Real estate investing can feel like an exciting adventure. When you take your time and find the right rental home, the investment might help you improve your monthly cash flow and generate extra income.
Yet qualifying for investment property mortgages may be more challenging than expected, especially if you’re a new investor. Many first-time real estate investors are surprised to learn that a 20% down payment on a rental property loan is considered normal.
A 20% down payment can be a sizable amount, depending upon the purchase price of the property. Imagine you want to buy a $500,000 multifamily dwelling. If the lender requires 20% down, you’d need to come up with $100,000 in cash to seal the deal.
High down payment requirements send many investors searching for more affordable ways to secure financing. And while lower down payment options on rental property loans can certainly be complicated (and risky), there are alternative solutions to consider.
Can I Buy an Investment Property with 10% Down?
A sizable down payment is standard when you take out an investment property mortgage. But you may be able to buy an investment property with as little as 10%, 3.5%, or even zero down.
Loan programs like HomeReady and Home Possible make purchasing an investment property with 10% down or less a possibility. But first, you’ll need to satisfy a lender’s approval criteria. In addition to more stringent credit score and cash reserve requirements, you may need to do the following:
- Become an owner-occupant and move into the property for a minimum of one year.
- Show proof of income high enough to qualify for the loan, but below the local median income.
Either loan may work for owner-occupied investment properties. But they’ll also appear on your personal credit reports with Equifax, TransUnion, and Experian. The mortgage could impact your credit for the good or for the bad, based upon how you manage the loan.
Fannie Mae’s HomeReady Loan Program
One option that can work well for buyers looking to purchase a home with a smaller down payment is Fannie Mae’s HomeReady Loan Program. Qualified buyers may be able to secure a fixed-rate mortgage for as little as 3% down.
The mortgage loan program is designed to help moderate to low-income borrowers with decent credit become homeowners. The HomeReady loan program may work well for owner-occupants who wish to rent out a portion of their home (or a multi-home unit) to help cover the cost of housing.
Here’s why the HomeReady program can be helpful to owner-occupant investors. The program lets borrowers include income from “accessory units and borders” for qualification purposes. Don’t earn enough income to satisfy the lender’s debt-to-income ratio requirements? The rent money you’ll collect on the property might push you over the top.
You’ll need to supply acceptable documentation for rental income to count on your loan application. Lenders may accept a lease or a Fannie Mae Single-Family Comparable Rent Schedule from the property appraiser as proof of the income source.
Freddie Mac’s Home Possible Loan Program
Freddie Mac’s Home Possible Mortgage offers low and moderate-income borrowers the opportunity to purchase a home with as little as 3%–5% down. If you wish to use the program to finance an investment property, you’ll need to live in the home (or at least a portion of a multi-unit property).
Again, your lender may be able to count rental income while calculating your debt-to-income ratio. But the rental income will need to satisfy Freddie Mac guidelines. For example, you’ll need to prove that your renter has lived with you for at least a year and plans to continue residing at the new residence.
Even with no credit scores, you may be able to qualify for a mortgage loan through the Home Possible program. But you may need to provide a larger down payment of 5% in this situation.
Common Loans As an Owner-Occupant
Being an owner-occupant can be an affordable way to become a real estate investor — especially in urban areas and parts of the country where the cost of homeownership is high. Instead of trying to come up with 20% down, you may be able to purchase a property for much less out of pocket.
Yet be aware that when you provide a smaller down payment, the lender may require you to pay for mortgage insurance on your loan. This added fee can offset some of the potential savings you might secure with a lower interest rate.
Overall, the loan application process and prep is a burden. Nav’s Business Loan Builder plan can help make the burden lighter.
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Below are several loans and programs that may help you save money if you’re interested in the owner-occupant path.
An FHA mortgage is insured by the Federal Housing Administration. Because the government backs the loan, FHA approved lenders may be willing to lend money (or extend lower interest rates) to borrowers usually considered higher risk. Even with income limitations or credit challenges, there’s a chance a lender could approve your application.
