During 2022, rental rates in Memphis, TN rose by 6%. This places Memphis among the top twenty cities for U.S. investors to spend their money wisely.

Are you among those interested in earning some passive real estate income driven by high rental demand in this city? Step one is securing the finances you need. 

Keep reading to find out more about how to apply for an investment property loan, so you can maximize your Memphis opportunities. 

What Is an Investment Property?

The term ‘investment property’ refers to real estate that you buy to earn an income from almost immediately. This might be a high-rise apartment block, a commercial building, or a single-family home. 

The term does not refer to a home that you buy for a reasonable price, live in for a time, and then sell for a profit. Fix-and-flip properties are a type of investment property, too.

For our purposes, we will focus on residential real estate investment properties.

That’s because home-flipping profits are at their lowest ebb in 13 years. So, it makes sense to buy a turnkey property and rent it out, rather than go the fix-and-flip route. 

These include:

  • Single and multi-family homes
  • Cooperatives
  • Manufactured homes
  • Condominiums

Some standard lenders might assist you with the funds to buy an apartment block providing you live in one of the units. In most cases, you’ll usually need to apply for investment property financing to purchase one of these properties. 

There are seven types of loans you can make use of as a real estate investor. These are:

  • Conventional Loans
  • FHA Loans for two- to four-unit properties
  • VA loans for military personnel
  • Non-QM loans based solely on rental income
  • Owner financing
  • Home equity loans
  • Cash-out refinance 
  • Hard money short-term loans (mainly for fix and flippers)

In most cases, lenders view investment properties as riskier options than owner-occupied homes. That means you’ll need to do a little more homework before you apply for a rental property loan.  

Applying for an Investment Property Loan

It’s important to shop around for reputable mortgage lenders and compare their offerings. Rates can vary considerably between these institutions, and they don’t all offer the full range of loans. 

In most cases, you’ll come across the following requirements when you apply for an investment property loan:

High Down Payments

Most investment property loans require a down payment of at least 20% of your own money – gifts don’t apply.

When you opt for a VA or FHA loan, you can put down as little as 3.5% upfront and some conventional loans require a 15% down payment on rental homes.

Mortgage Reserves

These reserves refer to monthly payments in the bank at the time of the loan.

This amount refers to at least two to six months’ worth of mortgage payments. The amount varies depending on how many properties you own. 

Proof of Rental Income

The lender may require copies of tax returns showing rental income, a rent roll history, and current leases. In many cases, the lender might request rental comps for other investment properties in the area.

FHA and VA loans might allow you to use the estimated income from the home you’re buying as a qualifying criterion. 

Proof of rental comps forms part of the appraisal process for investment properties.

Property Management Experience

Some loan programs want you to prove you’re capable of managing an investment property. They might ask you to explain your experience, or require tax returns proving you’ve managed rental homes before. 

High Credit Score Criteria

You’ll need a credit score of at least 640 to qualify for an investment property loan. If you’re buying a multifamily home, the requirement can escalate to 700 or more. 

Higher Mortgage Rates

Investment property mortgage lenders mark up their rates to cover the additional risk of borrowers defaulting. You’ll usually pay between 0.5 and 0.875 of a percentage point more for investment properties when compared to residences.

Your down payment and credit score will also have a major impact on the rate a lender offers you. In some cases, borrowers with a lower credit score will need to pay mortgage points to achieve their loan. 

Appraisal Requirements

Due to the extra work required when estimating the property value in line with rental comps, you’ll pay more for the necessary rental appraisal when applying for your mortgage.

You can expect to pay around $100 to $300 more than usual for an investment property appraisal.

Paperwork Required

Whether you’re applying for a residential property mortgage or an investment property mortgage, you’ll commence by filling out the loan application form. 

You’ll need to attach extra asset documentation to your application. These include two months of bank statements, current leases, and rental information for the property. 

Some lenders allow you to use a portion of your 401(k) toward your reserve requirement. In this case, you should attach a current statement, too. 

Closing on an Investment Property

Once your loan conditions clear and you’ve completed the appraisal, the lender will issue a closing disclosure. This usually occurs a few days before closing.

This document outlines how much you must pay at the closing table. Be sure to review it in advance and make sure you understand it. 

If you’re taking out a hard money loan, familiarize yourself with the terms and conditions involved, especially any prepayment penalties. 

The closing procedure on these property sales mirrors that of a conventional mortgage. You’ll pay the closing costs via wire or cashier’s check, receive your funds, and take ownership of the property. 

Buying an Investment Property

In many instances, you’ll only need a pre-approval letter from a lender to start your journey toward owning an investment property.  

Before you apply for an investment property loan, you should compare prices on suitable properties. This will help you determine how much you need to borrow in line with your budget and expectations. 

Are you ready to get started? Join our buyers’ list and we’ll notify you about available properties every week.