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Individual investors own about 26% of homes in Australia. If you’re thinking about joining this crowd of property owners, you should understand how to get financing.

If you’re new to investing in property, then an investment loan can be just what you need to get your first property. Investment loans are a bit different than standard mortgages, however, so it’s important to understand how they differ and how you can apply for the money you need.

In this guide, we’ll tell you about the process for getting investment loans.

What Are Investment Property Loans?

An investment loan is very similar to a standard mortgage and allows you to borrow money to buy a house or other type of property.

Unlike with a standard mortgage, however, you’ll be borrowing money to buy an investment property rather than a home that you’ll live in. This could include any type of property that you’ll use to generate passive income, such as rental homes or condos.

Generally speaking, a property qualifies as an investment property if it has 1 to 4 units and will be used to generate income. Properties could include condominiums, manufactured homes, multi-family homes, and more.

It’s also important to make a distinction between investment properties and second homes. A second home is usually considered a home that you’ll live in for part of the year, but an investment property will always be occupied by someone other than you. 

Types of Investment Loans

Before applying for investment loans, you’ll want to understand what your financing options are. 

Standard home investment loans are a popular option when buying an investment property, but not everyone will qualify. For buyers who may have a hard time qualifying for a standard investment loan, it may be worth turning to a private lender instead of a bank. A low-doc loan will require less documentation and may be a good alternative to a standard bank mortgage.

Alternatively, some investors may want to use a home equity line of credit (HELOC) or another type of loan to fund an investment property purchase instead.

Once you understand the options that are available to you, you can then look at the requirements for the loan and get preapproved.

Investment Loan Requirements

To qualify for a standard investment property loan, there are certain requirements that you’ll need to meet.

Typically, a borrower will need to make at least a 5% deposit to get an investment property loan. They’ll also need to have a good credit history and a sufficient credit rating.

Lenders will also look for a healthy income, stable employment, and a certain amount of savings as well. Your debt-to-income (DTI) ratio will also play a part in your ability to get an investment loan.

The more that you can improve your financial standing before applying for a preapproval or an investment loan, the better chance you’ll have of getting a loan and ensuring that it has great terms. 

Costs of Investment Loans

When buying an investment property, you should consider the current interest rates and have an idea of what the closing costs will be.

Generally, investment property rates will be a bit higher than on standard mortgages. Be sure to keep this in mind when going through the investment loan process.

Also, remember that there will be other things to pay for when closing on a home as well. You’ll also usually need to make a significant down payment to buy the investment property.

Your credit score, financial standing, and the down payment that you make can all impact your rate, so be sure to keep this in mind when borrowing money for your purchase.

Applying for Investment Loans

Although there are many types of loans for investing available, the process of applying will be very similar for each of them. Here’s the general process that you’ll follow when getting an investment loan.

Seek Pre-Approval

When applying for an investment property loan, it’s best to get preapproved before you start looking for a house.

With a pre-approval, you’ll have a better idea of what type of investment property you can afford and what you should be looking for. You’ll also be taken more seriously by the seller and their real estate agent.

Look for a Property

With knowledge of your preapproval amount in mind, you can start looking for homes and trying to find one that perfectly suits your needs.

Be sure that you carefully investigate your options. Consider the amount of income you could generate from a home, and be sure to take the cost of repairs and fees into account as well.

Once you find a property that you’re interested in, you can then make an offer and start negotiating with the seller. 

Apply for an Investment Loan

Although you may have been preapproved for a mortgage, you’ll need to fill out a loan application officially when you find a property that you’re interested in.

Preapproval offers may last only 90 days, but this length of time will vary based on the lender. You’ll need to apply for another preapproval if you haven’t found a home by the time it expires.

Once you’re approved for an investment property loan, you can lock in an interest rate and move toward the closing of the property.

Close on the Property

The final step of the process is to close on the property that you’ve decided to buy. You’ll need to pay closing costs and will need to be sure that you’ve done your due diligence. Make sure that you want to follow through with the purchase.

You should plan to pay around 2% to 6% of the cost of the home for closing costs. Ensure that you’re prepared for the extra costs when considering your budget.

Getting Started With Real Estate Investments

If you want to start investing in property, make sure that you’re familiar with the process of applying for investment loans.

If you’re applying for a loan, remember that you should be in good financial standing. Also, remember to get preapproval before you start browsing available properties.

Do you think that you’ll have trouble getting approved for a standard investment loan? If so, you may want to learn more about our low doc loans now.