Getting An Investment Property Mortgage
There are differences between obtaining a mortgage for an investment property and for a primary residence.
While some loans allow down payments as low as 3% for a single-family primary home, if you purchase a single-family investment property, the down payment requirement could be around 15%. Minimum down payments for multifamily unit investment properties can be as high as 25%.
A lender may require a of 620 or above to qualify for an investment property mortgage, and interest rates are generally higher for these loans. The loans are riskier for lenders because borrowers are considered more likely to default on an investment property if they run into financial trouble than on their primary home.
While it depends on the lender, you may also be required to have extensive cash reserves when buying an investment property. In most cases, government-backed loan programs offered by the Federal Housing Administration or the Department of Veterans Affairs aren’t an option because those loans can be used for a primary residence only.
Shop around at multiple lenders to find the best rates and fees, just as you would when obtaining a mortgage for a home. Compare what each lender offers by reviewing the Loan Estimate.
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Start Investing In Real Estate Now
Fortunately, you dont need to be a seasoned real estate entrepreneur to get started in real estate investing.
With interest rates still near historic lows, as well as homes continuing to appreciate, now could be a favorable time to start investing in real estate.
You have financing options. Stop paying rent, living with your parents, or living with a roommate and get out on your own.
What Is A Non
A non-owner-occupied mortgage, also known as an investment property mortgage or rental mortgage, is a form of mortgage thats meant for residential properties with 1 4 units. However, its specifically designed for borrowers who do not intend to live in the property.
In effect, real estate investors who do not plan to use a property as their primary residence will want to obtain a non-owner-occupied mortgage. Be advised though that those looking to purchase larger holdings like an apartment or condo building with numerous units wont find this form of mortgage to be a good fit.
Also be aware: Because these loans are meant for properties that are owned purely for investment purposes, there are higher-interest non-owner-occupied mortgage rates as a result. Thats because non-owner-occupied properties present higher risk of default in the eyes of financial lenders. In addition, lenders may also require borrowers to put down a larger down payment as a safeguard against the increased risks that non-occupied-owner properties present as well.
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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.
Mortgage Fraud And Your Primary Residence
You might be wondering at this point why any of these classifications matter. After all, you can say you plan on using a home as your primary residence when applying for a mortgage, and whos to say your plans didnt change afterward?
Unfortunately, thats an example of mortgage fraud, and it can be prosecuted. Dont take a chance on being dishonest with your lender or the government.
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Option : Tapping Home Equity
Drawing on your home equity, through a home equity loan, home equity line of credit , or cash-out refinance, is a fourth way to secure an investment property. In most cases, itâs possible to borrow up to 80% of the homeâs equity value to use toward the purchase, rehabilitation, and repair of an investment property.
Using equity to finance a real estate investment has its pros and cons, depending on which type of loan you choose. With a HELOC, for instance, you can borrow against the equity the same as you would with a credit card, and the monthly payments are often interest-only. The rate is usually variable, however, which means it can increase if the prime rate changes.
A cash-out refinance would come with a fixed rate, but it may extend the life of your existing mortgage. A longer loan term could mean paying more in interest for the primary residence. That would have to be weighed against the anticipated returns that an investment property would bring in.
Popular Loan Options For Investment Properties
- YOURgage Our exclusive program puts you in control of your mortgage. Choose a term between 8 and 30 years.
- 30-Year Loan Your mortgage rate is fixed your mortgage payment is low and never changes. Take advantage of some of the lowest mortgage rates in history.
- 15-Year Loan The same benefits of the 30-year mortgage, but you pay off your mortgage in half the time. Save thousands of dollars in interest with a 15-year fixed-rate mortgage.
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How To Get An Investment Property Loan With 10% Down
Real estate investing can feel like an exciting adventure. When you take your time and find the right investment property, the investment might help you improve your monthly cash flow and generate extra income. Finding the right investment property loan can make all the difference in whether or not your investment property is profitableor a financial burden.
High down payment requirements send many investors searching for more affordable ways to secure financing. And while lower down payment options on rental property loans can certainly be complicated, there are alternative solutions you might want to consider.
Rental Property Operating Expenses To Remember
In addition to the principal payments of the mortgage, there are several other operating expenses investors need to consider before buying a rental property.
