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8 Types of Rental Property Loans and The Pros/Cons of Each

You can diversify your investment portfolio with more than just stocks and bonds. Rental properties are a lucrative venture with high return on investment (ROI) potential.

Finding competitive investment property loan rates and other favorable loan terms is different from securing a conventional mortgage. Each loan type offers its own advantages and disadvantages for investment property.

Our guide to the eight types of rental property loans will help you maximize your ROI and find the right loan for you.

1. Veterans affairs (VA) home loan

A veterans home loan comes with many benefits. Because it was designed to provide military members and veterans with housing during/after service, it offers terms with:

  • No down payment required (by VA, some lenders may require one)
  • Low interest rates
  • Low closing costs
  • No property insurance required

You may even qualify for property tax reductions depending on state eligibility.

However, using a VA home loan for rental property is a bit complex. The house you purchase with a VA loan must be your primary residence, according to federal laws.

You cannot use a VA home loan for rental property loans, even as an AirBnB, vacation rental, or bed-and-breakfast. The loan terms will legally prevent you from doing this.

You can purchase a multi-unit house and rent out the other units, so long as you occupy at least one unit.

You can also refinance an existing loan with VA Streamline Refinance. This option doesn’t require you to live in the residence after refinancing, if it was already your primary residence before applying.

2. Federal housing assistance (FHA) loan

Like the VA home loan, the FHA home loan was designed so at-risk people have more housing options. Term benefits include:

  • Lower down payment required
  • Lower qualifying credit scores required
  • More flexible debt-to-income ratio requirements
  • Lower monthly mortgage insurance rates

The FHA loan also has residency requirements. You can still rent out a multi-unit home if you live in one of the units.

But at least one person on the loan must use it as their primary (not second) home. For an FHA loan, this residency requirement is only one year.

Owners can then use it as an investment property after those 12 months. And if you want to refinance for better investment property loan rates, you can use an FHA Streamline Loan.

3. Conventional loan

A conventional loan is what most people use to secure a home mortgage through a bank or credit union. Its requirements are set by Fannie Mae and Freddie Mac.

The loan terms are more flexible than the VA and FHA, who have strict qualifications on who can apply, the home they can buy, and what they can use it for.

Using a conventional loan for investment property is different from residential property. Compared to a residential property, an investment property loan may have:

  • Higher interest rates
  • Higher down payments
  • Prepayment penalties
  • Higher reserve requirements
  • Higher credit score requirements
  • Stricter income and debt-to-income requirements

Although it has higher costs than an FHA, VA, or conventional residential loan, conventional loans generally offer better investment property rates than a blanket loan or private money loan.

4. Blanket mortgage loan

A blanket mortgage loan is used to purchase multiple properties under the same investment loan terms. This is especially useful for:

  • Real estate investors
  • Real estate developers
  • Commercial and residential landlords
  • Flipping (improving for higher resale value) multiple houses
  • Multi-location business owners

Each of the multiple investment properties is cross-collateral for the loan. But investors can sell off individual properties without closing the entire loan.

Blanket loans usually have comparably higher investment property loan rates and down payments compared to conventional loans. But you’ll eliminate multiple closing costs and interest payments.

5. Portfolio loan

A portfolio loan is similar to a blanket loan. Multiple properties can be held by the same lender. However, this lender will not sell the rental property loans to the secondary market.  Instead the lender holds the loan in their own investment portfolio.  Hence, the name portfolio loan.

Because the lender holds onto the loan, they can offer more flexible terms than a conventional or blanket loan. This includes:

  • Easier to qualify
  • Loans terms tailored to the borrower
  • Optional mortgage insurance
  • Less property condition requirements

Because the lender is assuming more risk by holding onto the loan themselves, they may try to buffer that risk with higher investment property loan rates or higher fees and penalties.

6. Home equity line of credit (HELOC) loan

If you already own a home, you can build equity. Equity is the market value of the property versus the remaining amount of mortgage loan to repay.

The greater the difference between the property value and the remaining loan, the greater the equity.

Equity can be leveraged to either secure a second loan or used as a line of credit. The HELOC lender secures this revolving credit line by using your equity as collateral.

Because you’re getting revolving credit instead of a one-time loan, the eligibility requirements for a HELOC are higher. You’ll need:

  • Excellent credit
  • High income
  • High loan-to-ratio value
  • Large reserve funds

The terms may also have higher investment property loan rates. A rental property for sale is assumed to have a higher risk than a primary residence sale because it relies on tenant occupancy and other factors to make the credit payments.

7. Private loan

A private loan is issued by a private company or individual instead of a bank, credit union, or federal institution. Like a portfolio loan, this offers greater flexibility in loan terms and who qualifies.

While private loans still need to follow certain federal and state laws, they are less regulated than a bank or federal loan. This means borrowers assume more risk from the loan and the lender.

8. Owner-financed loan

Homeowners who have paid off most or all of their mortgage can sell their property privately as well. The seller sets the terms of the loan, which can forego items like closing costs, credit requirements, and appraisals.

The loan process is quicker and easier than applying for a loan through a financial institution. Both the seller and the borrower assume high risk, however.

If no title insurance is obtained, the property title could have mortgages, outstanding taxes, and liens that end up the buyer’s responsibility to repay. It could also have property line disputes and erroneous square footage listings that affect its value as an investment property.

Rental property loans for the smart investor

Whether you’re flipping or renting your investment property, the best loan for you is out there. Our rental property loans guide will help you find the best loan to maximize your ROI and manage your investments.

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