One of the best perks of qualifying for an FHA loan is the low 3.5% down payment. Interest rates on FHA loans are often more affordable as well.
You can use an FHA loan to purchase a home with up to four units, as long as you plan to live in the property personally. But there are limits on the amount you can borrow, based on the location of the property.
A VA loan is another mortgage that’s insured by the government. If you qualify for a VA mortgage, you may be able to purchase up to a four-unit property with no down payment.
Only eligible borrowers can take advantage of VA loan benefits, including:
- Active-Duty Service Members
- Honorably Discharged Veterans
- Qualifying Members of the National Guard or Reservists
- Eligible Surviving Spouses
Like FHA loans, you’ll need to live in at least one of the units yourself if you want to use VA financing to purchase a rental property. But after a year, you might be able to take out a new VA loan on another property and repeat the process. Note: You’ll generally need enough remaining entitlement to be approved for another VA loan.
A USDA loan is a government-backed mortgage with no down payment requirement. The low-interest, fixed-rate mortgage loans help low and moderate-income borrowers finance “safe and sanitary dwellings” in rural areas. If you qualify, you can use a USDA loan to purchase single-family or multi-family housing.
To qualify for a loan, you’ll need to satisfy a lender’s requirements, including the following:
- You must be a U.S. citizen or a permanent resident with a Green Card.
- The property must be in an eligible rural area, per the USDA.
- You must live in the home.
Conventional loans can also be used to purchase investment properties — multi-family units or otherwise. But the down payment requirements for investment loans are generally higher with conventional mortgages.
If you plan to be an owner-occupant, you’ll often encounter less stringent loan approval criteria. Down payments on owner-occupied homes can be as low as 5% to 10% with conventional mortgages.
It’s also worth noting that you may save money on interest fees if you plan to make your rental property your primary residence. Mortgage rates can commonly be .5% to .875% lower in this scenario compared with the rates on investment property loans.
FHA 203k Rehab Loans
Do you want to purchase an investment property that needs repairs? If so, an FHA 203k Rehab Loan could be a helpful financing solution. The government-backed mortgage gives you the means to purchase a property and covers the cost of repairs with a single loan.
Like traditional FHA loans, you may be able to get a fixed-rate loan with a down payment as low as 3.5%. But you’ll need to live in the home if you plan to use this strategy for a rental property purchase. For instance, if you want to buy a multi-family property and reside in one unit while renting out the others, the loan might work for you.
NACA stands for Neighborhood Assistance Corporation of America. It’s a nonprofit program that aims to promote affordable home ownership in urban and rural areas throughout the U.S.
Through the NACA Mortgage Program, qualified borrowers can enjoy benefits like zero down payment costs, no closing costs, and no fees of any kind. Interest rates are competitive, and your credit history doesn’t need to be perfect to qualify.
You can take out a NACA loan for single-family homes and multi-family properties. But you must make the home (or at least one of the units) your primary residence to use a NACA Mortgage for an investment property. You’ll also need to both take and host classes to satisfy NACA program requirements.
Down Payment Assistance Programs
When you plan to live in the property that you’ll also be renting to others, you may qualify for down payment assistance. Down payment assistance programs can make purchasing more attainable when you don’t have a lump sum of cash stashed away.
Whether down payment assistance programs are available primarily depends upon the type of loan you’re using to purchase your owner-occupied rental. Your state may also have down payment assistance programs to help its residents as well.
Want to review home loan and down payment assistance programs available in your state? The U.S. Department of Housing and Urban Development provides resources to help you start the search.
Additional Ways to Buy an Investment Property with 10% Down
Aside from the owner-occupant options detailed above, there are other ways to secure a lower-cost investment property loan. Some methods below are out-of-the-box approaches. Others may represent an increased level of risk. Be sure to research any of the options below carefully before you commit.
