How Much Down Payment Is Needed For An Investment Property
Demand from tenants for good rental property has been growing by leaps and bounds over the last few years, sending rents and home values soaring. As more people become interested in investing in real estate, one of the common questions that comes up is how much of a down payment is needed.
In this article, well discuss how a down payment for investment property works, along with five places to find funds for a down payment that many buyers overlook.
Key takeaways
- A down payment for investment property generally ranges from 15% to 25%.
- House hacking is a technique used by some real estate investors to reduce the down payment amount to as little as 3.5%.
- Loans backed by Fannie Mae and Freddie Mac are two options for financing an investment property.
How Much Will Property Taxes Be
Property taxes are taxes that homeowners pay to support their community and local government. Property taxes fund fire departments, public schools, libraries and other local projects. The amount you pay in property taxes is directly related to the value of your home. If your home is worth more money, you pay more, and vice versa.
Local governments set their own property tax rates, so the specific amount you pay in property taxes depends on your houses location. Speak with a local real estate agent or mortgage lender to calculate how much a certain house will require in property taxes. No estimate is going to be perfect because every homeowner qualifies for different levels of exemption as well.
Borrowing A Down Payment With Other Secured Loans
You may be able to finance your investment property down payment with loans secured by assets other than your home. Fannie Mae says, “Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, or financial assets, such as savings accounts, certificates of deposit, stocks, bonds, and 401 accounts.”
When you borrow against physical assets, the installment payment counts in your debt-to-income ratio.
However, if you borrow against a financial asset — like stocks or your 401 balance — the payment, if required, doesn’t count in your ratios. Because, for all practical purposes, you’re borrowing from yourself.
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Is It Hard To Get A Loan For An Investment Property
Qualifying for an investment property loan is more challenging because lenders view investment properties as a greater risk. Lenders will want to make sure that you earn enough to afford monthly mortgage payments in the worst-case scenario, such as your tenant stops making their payments.
Compared to loans for your personal residence where you may qualify for a 0% or 3% down program, lenders want to see a larger down payment on investment properties, often between 20% to 35%.
To get the best rates and terms, youll want to get a traditional mortgage, which is why most of our winners here have come from that sector. However, you can max out at four conventional loans for investment properties. If you want to keep going, youll need to convert to private and hard money lenders
How Much Is The Down Payment On Investment Property
The down payment requirements on investment property varies on a variety of factors, including a borrowers credit score, type of rental property being financed, debt-to-income ratio, and loan program.
These are the minimum down payments for an investment property, according to LendingTree:
| Loan program |
| 0.0% |
In general, the minimum credit score required for an investment property loan is 680, provided a borrowers debt-to-income ratio is 36% or less.
The debt-to-income ratio is calculated by dividing all monthly debt payments by gross monthly income. For example, if a borrower has a gross monthly income of $5,000 and total monthly debt payments are $1,800, the debt-to-income ratio would be 36%.
While the FHA and VA loan programs come with a low minimum down payment, borrowers are required to occupy one unit as a primary residence.
Oftentimes a borrower will purchase a small multifamily property with 4 units or less, and live in one unit while renting the other units out. Rental income from the tenants is then used to pay for the mortgage and the cost of owning and maintaining the property.
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Choosing An Investment Property Mortgage
Finding out the minimum down payment requirement starts with deciding which loan is best for you. Many home buyers looking to finance investment property will opt for conventional loans those backed by Fannie Mae and Freddie Mac. However, it may be possible to buy a rental property using government-backed loans from the Federal Housing Administration , Department of Veterans Affairs or U.S. Department of Agriculture .
If you decide to finance your investment property purchase with a government-backed loan, you wont be able to buy just any property. FHA, VA and USDA loan programs usually require the home youre financing to serve as your primary residence at least for a little while.
Nevertheless, you may still be able to use a government-backed loan to buy an investment property, such as a multifamily property where you occupy one unit and rent out the other.
The 8 Things You Will Need In Order To Qualify For Investment Property Financing
As any seasoned real estate investor will tell you, qualifying for a mortgage with preferable terms is essential. Before seeking real estate investment financing for your property purchase, planning ahead should be a key part of your overall strategy. The goal is to position yourself to not only qualify for financing, but to show yourself to be a low risk client.
