Getting A Mortgage For An Investment Property

Date:

Your Mortgage Rate Likely Will Be Higher

Investment property loans get tougher : Mortgage update

In a low interest rate environment, the interest rate on a mortgage for a rental property is still relatively low. For most borrowers, the rate will be about three-quarters of a percentage point higher for an investment property than it would be for a primary home, Dalzell says, or about the mid-3% range currently.

How Are Investment Properties Different From Second Homes

Its important to distinguish between investment properties and second homes because mortgage rules and interest rates are different for each type of property. The biggest difference between the two is that you must occupy a second home for at least part of the year, while you the owner dont live in an investment property.

A second home or vacation home might count as an investment property if you intend to rent it out even for short periods. However, lender policies vary over this.

For example, Fannie Mae lets you rent out a second home provided you occupy it yourself for a period each year, retain exclusive control of the home, and dont rely on your anticipated rental income when you apply. Lenders will also expect a second home to be in a tourist area for a vacation home or a certain distance from your main house if you plan to use it as an occasional residence.

There are three main loan types used to finance investment properties:

  • Conforming loans: By far the most common option
  • Jumbo loans: Used when the loan exceeds conforming loan limits
  • Government-backed loans: Used only when you occupy one unit yourself and rent out the others

Most of those seeking investment property loans will require conventional mortgages. The majority of these are conforming mortgages, meaning they conform to lending rules set by Fannie Mae and Freddie Mac.

Option : Private Money Loans

Private money loans are loans from one individual to another. The source of most private money loans are usually from the friends and family of an investor. If you do not have friends or family in a position to loan money to you for an investment property purchase, a great place to start looking for private money lenders is by going to local real estate investment networking events. The popular real estate investment podcast BiggerPockets keeps a directory of local real estate investment clubs that you can join for networking.

Actual loan terms and interest rates on private money loans can vary significantly, from extremely favorable to predatory, depending on the relationship between the borrower and the lender. These loans are typically secured by some sort of legal contract that allows the lender to foreclose on the property if you default on payments. If you are new to real estate investing, consider carefully how your relationship with the person lending you private money may sour if you default before you sign an agreement with a loved one.

Don’t Miss: I Want To Invest In Mutual Funds

Turn To A Local Bank Or Broker

If your down payment isnt quite as big as it should be or if you have other extenuating circumstances, consider going to a neighborhood bank for financing rather than a large national financial institution.

Theyre going to have a little more flexibility, Huettner says. They also may know the local market better and have more interest in investing locally.

Mortgage brokers are another good option because they have access to a wide range of loan products but do some research before settling on one.

What is their background? Huettner asks. Do they have a college degree? Do they belong to any professional organizations? You have to do a little bit of due diligence.

Why Use A Dscr Cash Flow Loan

3 easy steps to getting a loan on for investment property. Including 5 ...
  • We Require Less Documentation and Offer a Quicker Loan Process

With traditional conventional and hard money mortgage options, you may find yourself overwhelmed with paperwork. Because a DSCR Cash Flow loan with Newfi qualifies borrowers based on their expected market rent, we wont look at your tax returns, paystubs, or debt at all during the loan process!

  • We Qualify Borrowers Based on Cash-Flow

At Newfi, our DSCR Cash Flow loan only focuses on the cash flow of your property! We know many investors have a difficult time qualifying for an investment property mortgage because of a large real estate portfolio of other investment properties or not having traditional employment documentation. Thats why we qualify you based on your expected market rent!

  • We Allow You to Leverage Existing Equity into a New Investment Property

We want to help borrowers on their investment journey, so we allow you to cash out your reserves for the down payment on your new investment property! With a DSCR Cash Flow loan, you can leverage the equity of your home as the down payment on your next investment.

Also Check: Fha Loan Real Estate Investing

Fha Loans: 35% Down Payment

FHA loans are government-backed loans that make homeownership possible for borrowers who are usually seen as high risk. Despite a low credit score and income, borrowers can use an FHA loan to purchase property with four units.

Perhaps the downside of an FHA loan is that youre limited in how much you can borrow based on the propertys location.

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.

Don’t Miss: Self Directed Ira Invest In My Own Company

What Credit Score Do You Need For An Investment Property Mortgage

Investment property loans come with higher minimum credit scores. If you put less than 25 percent down and have a debt-to-income ratio above 36 percent, your minimum credit score is 700. If you put at least 25 percent down, and your DTI is 36 percent or lower, that minimum score drops to 640.

However, other programs, like those offered by portfolio lenders, can feature lower minimum credit scores. In general, the higher your down payment, the lower your credit score can be.

