Investment Property Credit Score Requirements
When you finance an investment property, lenders generally want to see a better credit score than they do for primary residence buyers.
For instance, Fannie Mae borrowers putting at least 25% down could get approved with a 620 FICO score for a primary home. That minimum credit score increases to 640 for a rental.
If you dont have great credit, you can try an FHA loan its underwriting is much more lenient.
FHA loans are available for homes with up to four units, and credit score requirements start at 580. The catch? You must live in one of the units, so the building is still technically a primary residence.
Other Guidelines For Rental And Investment Property Loans
When you apply to buy a rental property, underwriters will verify your ability as a potential landlord. If youve never owned a home or managed any property, youll have a tougher time.
Some lenders allow first-time real estate investors to get around this by hiring a property manager. There is nothing definitive about this in the official guidelines so check with your loan officer.
There are limits to the number of properties you can own with mortgages on them, if you go with conforming financing.
And youll be required to have reserves several months of mortgage payments in the bank to cover those months when your property is unoccupied.
What Are Prepayment Options
Prepayment options outline the flexibility you have to increase your monthly mortgage payments, or pay down your mortgage principal as a whole. The monthly prepayment option is a percentage increase allowance on your original monthly mortgage payment.
For example, if your monthly mortgage payment is $1,000 and your prepayment allowance is 25%, then you can increase your monthly payments up to $1,250. The lump sum prepayment option on the other hand, applies to the original mortgage amount. So, if your lump sum prepayment allowance is 25% on a $100,000 mortgage amount, then you can pay $25,000 off the principal every year.
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Lower Your Monthly Payment
Refinancing to a longer-term mortgage can be another way to lower your monthly payment. If you only have 15 years left on your loan, for example, and then you refinance into a new 30-year loan, your balance is then spread out over many more years and months, thus lowering your payment. Keep in mind though that a longer term means you may pay more interest over the life of the loan.
Are Mortgage Rates The Same For Every State
No. For instance, Mortgage rates in Orlando Florida are different than mortgage rates in New York. One of the key factors is loan sizes. Lenders make a portion of their yield based on loan sizes. New Yorks median home prices are much higher than of Florida, thus enabling a lender to offer a lower rate in states with higher home prices.
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House Flipping Pros & Cons
- Handsome profits are delivered fast and in lump sums.
- Potential for quick and large returns.
If you watch HGTV, you know the drill.
First, buy a slightly distressed property in an up-and-coming neighborhood for less than market value or less than its near-future value. Next, refurbish this fixer-upper into a model home. The moment the facelift is done, find a buyer willing to pay more for the property than you invested.
Rinse and repeat.
House Flipping Cons
The biggest mistake made by many newbie house flippers is underestimating the cost of purchasing and fixing up the property. As a house flipper, youre betting you can sell the renovated house at a significant markup before ever-escalating costs destroy your profit margin.
This isnt a game for naïve or impatient people.
A successful flipper thoroughly researches the local market before purchasing an investment property. The ideal neighborhood is one where homes are still affordable but appreciating fast.
Typical Ontario Mortgage Amounts
Finding the right mortgage has a lot to do with determining what you can afford. And that depends on where you live.
Below are typical mortgage amounts for someone putting down 20% in select Ontario cities. Theyre based on a 30-year amortization and average purchase prices as tracked by the Canadian Real Estate Association :
- Barrie and District: $570,800
Thanks to Ontarios stable economy and housing market, it tends to have lower arrears rates than other provinces.
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Can You Call An Investment Property A Second Home
Tempted to call your investment property a second home and take advantage of some of the second-home perks, like a lower down payment and interest rate?
Dont be. In the mortgage world, you need to call it what it is whatever it may be.
It is absolutely imperative that borrowers are completely transparent when disclosing to their lender the intended use of the property to ensure that they receive the appropriate product and rate, Joseph says.
Joseph adds that borrowers may be asked to sign a document verifying their intended use of the property, so theyll have to indicate in writing what they plan to do with the home. Deceiving a lender otherwise could have serious consequences.
Intentionally misleading a lender constitutes mortgage fraud, Joseph says. Not only is it unethical, its illegal and could result in criminal prosecution.
