Investing in real estate often means financing the acquisition as well. For shorter term flips, it’s simpler to pay cash if at all possible and avoid the financing loop which takes time as well as add additional costs. For long term holds however, using bank loanssomeone else’s money and taking advantage of all the tax benefits that go with it is typically the preferred option.

Mortgage lenders set their terms internally but most follow the same general guidelines when establishing rates and terms. What are some of the things lenders require when establishing loan terms?

Occupancy is the first issue. Investors don’t live in their properties but will find that rates for rentals are approximately ¼ to ½ percent higher than an interest rate assigned to a primary residence. Favorable rates are also given to beach or vacation homes, commonly called “second homes.”

You can also expect to put down at least 20 percent for a down payment. And if you have 25 percent down, go ahead and put down the extra, your lender will reduce your interest rate by about ¼ of one percent.

The loan amount can also affect the rate and terms for an investment property loan. Most loans today are of the conventional variety, loans underwritten to standards issued by Fannie Mae or Freddie Mac. Both provide lending guidelines for loans up to $417,000. Anything above that and the loan is considered “jumbo” with an interest rate anywhere from ¼ to ½ percent higher than for loans $417,000 and below.

Credit scores will also impact the terms of a loan. Most lenders require a minimum credit score of 640 for an investment property loan with the best rates reserved for those with credit scores above 740. The absolute best rates and terms are reserved for those with a score above 740 and a 25 percent down payment.  Sometimes rates may be favored when a borrower has a score lower than 740 by putting more down.