Commercial property lenders may not be overly concerned about your credit score if the property generates enough income to pay the mortgage. You may have to set up a single asset bankruptcy remote entity, which prevents property owners from retaining rental income without paying the mortgage.

The Risks Of Being Leveraged

VA Loan For Investment Property? (YES, It’s Possible!)

Taking on any type of investment has an inherent riskespecially when dealing with uncertainties in the housing market. First and foremost, the diversification of money across investment properties is an approach that should seriously be considered only by a well-informed investor. A sharp understanding of current economic conditions, the overall health of the housing market in general, and the area into which you are buying specifically is necessary.

While there are several advantages to taking out a loan to buy an investment property, things could go awry. Lets assume each rental property depreciated sharply in value. The leveraged investor now owes far more than they ever put down. Should you misstep the market by even a little, you could lose massively, especially with a couple of properties in your portfolio.

While a benefit here is that the bank will certainly lose more than you will, your could be severely impacted. The potential for significant returns attracts many to this type of strategy, but it should be approached with clear consideration for all the risks involved. This strategy will, of course, also require you to go through the mortgage processin many cases, several timeswhich is another thing to consider.

Don’t Miss: Best Investment Funds For Income

Commercial Residential Rental Property Loans

Advantage: These loans allow you to borrow based only on the propertys income. You can also buy projects with more than four units, or finance much more expensive property, such as whole apartment complexes.

Limitation: These loans can be expensive and complex to set up. Understand how to buy and finance apartment buildings.

If you are wondering, Can I get a mortgage for investment property? the answer is probably yes. You can even buy rental property as a first-time homebuyer with the right program.

And even if you cant qualify for an income property mortgage, you may be able to buy a multi-unit owner-occupied home and rent out the other units, or buy a primary home and convert it to a rental property later. Thats a great way to buy rental property with a low down payment or credit score.

Finally, if all else fails, ask your property seller to finance you. Some sellers may jump at the chance to earn interest from the sale of their home.

Piggyback Loans Vs Pmi Vs Fha Loans

In a three-way match-up, which mortgage product comes out on top? Lets look at an example of a home purchase of $250,000 with 10% down.

$250,000 Home
$1,360
$1,425

*Rates are only examples and are not taken from current rate sheets. Your rate may be higher or lower. Click here to request current rates.

In this scenario, the piggyback mortgage saves the buyer $60 per month compared to getting one 90% loan with PMI and $125 per month compared to FHA.

Also Check: Where Should I Invest In Real Estate Now

You May Like: How To Track All My Investments In One Place

How To Get A Mortgage For An Investment Property

A big question for people buying a property, whether its an investment property or a primary residence, is How much house can I afford? Start by looking at a mortgage calculator to get an idea of rates and monthly payments, and then you can get preapproved to see how much money you qualify for. Make sure that you tell your Home Loan Expert that youre interested in buying an investment property, which has different rules than a primary residence.

Property Investment Costs And Other Things To Consider

Real Estate Investment Loans

When youre thinking of buying a second house and renting your first property, youll need to allow for additional costs that may arise. Your rental income may cover these, but its wise to have a positive cash flow or a cash buffer.

These costs can include:

  • Rent shortfall. If your home loan repayments and ongoing property costs are greater than the rental income youre getting, then youll need to cover the shortfall.
  • Tenant loss. You need to have enough cash saved to make mortgage repayments should your rental become untenanted
  • Maintenance costs. Every property needs maintenance. You will need to budget for emergency repairs, regular maintenance and possibly renovations.
  • Bill payments. As the owner youre still responsible for paying certain bills, such as water, council fees, and if you own an apartment, even strata fees.
  • Landlord insurance. You may need to pay landlord insurance, which can include building insurance, landlord contents insurance and property owner liability insurance.
  • Real estate fees. You may need to pay property management fees if you use a real estate agent to manage the property on your behalf.
  • Home loan rate changes. If you have a variable rate home loan you will need to make sure you can afford any rate increase
  • Change in circumstances. Make sure you consider whether you can cover the loan repayments if your personal circumstances change.

Recommended Reading: All Cash Real Estate Investing

Hard Money Loan Rates

If you want to buy a property under an LLC, big banks like Wells Fargo won’t be a fit. For this reason, many individual investors explore hard money lenders. This also allows you to expand beyond 5 rental properties if a traditional bank limits the number of properties on your credit report.

Often times, investors want to purchase rehab properties but can’t obtain loans from credit unions or traditional banks due to the condition of the home. Many hard money lenders also offer short-term purchase-rehab loans for buying and renovating distressed properties. Investors using the BRRRR strategy can often refinance their hard money or pursue a cash-out in order to scale their purchase of additional rentals.

