Real Estate Investing Investment Property Financing 2 — Questions and Answers
Question 1: What is the typical minimum down payment required for a conventional investment property loan?
- 5%
- 10%
- 15%
- 20% (Correct answer)
Correct answer: 20%
Conventional lenders typically require at least 20% down for investment properties, compared to 3-5% for primary residences.
Question 2: A DSCR (Debt Service Coverage Ratio) loan qualifies borrowers primarily based on:
- Personal credit score only
- The property's rental income relative to its debt payments (Correct answer)
- The borrower's W-2 income
- The borrower's net worth
Correct answer: The property's rental income relative to its debt payments
DSCR loans evaluate whether the property's rental income is sufficient to cover the mortgage payment, making them ideal for self-employed investors.
Question 3: Which loan type is BEST suited for an investor who wants to purchase, renovate, and quickly sell a property?
- 30-year fixed mortgage
- Hard money loan (Correct answer)
- FHA loan
- USDA loan
Correct answer: Hard money loan
Hard money loans offer fast funding and short terms (6-24 months), making them ideal for fix-and-flip projects despite their higher interest rates.
Question 4: What does it mean when a lender 'calls' a loan?
- They lower the interest rate
- They require the full balance to be repaid immediately (Correct answer)
- They extend the loan term
- They convert it to a fixed rate
Correct answer: They require the full balance to be repaid immediately
A loan call provision allows the lender to demand full repayment of the outstanding balance before the loan's maturity date.
Question 5: An investor uses a blanket mortgage to:
- Finance a single luxury property
- Secure multiple properties under one loan (Correct answer)
- Refinance a primary residence
- Fund property improvements only
Correct answer: Secure multiple properties under one loan
A blanket mortgage covers multiple properties under a single loan, simplifying financing for portfolio investors.
Question 6: What is a 'non-warrantable' condo and how does it affect financing?
- A condo needing repairs; qualifies for FHA only
- A condo not meeting Fannie/Freddie guidelines; harder to finance conventionally (Correct answer)
- A condo over 20 stories; requires jumbo financing
- A newly built condo; eligible for first-time buyer programs
Correct answer: A condo not meeting Fannie/Freddie guidelines; harder to finance conventionally
Non-warrantable condos fail Fannie Mae/Freddie Mac guidelines (e.g., too many units rented, pending litigation), forcing investors to seek portfolio or commercial loans.
Question 7: Which of the following is an example of 'creative financing' in real estate investing?
- Getting a 30-year conventional mortgage
- Seller carrying back a second mortgage (Correct answer)
- Using an FHA loan on a rental
- Applying for a HELOC on a new purchase
Correct answer: Seller carrying back a second mortgage
Seller carry-back financing, where the seller acts as the lender for part of the purchase price, is a classic creative financing technique.
Real Estate Investing Investment Property Financing 2
What is the typical minimum down payment required for a conventional investment property loan?