Down Payment Requirements For Investment Property Mortgages
Your down payment will vary based on factors such as whether you live in your investment property and how many units it has:
- Owner-occupied property. Youll be required to provide a down payment of at least 5% if you plan to live in an investment property with 1 to 2 suites. For any property thats 3 units or more, your down payment will go up to 10%.
- Owner-offsite property. Youll have to pay a minimum of 20% as a down payment if you intend to live off-site of your investment property. This down payment applies no matter how many units your property has.
You should also keep in mind that youll be required to pay for mortgage default insurance for any down payment thats under 20% of your total mortgage amount. This insurance can be very costly so its recommended that you try to make a minimum 20% down payment wherever possible even if its not mandatory.
Using the equity in your home to fund an investment property
If you already own a property, you may want to consider using the equity in that property as a down payment on your investment property. You can do this by taking out a home equity loan or line of credit on your primary mortgage.
Calculating the equity in your primary residence
- Your home is valued at $750,000
- You owe $200,000 on your primary residence
- Your equity = $550,000
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Alternative Investment Property Financing
Your seller may be happy to have an income stream from you without the hassles of being a landlord. Seller financing can be cheaper than banks or brokers.
The seller may be more interested in unloading the property than in profiting from your mortgage. But make sure you get the home appraised and inspected before buying.
Alternatively, there are lenders that specialize in financing commercial residential property from homes to apartment buildings.
As long as the property income is sufficient to cover the mortgage and other expenses, they may finance you for less.
How Much Higher Are Mortgage Rates For Investment Property
Investment property mortgage rates are always higher than rates on primary residences . This is because financing agencies usually have a separate set of fees for primary residence and for investment properties. These fees are directly correlated with your mortgage rate. Usually, when getting investment loans, investors pay higher fees and, therefore, get higher rates. How much higher? Technically, it depends on the type of investment property, your credit-worthiness, and your down payment. However, the rule of thumb is that rental property mortgage rates are 0.5% to 0.75% higher than primary mortgage rates. So, at current rates mentioned above:
- 30-year investment property mortgage rates would range from 3.5% â 3.75% for single-family homes
- 15-year investment property mortgage rates would range from 3.11% â 3.36% for single-family homes
- 5-year adjustable-rate mortgage would range from 3.36% â 3.61% for single-family homes
Read this guide to learn all about the Best Real Estate Investment Loans in 2020.
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How High Will Mortgage Rates Go Up In Canada
On June 9, 2022, the Bank of Canada released a report that predicted that fixed rates will be at an average of about 4.5% by 2025. This average is actually lower than the current average fixed mortgage rate across Canadaâs Big 5 Banks . It is therefore possible that though mortgage rates will continue to go up in 2022 and even 2023, mortgage interest rates may plateau and then start to go down by 2024 and 2025.
Can A Broker Get You Great Investment Loan Rates
A professional mortgage broker can help you find the best loan options for your financial situation, personal goals, and investment strategy. They may also have access to special investment mortgage deals that are exclusive to brokers. A broker can also negotiate with a lender on your behalf, so if you can show that youre a good borrower, you may be able to enjoy a cheaper interest rate on your investment mortgage, whether you’re investing for the first time or refinancing.
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How Do I Shop For Current Investment Property Mortgage Rates
NerdWallets mortgage rate tool can help you find competitive investment property mortgage rates. In the “Refine results” section, enter a few details about the loan youre looking for and select “Investment property” from the “Home purpose” drop-down menu. Youll get a personalized rate quote in minutes, without providing any personal information. From there, you can start the process to get preapproved for an investment property loan. Its that easy.
What Should I Know Before I Apply
To apply for an investment property mortgage, you need to meet the following criteria:
- Be at least 18 years old
- Be a citizen or resident of Canada
- Be free from bankruptcy or other forms of unmanageable debt
You may need to provide a number of documents to qualify for an investment property mortgage. These can include the following:
- Proof of income. Youll be required to submit documents like pay stubs and letters of employment to verify how much money you make.
- Proof of down payment. Youll usually have to show that you have enough money in the bank to cover your down payments .
- You may need to authorize your broker or the bank to pull your credit report so that they can assess your creditworthiness.
- Government-issued ID. Youll have to show proof of ID like your drivers licence or passport to start the application process.
