The 8 Types of Rental Property Loans

8 types of rental property loans

While creating a portfolio of rental property is an excellent way to get financially independent, not everyone has cash available to purchase real estate. Several personal finance experts, such as Dave Ramsey, suggest you save up and purchase investment properties. However, this is not a viable option for a lot of people who wish to buy properties and put them up for rent. This is where rental property loans can help you out. They allow investors such as yourself to purchase real estate and create a source of income.

In this article, we talk about the eight types of rental property loans you can get. Continue reading to learn more.

1. Conventional Loan

A conventional loan is offered by lenders and mortgage brokers such as credit unions or banks. These loans are guaranteed by Fannie Mae or Freddie Mac and need to meet government-sponsored enterprise guidelines.

If your credit score is high, you can benefit from fairly low interest fees and rates. Moreover, the down payments might be lower than 25%. Nevertheless, the exact percentage depends on which rental property you wish to purchase.

2. FHA Multi-Unit Financing

The multi-family loan is guaranteed by the Federal Housing Administration and offered by mortgage brokers as well as traditional lenders. It is good for purchases, new construction, and significant property repair.

The credit score and down payment requirements for FHA multi-unit financing are much lower than that of conventional loans. The good thing about this rental property loan is that you can use existing property rental income to help you qualify. However, according to the loan conditions, you need to live in one of the units for twelve months or more.

3. Veteran Affairs Multi-Unit Financing

The Veteran Affairs loan is guaranteed by the US Department of Veterans Affairs and is offered by traditional lenders and mortgage brokers. You have to be an active veteran, a military member, or an eligible spouse to secure this loan. One reason why it is the best property loan is that it doesn’t have any credit score or down payment requirements.

As per federal laws, the house you purchase with a Veteran Affairs loan needs to be your primary residence. Keep in mind that the terms of this loan prevent you from using a Veteran Affairs home loan for rental property loans. This means you cannot invest in a rental property such as an Airbnb, bed-and-breakfast, or vacation rental. However, you can buy seven units and rent out six while living in one of the units.

4. Blanket Loan

Blanker loans are excellent rental property loans for investors who wish to buy multiple rental homes and finance them using just one loan or refinance a portfolio of existing rental properties. Private lenders and mortgage brokers can offer a blanket loan for all kinds of income-generating properties.

The credit score, interest rate, down payment, and loan period vary from one lender to another. In fact, the terms of the loan can usually be tailored to suit the requirements of both the lender and the borrower. Note that the rental homes or buildings in a blanket loan are typically cross-collateralized. This means that every individual property works as collateral for other properties.

5. Portfolio Loans

Another type of rental property loan is a portfolio loan. You can get a portfolio loan if you wish to purchase a single or multiple rental assets using just one lender. Once you qualify for a portfolio loan from a mortgage broker or private lender, you can work with the lender to set the credit score, interest rate, down payment, etc. Thus, there’s a high degree of flexibility.

The borrowing criteria are not as stringent as it is for other kinds of rental loans. You need to know that because of this, you might have to pay balloon payments, prepayment penalties, along with loftier fees. A balloon payment is a large payment that needs to be made at the conclusion of the loan period.

6. Private Money Loans

Instead of a credit union or a bank, a private loan is offered by an individual or a private lending company that makes loans to real estate investors. These loans are an excellent source for financing future investments based on existing property performance.

Even though private loans have to follow certain state and federal laws, they offer higher flexibility and are less controlled than a federal or bank loan. Private loans can be tailored. In fact, some private lenders might participate in the project in return for lower interest fees or rates.

7. Home Equity Line of Credit

A home equity line of credit (HELOC) is an option for getting money out of an existing property and using it to make a down payment for a rental property loan. This is a type of waterfall strategy where investors use the equity and cash flow from their existing rental properties to finance future purchases.

This rental property loan works as a line of credit that’s secured by the equity in an existing property that an investor can use at any point in time and make monthly payments to repay the loan, just as a credit card operates.

8. Seller Financing

A seller financing loan is provided by sellers who own real estate free and clear. It’s an excellent pick for buyers who plan to invest when the real estate market is in a down cycle or are looking for properties that are tough to obtain for conventional financing.

The terms of the loan can be fully personalized based on the seller’s and buyer’s needs.

Last Few Words

To have a successful real estate journey, you need to have the right financing options in place. Even though there are several kinds of rental property loans, you need to understand which options are available, as choosing the wrong one can prevent you from closing the deal. Thus, make sure you contact a dependable lending partner to understand your options and get the funding you require to expand your rental property business.