Down Payments For Investment Property Loans
If you dont plan to live in your investment property, expect to put down 15-25% on an investment property loan.
Lenders see investment properties as a riskier venture, as you are more likely to default on a property you do not live in. As with traditional mortgages, there are a few different types of investment property mortgages you should familiarize yourself with. If you go with a conventional mortgage, you will need high income, excellent credit, and seasoned cash reserves for the down payment.
With a portfolio loan, you will need to put down at least 20%. However, most portfolio lenders allow you to borrow the down payment, unlike conventional mortgage lenders. That means you can use business credit lines and cards like Fund & Grow helps you secure, to draw on and cover the down payment.
Income matters less, while the quality of your deal matters more. Portfolio lenders scrutinize the profit margins on your deal, and look less at your income or the source of your down payment. In fact, many portfolio lenders like Visio and LendingOne dont require any income documentation whatsoever.
Portfolio lenders underwrite your loan in the context of your likelihood to make money on the property, rather than traditional mortgage qualifications.
Cash Reserves Closing Costs & More
Regardless of whether you borrow from a conventional lender or a portfolio lender, you will need cash reserves.
Lenders require that you have enough cash set aside at settlement to cover a certain number of months mortgage payments. The typical range is one-to-six months worth of payments.
Where it gets hairy is that often lenders require cash reserves for all of your mortgages not just the new loan youre borrowing.
And, of course, youll need cash to pay for the closing costs. That includes between $1,000-2,000 for title-related expenses, plus taxes, insurance, and lender fees, which will lay on thousands more dollars. No one said borrowing a mortgage was cheap!
The upshot is that you need a lot more cash than just a down payment. Keep in mind these other cash requirements, as you start running the numbers on how much youll need to pull together to buy this next investment property.
What Are My Other Options
With Genworth Financial’s 10% program and CMHC’s 5% program these really are the golden years of residential investment property mortgages in Canada.
But there are other options…
If you really want to get aggressive you can turn to “hard money” lenders. These are basically mortgage brokers or other professionals who have access to individuals willing to lend you money.
There are still qualifications to meet but they may be less stringent. You’ll pay for this privelege though, typical hard money loans have interest rates of 12% or higher with finder fees tacked on to them as well.
Venture into “hard money” investment property mortgages with caution and work with an experienced real estate investor/coach/mentor only.
And there are private institutions like Xceed Financial that have offered 5% down mortgages in the past for investors without perfect credit. With recent changes in the financial industry these may vanish soon.
However, for these types of investment property mortgages you will require high enough income, a good to great credit score and you will likely jump through a few extra qualification hoops.
Recommended Reading: List Of Investment Banks In Los Angeles
The Ascent’s Complete Guide To Mortgages
Mortgages are a big decision. With all of the potential options on the market, where do you start? If you’re a first-time homebuyer looking for the best lender for you or a homeowner looking to refinance to take advantage of some of the lowest mortgage rates we’ve ever seen, we’ve got you covered.
Are There Sba Loans For Investment Property
If youre familiar with the low-interest small business loans offered by the Small Business Administration, you might wonder if you can use them for investment property. In fact, you can. The SBAs 504 loan program can be used to buy property or land, as well as cover improvements and renovations for commercial real estate.
Recommended Reading: Investment Companies In San Antonio
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our investing reporters and editors focus on the points consumers care about most how to get started, the best brokers, types of investment accounts, how to choose investments and more so you can feel confident when investing your money.
The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.
Invesment Property Mortgagessome Background For Context
When buying an investment property, you are likely looking to put as little down as possible to gain maximum leverage.
———-ASIDE: Now, be aware that when you do this if your property value falls you could have a mortgage amount that is more than the value of your property. You really want to work with a mentor or coach who can offer some experience and guidance. If you want to reach out to us for this to read about one of our favourite strategies and to get more information.———-
When you put less than 20% down on a residential property in Canada you are using what is referred to as a “high ratio” mortgage.
———-ASIDE: A property is “usually” classified as ‘residential’ if it has up to four living units.
So single-family homes up to four-plexes. Anything greater is usually classified as a commercial property, and the mortgage qualifications are very different. More on this in another article.———-
Whenever you put less than a 20% down payment the banks, use “mortgage insurers” to insure the mortgage because of the perceived higher risk that you might default on the mortgage payments.
The largest mortgage insurer in Canada is CMHC, The Canadian Mortgage and Housing Corporation.
Genworth Canada is another mortgage insurer and is the largest private sector supplier of mortgage insurance.
Now, here’s where things get interesting.