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Should You Hire A Property Management Company
You need to decide whether you want to handle property repairs, tenant management and maintenance yourself or if youll hire a property management company to manage the daily maintenance on your behalf.
Property management companies take both scheduled and emergency repair calls and check up on your property with both drive-bys and scheduled visits to make sure that tenants respect your space. They can also collect rent on your behalf. Some property management companies also offer tenant placement services and eviction processing for an additional fee. In exchange, the property management company takes a percentage of your monthly rent. If you live far away from your property or you dont have the home repair skills to fix your own property, hiring a property management company may be a great choice.
Utilize A Home Equity Line Of Credit
A home equity line of credit is a type of loan that uses the equity in your home as collateral. A HELOC allows you to borrow up to 80 percent of the value of your home minus any existing liens. The loan is usually split into two parts: a draw period, during which you can access the funds, and a repayment period, when you must pay back the loan. HELOCs typically come with variable interest rates, which can be higher than other types of loans.
The advantages of using a HELOC to fund a down payment on an investment property include low closing costs and flexible repayment terms. However, its important to keep in mind that if you default on the loan, your home could be at risk. Additionally, HELOCs typically require a minimum monthly payment, which could be difficult to manage if youre already paying a mortgage.
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Can I Use A Home Equity Loan To Buy Another House
Yes, you can use a home equity loan to buy another house. Using a home equity loan to purchase another home can eliminate or reduce a homeowners out-of-pocket expenses. However, taking equity out of your home to buy another house comes with risks. Learn more about using a home equity loan for a second home.
The Complete Guide To Investment Property Mortgages In 2022
If the road to real estate riches were an easy one, everyone would be a millionaire landlord or house-flipper.
Making big money from investment property is rarely as simple as buy low, sell high. It requires careful research, planning, hard work, and a dollop of good luck.
But as long as you make real estate investment decisions with your eyes wide open, the financial rewards could surprise and delight you.
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What Is Required To Be Approved For Investment Property Financing
Each lender and type of financing will have varying requirements. Private lenders may simply require a relationship with the borrower. Hard money lenders may only require a hot real estate market and a good estimated after-repair value . Home equity loan, home equity line of credit , and conventional loan lenders will have the strictest requirements on income and credit scores.
How To Invest In Real Estate With No Money Down
When you have to put 20% cash down on an investment property, theres a lot less of your cash available to you for when you need it. When you get a call from your tenant about a furnace emergency, having this money is a game changer. But its important to note that in most cases a lender wont just give you money with no money down, nor will a seller will agree to forgo this extra cash either. The truth is, the money has to come from somewhere. In order to make a no money down option possible, there are a couple of ways to do it:
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Be A Resident And The Landlord: Buy A Multi
Your primary residence doesnt have to be a single-family home. Multi-family homes can be a great way for novice real estate investors and aspiring property managers to get started buying properties that generate income.
First, with the help of a professional, find a good real estate deal on a 2-4 unit property. These homes are typically known as multi-unit properties. While living in one unit, youll rent out the others. You can then use the rent payments to help offset your mortgage payment.
The key here is that you can buy a multi-unit property using an affordable financing option like an FHA loan or VA loan as long as you live in it, too.
Mortgage programs like FHA loans dont just have good rates and terms. They also give you options for covering the down payment.
You may be able to obtain gift funds, or perhaps even down payment assistance. And you can use these programs to buy the home without emptying your bank account.
If not, thanks to Federal Housing Administrations low down payment loan requirements, borrowers with good credit only need 3.5% of the purchase price for the down payment with either a traditional FHA mortgage or the FHA 203K loan, which is well-suited for fixer uppers.
You may be out-of-pocket with some upfront costs, but it will be less money than 20% down.
Using The ”rule Of Four
When it comes to actually buying an investment property, it can be hard to know where to start.
But a simple rule of thumb is to multiply your useable equity by four to arrive at the answer.
For example, four multiplied by $100,000 means your maximum purchase price for an investment property is $400,000.
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Hard Money With No Money Down
Unlike traditional lenders who will look at your credit score, borrowing history, and income, hard money lenders are only concerned with the collateral securing the loan or the property being purchased. To these lenders, the value of the collateral is more important than your financial position because if youre unable to make payments, the lender will get their money back by taking the collateral and selling it.
