mortgage Interest Rates Higher for Investment Properties?

Real estate investors often pay more in mortgage rates for investment properties than primary homes due to the higher risk. However, there are loan programs that offer competitive rates for investors. For instance, interest-only loans have lower interest rates because the borrower pays only interest for a set period. Non-QM specialty programs and business purpose loans are also available for investors. These options are designed for investors with various credit scores and reserve tiers, providing additional options to benefit from competitive rates. As a result, investors have several options for securing attractive rates and finding the right financing solution for their investment properties.

What is the BRRRR Method?

The BRRRR strategy is a profitable real estate investment technique that involves buying a distressed property, renovating it to increase its value, renting it out for income, and refinancing the property to repeat the process. Here are the steps:

• Buy: Locate a property that is undervalued and has the potential to increase in value through repairs and upgrades.
• Rehab: Conduct repairs and upgrades to increase the property’s value and rental income.
• Rent: Generate income by renting out the property.
• Refinance: Finalize a cash-out refinance to extract invested cash and create positive cash flow.
• Repeat: Use the equity from the cash-out refinance to buy another property and repeat the process.

However, while the BRRRR technique can be an effective strategy for real estate investors looking to generate passive income and accumulate wealth, it requires careful planning, execution, and knowledge of the local market.

What is a DSCR Loan and How Does it Work?

Lenders approve loans based on a property’s DSCR. This type of loan evaluates a property’s rental income, not the borrower’s income, to determine if it can cover expenses and mortgage payments. To qualify for a DSCR loan, consider the following factors:

• DSCR Ratio: Divide the net operating income by the annual mortgage payment to determine a higher DSCR, which indicates the property generates enough income to cover expenses.
• Property Income: The rental income should cover mortgage payments and expenses with a minimum DSCR of 1.0 preferred by lenders. A lower DSCR may be acceptable with a higher interest rate and a creditworthy borrower.
• Creditworthiness: Lenders check credit score, debt-to-income ratio, and other financial factors. A minimum credit score of 575 with compensating factors is acceptable.
• Loan Terms: DSCR loans may have shorter terms, ranging from 3-10 years, but up to 30 years with a pre-payment penalty.

How Can I Finance an Airbnb?

You can finance an Airbnb or short-term rental in two ways. One option is to obtain a traditional mortgage loan and then rent the property out on Airbnb. This requires a low down payment, as long as the property is your primary residence. The other option is to use specialized non-QM financing designed for short-term rental properties, which allows investors to qualify based on cash flow. To qualify for this loan, you need documented proof of performance, at least a 575 credit score, and up to 80% LTV. If you’re purchasing a new property without short-term rental income, you can use estimated rent for traditional rentals instead.

Wrapping Up

Invest in real estate to generate passive income and build wealth. McLaughlin Mortgage provides access to specialty, non-QM, and DSCR investment loan programs to help you find the right financing solutions for your investment goals. With our extensive network of investors, we offer competitive rates and can guide you through the lending process to secure the best loan options available.

Factors such as credit score, loan-to-value, and property type significantly affect interest rates and loan terms. That’s why it’s crucial to work with an experienced mortgage broker like McLaughlin Mortgage to achieve your investment goals. Our team will assist you in finding the best financing solution with the lowest mortgage rates possible. Contact us now to learn more about our services.

The Loan Process

Here’s what to expect during the loan process:

• Verify your loan eligibility
• Receive options based on your unique criteria and scenario
• Compare mortgage interest rates and terms from our lender network
• Choose the offer that best fits your needs

• Bridge Loans
• 12-Month Bank Statement
• 1099 Only
• Condotel
• Fix & Flip Loans
• Non-Warrantable Condos