CMHC has dominated the Canadian market for mortgage insurance since I was sucking on a baby bottle.
Read Also: Best Hard Assets To Invest In
Types Of Investment Property Loans
Getting an investment property loan is harder than getting one for an owner-occupied home and usually more expensive.
Many lenders want to see higher credit scores, better debt-to-income ratios, and rock-solid documentation to prove youve held the same job for two years.
Additionally, most will insist on a down payment of at least 20%, and many want you to have six months of cash reserves available.
If you already have four mortgages, youll need some savvy to get a fifth. Most banks wont issue new mortgages to investors who already have four, even when the loans will be insured by a government agency.
But just because its harder to get investment property loans doesnt mean you shouldnt try. Although you might not qualify for a conventional mortgage, you might get one backed by the Federal Housing Administration or Veterans Administration . You could also opt for a hard money loan or a home equity line of credit .
Some lenders wont even care about your credit or employment history, as long as they see lots of potential profits in the investment property youre considering.
Why Is Your Investment Property Mortgage Referred To As ‘traditional’
A traditional mortgage has a minimum 20% down payment â and therefore doesn’t need mortgage default insurance. Also referred to as a conventional mortgage, it means that you’ll have more options and flexibility, compared to a high-ratio mortgage that requires insurance and comes with higher premiums.
You May Like: Starting An Investment Advisory Firm
How Much Money Down Do Most Banks Require
An investor will have to put down at least 20 percent to buy a property from a typical bank. If you own more than four properties, that figure can increase to 25 percent down, providing that they are even willing to finance more than four properties. On top of the down payment, an investor will have to pay closing costs, which can range from two to four percent of the loan amount. It is very expensive to buy an investment property using financing from a typical bank. I have found a great portfolio lender who will finance as many properties as I want with 20 percent down, but they are not easy to find. Once you factor in repairs, carrying costs, down payment, and closing costs it can cost as much as $30,000 to buy a $100,000 rental property.
The video below goes over ways to buy with little money down as well:
Debt Service Coverage Ratio
The DSCR is calculated as the Net Operating Income from the property divided by the annual mortgage payments , where NOI is total income of the property less operating expenses. The DSCR ratio should ideally be over 1, meaning that the property is generating enough income to fulfill its debt obligations. The higher this ratio is, the easier it is to obtain a loan.
|Net Operating Income||= Rental Income â â Operating Expenses|
|DSCR||= NOI /|
When looking at the NOI, lenders will make sure the stated income and expense data are accurate, supported and reasonable. For instance, if the allowance for vacancies and collections is atypically low, a lender may substitute in higher âmarketâ vacancy and collection rates.
Typical operating expenses subtracted from rental income include taxes, insurance, repairs and maintenance, utilities and property management fees.
Recommended Reading: Optum Bank Hsa Investment Fees
Rental Equity Line Of Credit
All right, so RELOC may not be a term, but its still a thing. Landlords can take out HELOCs against rental properties, rather than their homes, if they have enough equity.
As with mortgages, expect the interest rates and fees to be higher on credit lines against an investment property compared to a HELOC. Thats because the risk to lenders is higher, as borrowers are more likely to default on investment property loans than on their home loans.
You can also expect the maximum LTV to be lower, with RELOCs compared to HELOCs. That means that lenders will lend you less of the propertys total value, again because their risk is higher.
Like HELOCs, rental property lines of credit make for flexible sources of financing for new investment properties if you have the equity.
Another option if you have equity in your home or other rental properties is cross-collateralization.
Also known as a blanket mortgage, you can offer to let your lender put a lien against your home or another rental property, as additional collateral. Say you apply for a loan to buy a new rental property, and they require a 20% down payment . You dont have enough cash, but lets say you do have another property with $100,000 in equity in it.
Should You Buy With A Partner
A partner might seem like a great idea you can pool your money, split maintenance costs and requirements and combine your home repair skills to save money on professional contracting costs. However, buying with a partner also splits your potential profits in half and puts you in the position of sharing legal liability with another person.
For example, if your tenants tell your partner about a pest problem and your partner doesnt fix the issue in a timely manner, your tenants may sue both of you because you are both landlords and you are both equally responsible for providing a habitable environment.
You should also remember that if something goes wrong with your partner and you split the cost of the home equally, youre both equally legal owners of a single property. Make sure that the person you choose is trustworthy, responsible and proactive when it comes to maintenance if you decide to go in on a rental property with someone else.