Todays Mortgage for Rental Property Rates:

  • Adjustable Rate Mortgages : 6.5% 8.0%
  • 30-Year Fixed Interest Loans: 6.75% 9.5%
  • 12 month “Fix & Flip” Loans: 7.0% 12%

Down payment required:

  • Often allow DSCR loan criteria for underwriting rather than income
  • Scalable: no limit on the number of mortgages
  • May not report to the credit bureaus depending nature of loan
  • Allow loans to LLCs and other legal entities
  • Quick closing as fast ast 14 days
  • Often no W2 income documentation required by some lenders
  • Allow purchase-rehab loans

Cons:

Intro To Investment Property Mortgages

When you buy an investment property, you need an investment property mortgage. The first thing to know is what other names these mortgages go by, so you know them when you hear them.

A lot of consumers and real estate agents will call this kind of loan a rental property mortgage.

Lenders, on the other hand, will call this a non-owner occupied mortgage.

The reason for this is that lenders categorize loans by the occupancy, and there are three kinds of home loans:

  • Owner-occupied mortgages: These loans are for people buying a home they intend to live in as their primary residence. These loans require you to move into the home within 60 days of closing the loan, and you must live there for at least one year after that, youre free to rent out the home, and your loan terms cant change.
  • Second-home mortgages: These loans are strictly for people buying a home they intend to use as a second home for family and friends, and lenders prohibit rental of the home. If you rent your home with a second-home mortgage on it, that mortgage can be called due and payable all in one lump sum.
  • Non-owner occupied mortgages: These loans are for people who want to rent out the home. If at any time you want to convert this rental home to a primary residence, youre free to do so, and it wont change the terms of the loan.
  • Also Check: Apps For Investing For Beginners

    How To Apply For A Rental Property Mortgage

    The application process for a mortgage involves all the same steps, whether the mortgage is for a primary home or an investment property, Dalzell says. Those steps include qualifying the buyer, appraising the property, researching the title and underwriting the loan.

    Youâll typically need a credit score of at least 620 and a debt-to-income ratio that is no higher than 35% to 45%. But youâll also need to document that you have the income to cover the rental property mortgage along with your other monthly obligations.

    One difference for investment property mortgages is that if the buyer plans to earn income through renting the property, that projected rental income can sometimes be included in the qualification process.

    âAn appraiser can create a rented income schedule to show what the property will typically rent for,â Dalzell says. âThen the lender can figure your income to include that projected rental income, which may help you qualify for better terms and offset your payment.â

    Many lenders require additional steps and documentation during the mortgage application process for an investment property. For instance, banks are more likely to view a real estate investor as a commercial customer, requiring a commercial loan relationship with the institution.

    âThe document requirements for commercial loans differ substantially from that of a mortgage on oneâs primary home,â McCormick says.

    Home Equity Of 20% Or More

    Getting Real Estate Investment Loans Using LLCs (Banking Set Up)

    Homeowners will need more than 20% equity in their primary residence to qualify for a cash-out refinance. You typically have to leave 20% of the homes value untouched, which means that you can only cash out the amount of equity you have above that threshold.

    Leaving 20% equity in the home also has an advantage: the borrower dodges Fannie Mae and Freddie Macs private mortgage insurance requirement.

    However, an FHA loan will require FHA mortgage insurance premiums even with 20% equity left in the home.

    Don’t Miss: How To Invest In The Private Market

    Get Started Closing Multifamily Mortgages

    For residential brokers looking to increase business by expanding their product offerings, small-balance commercial mortgages are a great option. And for brokers new to commercial mortgages, connecting with borrowers who need to finance multifamily properties is a great way to transition into the industry. to read about why targeting the multifamily mortgage market is a smart move and learn more about how you can help borrowers obtain financing for these investment properties.

    Pay For Private Mortgage Insurance

    You may just want to bite the bullet and pay for PMI, especially if PMI payments will be less than second mortgage payments. You can also cancel PMI later. Lenders are legally required to cancel PMI once you have 22% equity in your home, and you can request early cancellation when you reach 20% equity.

    Dont Miss: Real Estate Investment Opportunity Zones

    You May Like: Pacific Investment Management Company Llc Pimco

    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.

    Popular

    More like this
    Related

    Best Real Estate Investing Advice

    There Is...

    Series 65 Registered Investment Advisor

    Who Needs...

    Investment Account Sign Up Bonus

    Acorns $25...

    Is Gold A Good Investment In A Recession

    Silver Did...