An investment property loan finances your investment in real estate property. There are many alternative ways of financing for investment property. Traditionally, you would arrange your loans for investment property through savings banks, commercial banks, savings and loan associations, and credit unions, among others. Other sources through which you can arrange your financing for investment property are: mortgage bankers, mortgage trusts, insurance companies, and investment trusts. In addition, you can also seek such loans from finance lenders, pension funds, mortgage loan pools that are securitized, and from private individuals, too. 

Let us look at other ways of buying an investment property. 

1. Assuming A Loan – This is one alternative to getting a new loan. You can assume someone else’s mortgage, and sometimes, this can be the least expensive way of financing for investment property. You first have to find a property that has assumable mortgage, and this may require a lot of footwork. The only assumable mortgages are VA loans, FHA mortgages, and adjustable rate mortgages. 

You need to get a copy of all the loan papers from the seller. It is very important that you understand all the terms of that loan. Next, you ask for the assumption package from the lender who holds the current loan. This package will give you all information you will need to acquire the loan. Acquiring a loan typically involves a minimum amount as down payment, proof of income, such as tax returns, pay stubs, etc., a satisfactory credit score, and an assumption fee, which could be I point. 

Between the times the seller first got the loan, and now, there may have been a significant increase in equity, depending on how long it has been. There may be a great disparity between the loan amount and the sales price of the property. Ensure that it is beneficial to assume the loan by comparing the loan you want to assume, the other loans that are available, and the current rates of interest.

You will need to either pay the difference between the loan amount you are assuming and the market price of the property, in cash, or have it financed. The lender can guide you about the additional financing. 

Finally, before you assume the loan, ensure that you understand all the terms of the loan. 

2. Wrap Around Mortgage – You can purchase property without the need to qualify for a loan or pay closing costs with the help of wrap around mortgage financing. This mortgage is also called an all inclusive trust deed, where the new mortgage includes the unpaid balance of the first mortgage, and is subordinate to the first – the original - mortgage. In general, though not always, the lender is the seller, and wrap around is a form of seller financing. 

The wrap around is a loan transaction in which the lender assumes the responsibility for the existing loan. You are buying a home for $100,000 on which there is an existing mortgage balance of $70,000. You make a down payment of $5,000, and take a new mortgage of $95,000. This new mortgage ‘wraps’ around the existing mortgage of $70,000 as the new lender will make the payment on the old mortgage. 

Wrap around mortgages are attractive to lenders as they profit from the difference in interest in the two loans. Let us assume that the existing mortgage of $70,000 has an interest rate of 6%, and your new mortgage of $95,000 is at 8%. However, the lender’s actual outlay is only $25,000 ($95,000 - $ 70,000) on which he earns 8%. In addition, on $70,000, he earns the difference of 8% and 6%. This makes his total return on $25,000 about 13.5%. 

3. Trust Deed Financing – This is another way of financing for investment property. The only difference between this and mortgage financing is who hold the title to the property until such time that the loan has been repaid, and the consequences in case of default. With trust deed financing, you do not sign a mortgage, but execute a deed of trust conveying the title to the property to a trustee, usually chosen by the lender. The trustee holds the property as security for the lender. 

Once the loan has been repaid, you get the title to the property back. In case you default on the loan, the trustee, as per the terms of the trust deed, is empowered to sell the property to make up for the loan default. 

Whereas the foreclosure of a mortgaged property needs court action, in this case, the foreclosure and sales can occur without court intervention.

 

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