5 Tips For Financing Investment Property

With some small improvements in the economy, many investors are starting to consider jumping into the residential real estate market again. And low prices make it a good time to do so.

According to figures from the National Association of Realtors, most metropolitan areas within the U.S. reported lower median sale prices on existing single-family homes during the second quarter of 2009 compared to the second quarter of 2008. Sales in Florida and California appeared to post some of the highest price drops, while prices on homes in the South, Midwest and Texas were less affected.

But while prices are good, the days of quick-and-easy financing are over, and the tightened credit market can make it tough to secure loans for investment properties. However, there is some good news: A little creativity and preparation can bring loans within reach of many real estate investors.

"Investors are more scrutinized than they ever were, and financing is more difficult, but not impossible," says Ben Spofford, an Ohio real estate investor and president of RealtyRTO.com.

If you're ready to seek out financing for your residential investment property, these five tips can improve your chances of success.

Have a sizable down payment

Mortgage insurance won't cover investment properties, so you need at least 20 percent down to secure traditional financing for them. If you can amass 25 percent, you may qualify for an even better interest rate, says Todd Huettner, a mortgage broker and president of Huettner Capital in Denver.
If you don't have the down payment, you can try to obtain a second mortgage on the property, but it's likely to be an uphill battle.

"I don't know of any lenders doing second loans on investment residential right now," Huettner says. Jumbo loans, which are used for financing more than $417,000, are also a rarity.

Be a "strong borrower"

Although many factors -- among them the loan-to-value ratio and the policies of the lender you're dealing with -- can influence the terms of a loan on an investment property, investors should check their credit score before attempting a deal. It will have the greatest impact on a loan's terms.
"Below (a score of) 740, it can start to cost you additional money for the same interest rate. Below 740, you will have to pay a fee to have the interest rate stay the same. That can range from one-quarter of a point to two points to keep the same rate," Huettner says.

The alternative to paying points if you score is below 740, obviously, is to pay a higher interest rate.

Always do your own due diligence.