House Hacking: The term “house hacking” describes a real estate investment strategy often used with multi-family homes. You (the investor) live in one unit of the property, and you lease out the other units to tenants.
The rent your tenants pay helps cover the cost of your mortgage. Best of all, you might be able to put as little as 3.5% down (possibly 0 down with a VA loan) to secure a fixed-rate mortgage using this approach.
BRRRR Method: BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. The term describes a strategy house flippers often use to grow their real estate investment portfolios.
Step one is saving up money to buy an affordable rental property — perhaps a foreclosure or a home in need of repairs. Next, rehabilitate the home strategically — focusing on repairs or upgrades that add the most value. Once the house is ready, you can vet potential tenants and rent it out. This guide, with 11 steps on how to become a landlord, may help you complete the first three steps of the BRRRR process.
Once you’ve rented out the home for at least 6–12 months, you may qualify for a cash-out refinance on your property. From there, you can take the equity you borrowed against for the new mortgage and repeat the process.
Hard Money: Hard money loans offer an alternative way for real estate investors to borrow money. The financing (often short-term bridge loans) is generally provided not by banks, but by private lenders or individual investors.
Hard money loans generally feature higher rates and fees than traditional financing. They can also be risky and, sometimes, predatory. Be sure to vet hard money lenders carefully and review contracts in detail before you commit.
Private Money: Although it’s unusual, you could consider borrowing money from private, wealthy individuals you know personally. This strategy requires approaching family or friends to ask for a loan or investment partner.
The down payment size on such a loan can vary widely from one experience to the next. It all depends on the individual you’re asking and what she wants to require.
There’s also an added risk with this type of private money loan — the risk of damaging a personal relationship. Make sure to count this cost carefully upfront. If something goes wrong and you can’t repay as agreed, you could create a stressful situation.
Private money lenders may also offer short-term loans you can use for investment property purchases. However, this type of financing generally falls under the category of “hard money” and is likely to feature higher interest rates and fees.
Off-Market Properties: An off-market property is one that isn’t publicly advertised on the Multiple Listing Service (MLS) or similar online portals. Sometimes, it’s a property that’s for sale by owner or one that the owner hasn’t even decided to sell yet. Sellers may choose to sell off-market to generate intrigue and, hopefully, demand a higher sales price.
Real estate investors may also sell off-market properties wholesale. These properties may be purchased with no down payment, but they’re often tough to find and need to sell quickly when they become available.
Having a Real Estate License: Becoming a licensed realtor may give you an edge as a real estate investor. This approach won’t directly save you money on down payments. But it might offer you the chance to score better property deals and save on the cost of agent commissions.
Having a real estate license also gives you access to the MLS. You can use this tool to search for properties and check comps of recently sold homes in the same area. Being a licensed real estate agent also gives you more control over the deal and other perks.
But, getting your license requires an investment — both of your money and your time. Generally, it takes around 100 hours of studying, coursework, and exams to qualify for your license. Once you get your license, you’ll need to work under a broker (who will require fees) plus complete continuing education classes every year.
Turnkey Rentals and Move-In Ready: There are two terms you may come across as you search for rental homes: turnkey rentals and move-in ready. The idea behind both terms is that the investment property won’t require renovation or repairs before it’s ready for tenants.
Some turnkey providers offer financing for as little as 5% down. But these loans generally feature high interest rates.
Buying a rental property that you may be able to start earning money from immediately can seem appealing. However, seasoned investors warn these types of investments aren’t always what they seem.
Instead of properties being in good condition for tenants, sellers of move-in ready or turnkey rentals may skip repairs they don’t deem essential. The result may be more frequent tenant turnover and a host of other potential problems.
Line of Credit: Do you need help coming up with a down payment for a rental property loan? You might be able to borrow those funds using a line of credit.
If you own another property, you might be able to secure a line of credit with the equity in that home. Loans secured with the equity in your primary residence are known as HELOCs or home equity lines of credit. Loans secured with the equity you have in an investment property are known as single property investment lines of credit.