These loans are generally short-term from one to five years and the borrower is expected to pay monthly interest until the loan is paid back in full.
This option offers a much faster loan application process since there are fewer details to go through in order to get approved. These agreements are also more flexible as each deal is looked at individually, versus through a standardized underwriting process. A hard money lender will lend as much as the property is worth, but typically theyll keep loan-to-value ratios fairly low, so they know they have a good chance at getting their money back in case anything goes wrong.
Improve Your Credit Score
Your credit score is an important factor in determining whether you qualify for a home loan, how much you qualify for, and what interest rate you can get. A good credit score may allow you to buy a home with a smaller down payment and lower interest rate, which can help you save tens of thousands of dollars in interest.
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How Do I Calculate Mortgage Interest Apr
For many investors, the real estate market represents a dynamic and exciting arena where hard work and a small amount of luck can yield tremendous profits. Historically, real estate has been one of the most reliable investment platforms in the United States. Although seasoned investors have the ability to buy and sell numerous properties as part of larger tactical strategies, those who are new to the profession may struggle to accrue the funds needed for the down payment on their first investment property. Fortunately, it is possible to borrow the down payment for an investment property, although finding advantageous borrowing terms is an absolute must.
TL DR
Borrowing the funds you need for a down payment on an investment property is possible, although it may require some work on your part. HELOCs and bank loans are some of the most common forms of borrowing that property investors will seek out.
Cash Reserves Closing Costs & More
Regardless of whether you borrow from a conventional lender or a portfolio lender, you still 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 lenders often require cash reserves for all of your mortgages not just the new loan youre borrowing.
And, of course, youll need cash to pay for 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 rental property down payment. Keep these other cash requirements in mind as you run the numbers on financing options.
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What’s An Escrow Account
Find out how we calculate your escrow payments and get answers to your most frequently asked questions.
This article is intended to provide general information and shouldn’t be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.
A fixed-rate loan of $300,000 for 15 years at 5.125% interest and 5.356% APR will have a monthly payment of $2,391. A fixed-rate loan of $300,000 for 30 years at 5.500% interest and 5.661% APR will have a monthly payment of $1,703. Taxes and insurance not included therefore, the actual payment obligation will be greater. All loans subject to credit approval. Jumbo Loans: Loan amounts greater than $647,200. In AK and HI, the Conforming loan limit is $970,800. The Jumbo rates quoted above are for loan amounts above $647,200 up to $2,000,000.
Ways To Come Up With A Down Payment For An Investment Property
Not scared away yet? Good, because despite the high cash requirements for buying investment properties, you have plenty of options to come up with the cash for a down payment on a rental property. You may even be able to buy your next rental property with no money down!
Before we dive in, its worth pausing to note that the best source of funds for a down payment was, is, and always will be cash from your savings. When you borrow a down payment from someone else, you leave yourself vulnerable to overleverage, to narrow cash flow margins or even negative returns, and to possible rate hikes or called loans.
This is why were so big on boosting your savings rate and cutting your spending, and even going so far as living on half your income. The more of your own savings and cash you can invest with, the better position youre in to earn high returns from your rental properties.
All right, enough proselytizing, lets dive into some alternative ideas for coming up with the down payment for an investment property!
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How Do You Borrow A Down Payment For Investment Property
Fannie Mae’s guidelines say that the lender must document the following:
What this means is that you must provide the loan documents specifying the amount borrowed, the payment, term and interest rate.
To make sure that you’re approved for the investment property mortgage before taking out the home equity loan, you can apply for credit approval assuming certain terms for the second mortgage. Then you’ll provide the loan documents when you are under contract and complete the home equity loan process.
The lender financing your investment property, in accordance with federal law, verifies that the home equity loan doesn’t come from anyone who will gain from the property sale, like the seller or real estate agent. And before you can close on your investment property, you must show that the money is in your possession.
Most of the time, you’ll have your loan proceeds wired to your title company or real estate attorney, and they can fax the proof to your lender, which then funds the investment property mortgage so you can close.
The payment for the home equity loan counts in your debt-to-income ratio, so include it when you’re evaluating the property’s investment income potential.
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