An option that will always be around is to take out a home equity loan from a bank or credit union to purchase your investment property. If you’re looking for an investment property with a longer-term payoff, this is the best choice. However, if you’re hoping to get cash out of the deal in the short term, this isn’t the most financially-advantageous strategy.
If you’ve got bad credit, but still want to push ahead with your real estate investment dreams, you’ve got a few more options available. However, they’re not all ideal, so it’s crucial that you do your research before you take the leap.
If the seller is willing, he or she can offer financing over the course of two to five years with a balloon payment at the end. You’ll have to verify that the seller has the means to pay off these notes and that he or she is not already overextended financially. You can also ask if there is any interest and carry the loan with another entity, such as a company or your own LLC.
Federal Housing Authority (FHA) Loans
The Federal Housing Authority (FHA) is a division of the U.S. Department of Housing & Urban Development (HUD). The FHA provides financing in the form of long-term, low-interest loans to individual home buyers who meet certain requirements.
The FHA backs mortgages and charges a 1.75% fee on the total loan amount.
Eligibility requirements include:
- You must have a minimum credit score of 580.
- You must demonstrate you have the required down payment (currently at least 3.5% of the entire project cost).
- You must meet certain debt-to-income ratios.
- You must meet FHA guidelines for the property location.
In addition to this, the FHA requires lenders to charge at least two rates of interest for their loans. The lender is required to offer a higher initial rate of interest for the first 7 years of the loan and a lower rate of interest for the remaining portion of the loan term.
Interest rates are usually slightly higher than other financing options but the rate can vary based on several factors such as credit score and down payment amount.
A 203(k) loan is meant to fix existing houses that need remodeling. You need to submit requests for repairs or modifications.
When you apply for the loan, you’re allowed to go over the cost of the repairs by a small fraction. This is only allowed when the improvements serve a useful purpose and make the house more attractive to potential lenders.
So, if your house can be fixed up in a way that adds value to it, then you can raise the price of repairs and use the extra money.
Veteran Affairs (VA) Loan
If you are a military veteran that has served in the United States military, you can apply for a VA loan that will let you get a mortgage for low interest rates. Even if you have bad credit, you can receive a loan through a VA back up guarantor at a very reasonable interest rate. Even with bad credit, you may still qualify for a loan with a VA guarantor.
Urban Institute’s Housing Finance Policy Center has identified VA loan guarantors as a significant source of funding for certain urban housing markets. Guarantors are not always available in urban areas, and many local lenders report it is often easier to work directly with the VA.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) has interest rates that are adjusted according to a specified inflation index such as the Consumer Price Index (CPI). The adjustment may be once a year or every six months. Eventually, the rate adjusts to the fully indexed rate. This rate is disclosed at the beginning of the loan.
With an ARM, you can often reduce the original loan amount. This contributes to the affordability factor. It also allows you to purchase a quality property that you otherwise may not be able to afford with a conventional fixed-rate mortgage.
However, mortgage rates are not always steady. They may rise, bringing more money to the homeowner, but they may also fall. The borrower keeps the same payment amount no matter what. The upside is that if rates go down, you keep the savings, as your payment remains the same.
It’s important that you understand the risks associated with a rising interest rate, which can result in higher payments. You should discuss these with your broker to determine if the reduction in the mortgage amount is worth the risk. Be aware that interest rate increases may not always occur.
Hard money is a term that is used to describe private money loans that are generally offered at high interest rates. As a general rule, hard money lenders will charge anywhere from 5-20% for the amount of the loan. Therefore, it may not be suitable for all transactions. However, if you are looking to get funding for a deal quickly and don’t necessarily need to have the lowest interest rate, hard money may be your best bet.
A hard money lender may be willing to fund your deal even if the other lenders deem the loan as too high of a risk. This can be a good option if you have experienced equity investors that have expressed interest in the deal that you want to purchase. However, if you don’t have great equity investors, look to others to fund your deal. Hard money can be a great way to get short term financing, but don’t let it become your long term solution as it can get expensive.
Home Equity Line of Credit (HELOC)
There are two types of HELOCs. The first one is similar to a credit card balance on a revolving line of credit. You can spend up to your authorized credit line, and when you’re ready, simply pay off the balance. The second type is one that is comparable to a checking account with a direct debit option. This second type is considered a safer HELOC option because it has a fixed interest rate and the funds are in a transaction escrow account.
So what are the pros and cons of using a HELOC? It all depends on your individual situations. At the outset, you may be thinking that it’s an excellent building block due to how easy a HELOC is to obtain. However, you might notice that that’s where the perks end. Unlike many other mortgage options, there is a limited amount that you can borrow, and the interest rate can increase substantially after a certain period of time.
Debt consolidation is another option if you have multiple debt sources to pay off. But keep in mind, this is one of the riskiest ways for you as the borrower to fund your real estate deals. The primary concern with debt consolidation is the high possibility of losing your home, if you don’t manage it well.
The goal here is to provide you with a set of rules or guidelines that you can follow given your present financial condition. We have all heard people talk about how real estate investing can change people’s lives but they often find that it is either too difficult or they are unable to find the right way to approach this lucrative investment vehicle.
In this guide, I have covered all of my current thoughts and strategies that I am using as I enter into the real estate investing market. The goal of this is that you will be able to narrow down your focus and ignore the excess noise that is out there that just gives you more excuses as to why you cannot be successful.
I am going to go over the 11 ways you can start getting started on the path to successful real estate investing. The first thing you are going to want to do is to evaluate your personal investing goals. As you are doing this, if you are like most people, you are going to have more than one of these items checked off. If this is the case I am going to go ahead and let you in a bit of a secret that most real estate investors never tell you but they definitely should. The fact of the matter is that you can have a great deal of success with just one of these items if you want but you could potentially have an even greater result if you ended up trying two or more of them.