All of these can be deducted as normal expenses to reduce taxable net income:
- Mortgage interest payment
- Capital reserve account contributions
- HOA fees
- Utilities
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Investment Property Loan Rates Vs Conventional Loan Rates
Investment property loan rates are almost always higher than conventional loan rates, including second home loan rates, due to the steeper risk an investment property poses compared to a primary residence. If you plan to rely on the rental income from a tenant to contribute to the mortgage payments for the investment property, theres a greater possibility you could default on the loan if your tenant fails to pay rent.
Tips For Buying An Investment Property
Here are tips for people who decide that it makes more financial sense to buy an investment property to rent out before buying a first home to live in:
- Spend time researching good markets for rental property investing, where job markets are growing and the population is increasing.
- Understand financial performance metrics that real estate investors use, such as cash flow, net operating income, cash-on-cash return, gross yield, and appreciation.
- Reduce personal debt by paying off credit cards and paying down student loans.
- Save money for a down payment, such as raising money from friends and family or tapping into an IRA.
- Shop around for your first investment property loan by speaking with local lenders and visiting the Stessa Mortgage Center.
- Always plan for the unexpected, such as major repairs or longer than normal vacancy periods.
- Prepare to be a landlord or hire a good property management company.
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What Is Real Estate Investing
Real estate investing involves purchasing an investment property to generate profit. An investment property is real estate that isn’t a primary or secondary residence. It’s a piece of property that will not be occupied by the owner. Instead, the property is purchased in order to generate a profit, either through rental income, a future sale, or both. A home buyer may be interested in investing in real estate due to potential tax benefits or the opportunity to build up an investment portfolio.
An investment property can be a long-term commitment or a short-term endeavor, such as “house flipping”, where a home is purchased, renovated, and then sold at a profit. Regardless of the specifics, the needs of real estate investors are different from the needs of a typical home buyer, so working with a lender who understands your goals is beneficial.
Qualifying For More Than Four Loans On A Property
When you have four mortgages in your name, it gets much more difficult to get loans. Fannie guidelines include a 25 percent down payment, 720 credit score, and they do not allow a cash-out refinance. It is so important to find a portfolio lender who does not follow Fannie guidelines! My lender will still do 80 percent loan-to-value loans on more than ten mortgages and allow a cash-out refinance on more than ten mortgages as well!
Remember, if you already have investor loans in place and you are trying to buy more investment properties, the bank will consider your debt-to-income ratio. If you have not had your investment properties rented for at least a year, it may be very difficult to qualify for more rental properties. Investors should not buy the most expensive house they can. This is not always possible, but buying less expensive houses may allow an investor to keep buying rental properties without having to take long breaks waiting for the rental income to help the debt-to-income ratio.
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Your Guide To Investment Property Loans
Here are the financing options that are available to investors.
Get our 43-Page Guide to Real Estate Investing Today!
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If you’re just getting started with real estate investing, odds are that you don’t have enough funds on hand to buy an investment property outright. Fortunately, however, there are plenty of investment property loan options available to help you start building your portfolio. Below is a guide to the different types of investment property loans that are available to investors today. Keep reading to learn which one might be the best fit for you.
Qualifying To Refinance A Investment Property
What if you already own an investment property? Is qualifying different? Yes. By and large, if you have owned an investment property for six months or longer, lenders will expect to see that rental income on your tax return .
I put the rental income on my Schedule E, but my accountant writes off all the rental income with expenses. Which number do they use?
Banks look at the net rental income on your Schedule E, and then they add back certain expenses such as depreciation and interest expense. So even if you show a loss on Schedule E, after adding back depreciation and interest, you might have a positive number to use to qualify.
What if I did renovations to the house after I bought it and I just started renting it?
If that is the case and you can prove that you did these renovations with bills from contractors and paid receipts, then you might be able to use the appraisal form 1007 to estimate the value of the market rents for the units.
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Financing Options For Rental Properties
Conventional investment property financing. A conventional loan is your only option if you want to buy a true investment property that is, a property you plan to rent or sell, but not live in. Conventional loans require 15%-25% down , and the credit score minimums will be higher than government programs. However, youll also have the flexibility to own the property without a residency requirement.
