Many individuals purchase rental homes as a way to diversify their investments. Over time, the money they collect from tenants can help them save for their futures. Most of these homeowners take out loans to pay for the initial property acquisition, similar to a residential mortgage. 

You might also be considering a similar approach to investment. So, at Titan Funding, we want you to better understand rental property loans and how they work, which is why we’ve put together this article.

What Are Rental Property Loans?

Rental property loans are funds that individuals borrow to purchase investment properties. These loans allow them to cover the up-front cost of the property, after which they pay back the money they’ve borrowed. These loans are very similar to the mortgages people take out to buy homes.

Since borrowers are often less invested in rental properties than homeowners are in their houses, financial institutions often view rental property loans as riskier. This means they require larger down payments to process and usually involve higher interest rates. Also, to take out a rental property loan, borrowers need a good credit score, a down payment of around 25% of the property’s value, and cash to cover six months of payments. These requirements may be slightly different depending on the lender.

What’s more, there are many different ways borrowers can secure funding for rental property purchases. In the following sections, we describe seven of the most common rental property loans.

Contact Us for Advice About Rental Property Loans

Private Money Loans

Private money loans are funds one individual or group offer to another without mediation from a financial institution. In the rental property niche, experienced real estate investors are the most likely private party to offer private money loans. Their expertise allows them to spot potentially lucrative ventures, and they may provide funding to borrowers who pursue promising investments.

Since these loans are private, the lender is free to set the conditions. This freedom can benefit borrowers since interest rates may be more flexible. In many cases, lenders will take a share of the future profits from the rental property in exchange for lower rates.

Conventional Loans

As their name suggests, conventional loans are some of the most common borrowing mechanisms that investors use. These loans may also be referred to as mortgages and are offered by banks and credit unions. While interest rates and down payments are less flexible than with private loans, they can be reasonable for individuals with good credit scores. Nonetheless, if you already have one or more mortgages, it’s important to check your bank’s lending limit to see if you’re eligible.

Home Equity Line of Credit (HELOC)

Investors often use equity from their existing properties to pay for new investments. These arrangements are called home equity lines of credit or home equity loans. If you already have one or more properties, you can consider borrowing against them to make a down payment on a new rental property. These loans can be useful but often have higher interest rates and fees than traditional loans’.

If you choose to take out a HELOC, it will act as a line of credit with the other property as collateral. You can borrow from it at any time and repay it on a monthly basis like a credit card. Home equity loans are slightly different, though, and involve borrowing a lump sum to be repaid by a certain date. It’s important to know that you won’t be able to borrow 100% of the other property’s equity, with most loans limited to 75-80% of the total equity value.

Seller Financing

Seller financing is a unique lending arrangement in which the owner of a property provides loans to the new buyer. This is only possible if the individual owns the property outright or has very little outstanding debt. In this arrangement, the lender will receive the sales profits slowly over months or years instead of in a single lump sum. Despite this, seller financing can benefit the lender in a few ways, including generating interest revenue and allowing capital gains taxes to be spread out.

Federal Housing Administration (FHA) Loans

The Federal Housing Administration is a government agency that insures mortgages offered by private lenders. The primary goal of the FHA is to encourage lending by protecting lenders from loss. Basically, FHA loans are private loans guaranteed by the FHA. FHA loans may be offered by mortgage brokers or traditional lenders, such as banks. These loans are often sought after by individuals with lower credit scores as they have more lenient conditions and require smaller down payments.

Veterans Affairs (VA) Loans

The United States Department of Veteran’s Affairs is a government agency that provides medical care to military veterans. The agency also offers a wide variety of other benefits, including educational assistance, life insurance, disability compensation, and home loans. But to be eligible for a VA-backed loan, you must be an active duty member of the military, a veteran, or a service member’s spouse.

VA loans sometimes have advantages not available in other financial arrangements. For example, a borrower may purchase up to seven units if at least one of them is their primary residence. Additionally, there is no minimum down payment percentage or interest rate.

Blanket Loans

Blanket loans are financing mechanisms that cover multiple properties. They are a popular choice for investors who want to fund more than one property purchase without taking out multiple loans. Borrowers can seek blanket loans from private lenders or mortgage brokers, though interest rates and down payments vary markedly by lender. Most blanket loans use a system in which each property included in the loan acts as collateral for the others. This is called cross-collateralization.

That’s a quick review of the different types of rental property loans and how they work. At Titan Funding, we offer loans for a wide variety of purposes, and we’d love to hear from you if you’re looking for a rental property loan in Florida. You can contact our team at your convenience to set up a consultation and to learn more about the lending process. You can also explore our lending processes online. Good luck in your endeavors, and we hope to hear from you soon.

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