Real Estate Investing Investment Property Financing 3 — Questions and Answers
Question 1: What is the primary advantage of using a portfolio loan for investment properties?
- It is insured by the FHA
- It follows Fannie Mae underwriting guidelines strictly
- The lender keeps it in-house, allowing more flexible qualification criteria (Correct answer)
- It offers the lowest possible interest rates
Correct answer: The lender keeps it in-house, allowing more flexible qualification criteria
Portfolio loans are kept on the lender's books rather than sold to the secondary market, giving lenders flexibility to set their own underwriting criteria.
Question 2: An investor refinances an investment property to pull out equity without selling. This strategy is called:
- A 1031 exchange
- Cash-out refinance (Correct answer)
- Assumption of mortgage
- Contract for deed
Correct answer: Cash-out refinance
A cash-out refinance replaces an existing mortgage with a larger one, allowing the investor to access built-up equity as tax-free cash.
Question 3: What does LTV stand for and why does it matter for investment loans?
- Loan-to-Value; higher LTV means less equity and more lender risk (Correct answer)
- Lender-to-Vendor; measures lender fee structures
- Leverage-to-Value; measures total portfolio returns
- Long-Term-Variable; describes adjustable rate timing
Correct answer: Loan-to-Value; higher LTV means less equity and more lender risk
Loan-to-Value is the ratio of the loan amount to the property's appraised value; lenders cap LTV on investment properties (typically 75-80%) to reduce default risk.
Question 4: Which statement about assumable mortgages is TRUE for investment property buyers?
- All conventional loans are freely assumable
- Assuming a low-rate loan requires full cash payment to the seller for equity (Correct answer)
- FHA and VA loans are always assumable without lender approval
- Assumable mortgages are only available for commercial properties
Correct answer: Assuming a low-rate loan requires full cash payment to the seller for equity
When assuming a seller's low-rate mortgage, the buyer must cover the difference between the purchase price and the loan balance — often requiring a second loan or cash.
Question 5: A lender charges 2 points on a $250,000 loan. How much does the investor pay in points at closing?
- $2,500
- $5,000 (Correct answer)
- $500
- $25,000
Correct answer: $5,000
One point equals 1% of the loan amount, so 2 points on $250,000 equals $5,000 paid at closing to reduce the interest rate.
Question 6: What is the main risk of using interest-only loans to finance investment properties?
- Monthly payments are too high to cash flow
- No principal is paid down, so equity builds only through appreciation (Correct answer)
- They are not allowed on residential rentals
- They require balloon payments in the first year
Correct answer: No principal is paid down, so equity builds only through appreciation
Interest-only loans keep payments low but leave the principal balance unchanged, meaning the investor builds no equity through amortization.
Question 7: A 'seasoning requirement' in real estate financing refers to:
- The age of the property's HVAC system
- The minimum time an investor must own a property before refinancing or selling (Correct answer)
- The period a tenant must live in a property before conversion
- The waiting period before a first mortgage payment is due
Correct answer: The minimum time an investor must own a property before refinancing or selling
Lenders impose seasoning requirements (typically 6-12 months) to prevent investors from immediately refinancing a recently purchased property at a higher appraised value.
Real Estate Investing Investment Property Financing 3
What is the primary advantage of using a portfolio loan for investment properties?