The added security of pledging an asset to the lender as collateral may help you secure a lower interest rate. Yet although they can be a cheaper way to borrow, lines of credit (especially HELOCs) come with added risk. If something goes wrong and you can’t keep up with your monthly payments, the bank might foreclose on the property you pledged as collateral when you took out the loan.
Seller Financing: When you make payments directly to the property owner instead of financing your purchase through a lender, standard mortgage rules don’t apply. This type of arrangement is known as seller financing, and it’s rare.
Sellers don’t have minimum down payment requirements they’re required to follow. Rather, sellers decide for themselves the amount they’re comfortable accepting. Interest rates on seller financing agreements tend to be on the high side, but you might be able to negotiate a lower down payment in exchange. It all depends on what that seller feels is fair.
Refinance: Whether you want to refinance an investment property or your primary mortgage, you may be able to tap into the equity you’ve built up in another property. This is known as a cash-out refinance.
If you qualify for a cash-out refinance, you may be able to access a significant portion of your property’s value. For non-owner occupied homes, your loan-to-value ratio could be as high as 75%, depending upon the lender and various factors.
However, a cash-out refinance can be risky. If something goes wrong and you can’t afford to maintain your monthly payments, you’re risking the property you borrowed against when you took out the loan.
Credit Cards: Technically, you may be able to use a cash advance from a credit card (or multiple credit cards) to purchase an investment property. Yet in reality, this can be a dangerous way to secure financing.
Credit card interest rates are notoriously high. The average credit card rate is currently just under 17% for accounts that assessed interest, according to the Federal Reserve. Your credit scores could also suffer if your credit reports show a high balance-to-limit ratio on your credit card account(s).
Despite high rates, business credit cards can help you build business credit. You can keep an eye on yours for free with Nav.
Self-Directed IRA: IRAs can offer you tax advantages as long as you follow IRS rules.
With a self-directed IRA, you have the option to make investments beyond typical stocks, bonds, and mutual funds. These alternative investments might include precious metals, businesses, and — you guessed it — real estate.
To use this method, start by opening an IRA with a custodian that services self-directed accounts. Alternatively, you can open a checkbook IRA account and manage the investment, record-keeping, and IRS reporting requirements yourself. Either way, you need to learn the rules and understand the risks if you plan to use this approach to invest in real estate.
401(k): A 401(k) can also be a tax-friendly way to save for retirement. Often, you can’t invest in real estate directly from your 401(k) account. You can, however, roll over your 401(k) — tax-free — into a self-directed IRA account. After the rollover, you can use the funds to invest in real estate.
But cashing out a large portion of your 401(k) for a real estate investment opportunity is a risk. You could lose the money you invested if things go wrong. You may also be subject to taxes and an early withdrawal penalty if you can’t repay your 401(k) loan.
Subject to Loans: When you take on a “subject to” loan, it means you’re taking over mortgage payments on the seller’s existing loan. The property you’re buying is subject to the loan that’s already in place. But you’re not assuming the loan itself.
There may be a difference between the total purchase price the seller is asking and the loan amount. In this case, you’ll need to pay the seller the difference in cash, take out additional financing, or negotiate a seller financing agreement.
In some ways, a “subject to” loan represents less risk to you. If the property goes into foreclosure, for example, your personal credit could escape undamaged. On the other hand, if the bank learns that you made an arrangement without its permission, it might call the loan due. At that point, you’d either need to find alternate financing or risk losing any funds you invested in the property.
It’s not impossible to get an investment property with just 10% down. It is, however, complicated. You may need to accept extra risk or inconvenience if you want to avoid the traditional 20% (or higher) down payment generally required for non-owner occupied investment loans.
Of course, if the options above sound too inconvenient or too risky, that’s okay. You’re may be better off searching for a rental property loan through a more traditional route. It may take more time to save a large down payment, but doing so could help you secure financing that makes you more comfortable.
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