If you plan to finance the purchase of a rental property, choosing the right lender to work with can have a major impact on the overall success of your investment. Different lenders offer different options for investors, so don’t go into it assuming that the scenario would be the same across the board. It’s critical that you “lender shop” and ask questions to ensure you get the best loan for your future property. Here are some of the questions you should ask:
- Do you work with investors? The first question to ask is whether or not they work with investors, because not all do. Investment properties are higher risk than regular properties, and some lenders simply opt not to take on that added uncertainty. Before you spend valuable time learning about loan options and going back and forth with them, find out if they can even help you.
- What loan types do you offer? There are a lot of different loan types available and it pays to get familiar with all your options. Whether you opt for a conventional mortgage on a residential property or you’re looking to invest in a commercial building, you must understand the ins and outs of each loan type and how it can affect your investment. After discussing your goals and your current financial situation, your lender will be able to make suggestions on what type of loans you qualify for and which one may be best for you.
- How much of a down payment will I need? As I mentioned, investment properties present more risk for lenders than regular properties. To help offset some of this risk, your lender will likely require you to put down at least 20% of the purchase price. This is the standard amount you can expect to put down, but it never hurts to ask if there are any options available that require less if you don’t have the funds available.
- What are the terms of the loan? You’ll want a clear understanding of the loan terms before you sign anything. This includes the interest rate, points, repayment schedule, fees, and whether or not there is a penalty for paying the loan off early. This is perhaps one of the most important areas of discovery for you, so don’t be shy about asking questions. Neglecting to get all the information could lead to surprises later on that you don’t want.
- Do you offer non-recourse loans? Finally, find out if the lender offers non-recourse loans. With a non-recourse loan, your home and other assets cannot be seized by the lender should you default on the loan. Only the property which the loan is for can be taken in this instance. While you may pay higher interest rates for this type of loan, the protection it affords you should things go south is usually worth it.
If you’re a new investor taking out your first-ever rental property loan, it can be a little overwhelming. However, going in with a list of queries can help you gather all the information you need as you move through the lending process. Don’t be afraid to ask any questions that you think of, or to move on to another lender if the first (or second, or third) person you’ve talked to doesn’t seem like a good fit. Armed with the right knowledge, you can make a better choice that will suit your needs and help you reach your investment goals.