- Property documentation. You may be required to show property listings and zoning documentation for the property you want to buy.
- Other financial information. You could be required to provide a list of your debts and assets so that your lender can calculate your debt ratio.
How do lenders assess your financial eligibility?
There are 3 main debt ratio calculations a lender might use to figure out if youre eligible for a mortgage, and what your investment property mortgage rates should be.
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Why Are Investment Property Rates Higher
The simple reason investment property mortgage rates are higher is that they are considered a riskier proposition for lenders.
Most investors use the business model of renting out an investment property and using the rental income to make monthly mortgage repayments. Rarely will these payments come from the investors day job.
If their rental income goes south, there is a high possibility of the investor defaulting on the mortgage. At that point, the lenders only option is to foreclose on the home. The investors primary home is considered less risky than a rental home because investors are unlikely to fight as hard for their investment home as they would for their primary residence.
All these factors contribute to higher rental property mortgage rates because its the only way the lender can protect themselves.
Current Investment Property Mortgage Rates
Even before the COVID-19 pandemic, investment property mortgage rates in 2020 were forecast to be lower than they were in 2019. The pandemic and the aftermath only resulted in rates falling lower than initially expected. The Fed responded to COVID-19 by cutting the Federal Funds rate to 0% interest rate and purchasing billions of dollars of mortgage-backed securities. These actions have increased the supply of money and liquidity in the US economy. Consequently, this led mortgage rates to decrease. Based on a NerdWallet survey of mortgage rates as reported by national lenders, these are the average mortgage rates as of this writing
- The average 30-year fixed mortgage rate fell three basis points to 3.00%
- The average 15-year fixed mortgage rate dropped three basis points to 2.61%
- The average 5/1 ARM rate dropped one basis point to 2.86%
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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.
What Rates Can You Get On An Investment Loan
As with owner-occupier mortgages, you can choose an investment loan with:
- a variable interest rate, which may rise or fall over time, making your loan repayments cost more or less
- a fixed rate, which lets you enjoy consistent repayments during the fixed rate period, or
- a split rate, where you pay a mix of variable and fixed interest on your mortgage.
Its important to remember that the best investment loan for you may not be the one with the lowest interest rate. If you compare different loan products, you may find a fixed rate home loan or variable rate home loan with features and benefits that offer you extra value, as well as affordable home loan interest rates.
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What Can I Do With An Investment Property
There are several uses for a residential investment property, including:
- House flipping, which can be done after making home improvements that increase the propertys value
- House hacking a multiunit home, which allows you to live in one unit and rent out the other unit to cover your mortgage payments and create a passive income stream
- Providing short-term rentals through a platform like Airbnb
- Providing long-term rentals in six- to 12-month increments
George Botroschief Executive Officer
George Botros was appointed as CEO of Alta West Capital in April 2021. Prior to his role as CEO, George served as Alta West Capitals CFO and CCO from 2014 to 2021. He has over 20 years in the lending business, participating in residential, commercial, mezzanine, and interim financing related activities.
George is also a Director of the funds Alta West administers. Prior to joining Alta West Capital, he managed Toro Financial Corporation which amalgamated with AWM Diversified MIC, an entity managed by AWC, in 2014. George was also a University Professor teaching Finance and Economics for University of Lethbridge.
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Highlights From The Bank Of Canada’s July 13 2022 Announcement
On July 13, 2022, the Bank of Canada increased the key overnight rate by 1.00%. This is the largest rate hike since 1998. The target for the overnight rate is now 2.5%.
- Canadians with variable-rate mortgages and home equity lines of credit will see their rates rise accordingly by 1%. They should calculate what their new mortgage payment will be and budget for more increases to come this year.
- Canadians with fixed-rate mortgages arenât affected by the announcement directly, but can expect higher rates when they renew at the end of their current mortgage term.
- As rates rise, so does the mortgage stress test. With today’s announcement pushing variable rates up by 1%, the stress test will now effectively be 2% above your contract rate. To calculate how much you can qualify for, use our mortgage affordability calculator.
- The Bank of Canada has made it clear that they will continue raising rates this year until inflation moderates, so Canadians currently shopping for homes should get pre-approved to hold todayâs fixed rates for up to 120 days.