Recommended Reading: What Can You Invest In With A Self Directed Ira
How Much Investment Property Can You Afford
Qualifying for an investment property mortgage involves proving your ability to comfortably manage the monthly payments. Before you make purchase offers, its wise to apply for a mortgage preapproval. This is the most straightforward way to determine how much investment property you can afford to buy.
Once you have a price range, take some time to research the local rental market online. Lenders typically consider 75% of your expected rental income as part of your loan application. This can be done easily if the property was already an investment property and theres a rental history to evaluate. Otherwise, your lender can look at market rents in your area to come up with a reasonable estimation of rental income.
Dont forget to factor in ongoing rental property expenses when figuring out how much you can afford. These may include but arent limited to:
- Landlord insurance
Opt For A Larger Down Payment Where Possible
Whenever possible, reduce the interest rate in exchange for a larger down payment. In some cases, it might also make sense to pay upfront fees to lower the rate. If you apply for a big loan and plan to hold the property for a long time, paying upfront fees and/or a higher down payment could trim thousands of dollars from your repayment total.
You May Like: What Is An Investment Grade Bond
Cost Of Mortgage Loan Insurance
The fee you pay for mortgage loan insurance is called a premium. Mortgage loan insurance premiums range from 0.6% to 4.50% of the amount of your mortgage. Your premium depends on the amount of your down payment. The bigger your down payment, the less you pay in mortgage loan insurance premiums.
Find premiums based on the amount of your mortgage:
You can pay your premium by adding it to your mortgage or with a lump sum up front. If you add your premium to your mortgage, you pay interest on your premium. The interest rate is the same rate as youre paying for your mortgage.
Ontario, Manitoba and Quebec apply provincial sales tax to mortgage loan insurance premiums. Your lender cant add the provincial tax on premiums to your mortgage. You must pay this tax when you get your mortgage.
Reasons To Make A Larger Investment Property Down Payment
Although some government-backed loans allow you to purchase a rental property with no money down, many people choose to pay more. The reason: The higher your loan-to-value ratio, the higher your interest rate and loan fees will likely be. If you can scrape together a bigger down payment, you stand to save thousands on interest and fees.
Read Also: Best Way To Invest Home Equity
Should You Flip Or Rent
Should you flip houses or purchase rental properties?
It all depends on your goals, and to what degree you can leverage your skills, expertise and your current financial situation.
In general, house flipping is usually the bigger gamble because these deals hinge on whether property values will rise in the near future. Although price depreciation is never a good thing for property owners, stable and/or falling prices have less impact on someone whose main source of income comes from rents versus a fast resale of a property.
In mid-2017, the highest flipping returns were in Pittsburgh, at 146.6% Baton Rouge, LA, at 120.3% Philadelphia, at 114% Harrisburg, PA, at 103.3% and Cleveland, at 101.8%, according to ATTOM Data Solutions. These cities topped the list because they had lots of affordable, older homes that could be quickly renovated. At the same time, housing prices there were also rising.
For rental properties, the best markets in early 2017 were Cleveland, with an 11.5% annual return Cincinnati, at 9.8% Columbia, SC, at 8.6% Memphis, TN, at 8.5% and Richmond, VA, at 8.2%. The worst markets were generally located in the biggest cities on either coast, where real estate prices have long been sky high.
But local markets are always changing. Like any other type of investment, real estate carries both risks and rewards. You can reduce the risks by thoroughly researching markets and your financing options, but you can never entirely eliminate them.
Best For Veterans: Veterans United Home Loans
Veterans United Home Loans
Why We Chose It: We chose Veterans United Home Loans as our best investment property lender for veterans because the firm specializes in VA-backed mortgages with experts who understand this loan program better than anyone else.
Offers 24/7 customer service over the phone
Has online application and pre-qualification
Employs advisors from each branch of the armed forces
Doesn’t offer home equity loans or HELOCs
Information on FHA, USDA, and conventional loans is harder to find on its website
Founded in 2002, Veterans United is a full-service lender that specializes in VA loans for qualifying veterans, active service members, and their spouses. They are one of the largest VA mortgage lenders in terms of volume in the United States.
Investors benefit from flexible qualification guidelines, lower rates, and monthly payments, no down payments, and no private mortgage insurance. Veterans United has VA loans for as little as 0% down, and they understand how to make the VA loan work for an investor and still remain within the programs guidelines.
Among the products offered are fixed and adjustable-rate mortgages, jumbo loans, refinance loans, and cash-out loans. Loan rates range from 4.625% to 5.5%withAPRs between 4.991% and 6.117% depending on the loan product.
Don’t Miss: Are Nnn Properties Good Investments