FHA multiunit financing. Loans backed by the Federal Housing Administration are attractive if youre struggling to save up for a big down payment or if your credit score is under 620. The credit score and down payment requirements for an FHA loan for an investment property are lower than conventional loans, and you can use rental income to qualify. But there is a catch: You must reside at the property for a minimum of 12 months.
VA multiunit financing. Loans guaranteed by the U.S. Department of Veterans Affairs dont have a minimum credit score or down payment requirement. Qualifying active-duty service members, veterans and eligible spouses can use a VA loan to buy a property with up to seven units, including one designated for business. The borrower must live in one of the property units.
Avoiding Capital Gains Tax With The 1031 Tax Exchange
When the time comes for you to sell your investment property, youll likely have to pay a capital gains tax at the time of sale. That is unless you reinvest your proceeds in another, similar property.
IRC Section 1031 provides an exception to tax gain payments and allows you to postpone paying that tax if you reinvest the proceeds a like-kind exchange. To qualify, both the relinquished property you sell and the replacement property you buy must meet specific requirements. Both properties must be held for use for investment. Property used primarily for personal use, like a primary residence, a second home, or vacation home, does not qualify for like-kind exchange treatment in the eyes of the IRS. You have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification replacement property must be in writing, signed by you and delivered to the seller of the new property. While there’s no limit on how many times you do a 1031, there are restrictions that accompany it. Be sure you consult with your real estate agent, investment broker, accountant, attorney, etc. to better understand 1031 rules.
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What To Know About Buying An Investment Property
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An investment property is real estate bought for the purpose of generating income. Buying an investment property can come with challenges, such as maintenance costs and more stringent financing requirements including higher interest rates and a larger down payment compared with mortgages on primary homes.
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Perceived To Be A Higher Risk
Some lenders may not be willing to take on the risk at all if youre trying to secure an investment property loan. This can occur if theyve lost money in the past on investment property loans and are unwilling to take the risk again. Their rationale is that if the borrowers investment fails, they may prioritize other debts over the investment propertys mortgage .
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Home Equity Loan & Heloc Tax Benefits
Prior to 2018, federal tax law allowed homeowners to deduct the interest they paid on their mortgage as well as their home equity loan or HELOC. At the beginning of 2018, however, the IRS added some qualifications to home equity debt tax deductions.
Under the current law, interest on home equity debt is only tax deductible if the homeowner uses the proceeds to make substantial improvements to the property serving as collateral for the loan. As a result, homeowners cannot deduct the interest if they use the proceeds to purchase or improve a separate investment property.
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.
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What Are The Housing Market Trends
You want to choose a property that rises in value over time. But how can you tell which areas will become the next best places to invest in real estate? The only way is to watch an areas housing market indicators and rental trends over time and compare the direction of previous property prices and taxes to where they are now. A home purchase is a major investment, so dont be afraid to take plenty of time to do your research and to analyze market trends to find the perfect area before you dive into a loan.
Best For Rehab Loans: Lendingone
LendingOne
Why We Chose It: LendingOne earns our nod for best rehab lender because they are one of the very few commercial lenders that make it easy to get a pre-approval letter, they finance up to 90% loan-to-cost and provide lower rates and fees than their competition.
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Pre-approval/proof of funds available online within minutes
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High leverage
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Founded by investors to improve upon traditional lenders limitations
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$150 charge for each draw
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Only available for one- to four-unit properties, no commercial
In 2014, Bill Green and Matthew Neisser founded LendingOne in response to their frustrations felt toward the difficult lending environment from rigid bank criteria and the easier, though more expensive, hard money alternatives.
As a direct private real estate lender, LendingOne has become the best rehab lender in the industry because they help investors get what had been missing in the market, such as pre-approval letters and proof of funds, higher leverage, and lower rates and fees.
LendingOne offers fix-and-flip and rehab-to-rent loan products. Down payments range from 10% to 20%. For rehab to rent, they have a 30-year fixed-rate loan as well as 5/1 and 7/1 ARM loans. Their fix-and-flip loans can finance up to 90% of your repair costs. Two years of interest only payments are an option on the fix-and-flip loans too. LendingOne loans on two- to four-unit properties only, including condos and townhouses.
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