Buying your first rental property can be an exciting journey to say the least. When you put your time and energy into finding the right rental property, the investment could increase your monthly cash flow and generate additional income. Of course, with finding the right investment property also comes the challenging task of choosing a suitable investment property loan. Researching and finding the right investment property loan can make all the difference when it comes to a profitable investment.
On top of selecting the right loan, qualifying for investment property financing can sometimes be met with difficulty, especially if you’re a first-time property investor. In fact, some first-time buyers will be surprised to know that most lending institutions require a down payment of anywhere between 20% – 30%.
However, this shouldn’t discourage you from property investment. There are options that provide a lower down payment if you fulfill specific criteria and are willing to provide the required documentation.
Here, we’ll take a look at some options on how you can get an investment property loan with only a 10% down payment.
The Owner-Occupant Option
Being an owner-occupant can be an affordable way to buy your first rental property. This is especially so in urban areas where the cost of property is high.
Owner-occupants are residents who own the property they live in. Most of these loans are only available to owner-occupants and not absent investors.
- Federal Housing Administration (FHA) Loans
The FHA loan is a type of government-backed mortgage loan that is designed for low-to-moderate-income borrowers.
It’s a great option if you have current debt or a lower-than-average credit score. It requires a low minimum down payment of 3.5% if your credit score is 580 or higher.
There are no salary requirements, but to qualify, you are required to have at least two established credit accounts.
- VA Loans
VA loans are like FHA loans. It helps service members, veterans, or surviving spouses purchase a property.
There are no down payment requirements, and you don’t need a good credit score to qualify. This is an excellent program if you have several debts, as it allows a little more debt leeway than other mortgage programs.
You don’t need mortgage insurance with the VA loan, but the property you’re investing in will have to meet additional VA loan safety standards.
- USDA Loans
The USDA loan is a great option for low-to-moderate-income earners looking to purchase a single-family or multi-family property.
You’ll also need to live in the property and will not be able to use it for investment or to buy a vacation home.
The main requirement for a USDA loan is that the property must be in an eligible rural area, as deemed by the USDA.
- Conventional Mortgage
A conventional lender can also offer a loan when it comes to purchasing an investment property. However, the down payment requirements are generally higher when it comes to a conventional loan.
But it’s essential to know that if you plan to be an owner-occupant, you are likely to be met with less strict loan criteria. Often, with conventional mortgages, down payments on owner-occupied homes can be as low as 5% to 10%.
Plus, it’s also worth noting that you may end up saving money on interest fees if you make your rental property your primary residence.
- FHA 203k Rehab Loans
Does the property you have your eye on, need repairs? If this is the case, an FHA 203k Rehab Loan could offer a beneficial solution.
An FHA 203k Rehab Loan is a government-backed mortgage option that lets you purchase a property and covers the cost of repairs within a single loan amount.
Much like conventional FHA loans, you could get a rehab loan with a down payment of as low as 3.5%. Although for this to happen, you’ll need to live in the property if you plan to make use of this option.
Loan Programs
There are other loan programs that can provide an investment property loan with a down payment of only 10% or lower.
The two main programs are the Fannie Mae HomeReady and Freddie Mac HomePossible programs. It’s catered to those who aren’t able to afford a higher down payment or those with low credit scores.
- Fannie Mae HomeReady Mortgage
The Fannie Mae HomeReady Mortgage plan aims to help first-time or repeat home buyers purchase a property with low down payments.
This is a great plan for those with limited upfront cash and who earn a salary of less than or equal to the area median income. However, you will be required to complete a Homeownership Education program.
If you have a credit score of 620, this loan program may be suitable for you as it only needs a 3% down payment.
- Freddie Mac’s HomePossible Mortgage
Freddie Mac’s HomePossible Mortgage program is similar to the Fannie Mae HomeReady Mortgage.
One of the main requirements to qualify for this loan is that the property must be a one-unit primary residence. This includes single-family residences, condominiums, and townhomes. Like the HomeReady program, the loan only requires a 3% down payment.
If you have a credit score of 660, this may be a better loan for you.
Final Thought
Searching for the right investment property loan can be complicated but it is by no means impossible. You should consider how much down payment you’re able to afford and other requirements that come with each loan program.
If the options still seem too risky, you can always opt for the many available traditional rental property loans. Of course, it may take more time to save enough money for a substantial down payment, but on the upside, this route could help you secure the type of financing that makes you feel more at ease when it comes to investing in property.
Either way, you’ve started the exciting journey of becoming a property owner. Now, you need to decide what route is best suited to you and your pocket.
Contact Your FundingTree today to learn more about the different options available to you.