Smart Money Mortgages - Investment Property
The investment property market has changed, has your mortgage changed with it? How does your current mortgage provide you with an infusion of cash flow? Does it leave you flexible in the event of circumstances beyond your control in receiving rent? (See 2020).
Being an investment property owner, you deal with changes on a daily basis. Whether you are a single property owner seeking more properties or multi-property investors, chances are you are leaving $1000’s and $1000’s on the table.
Often, over the last 10 years, we have found that investment property owners are more concerned about getting a mortgage, instead of truly understanding the right mortgage. There is a difference. In fact, choose wrong and it will cost you right now and your ability to source and purchase more properties.
What category do you fall into:
- Multi-state investor?
- Mixed-use properties?
- Exclusively for AirBnB?
- Apartment complexes?
- Condos?
- Duplexes and four-plexes?
Believe it or not, there are lenders across the country seeking this very business today, with rates, terms, and flexibility you may have never seen in the non-owner occupied. We put together the best in investment property mortgages. Simply click the link and set a 10-minute overview. That way we can understand your portfolio and how we can maximize its result.
Here is a bit of a guide for a new investor:
Please note, we put this together as a general guide. We customize our solutions for our customers, however, this can give you an idea of what may be needed.
When you decide to buy an investment property, the down payment is going to be an important factor in how much profit you make each month. The more cash you’re able to put down on the home, the lower your monthly payment is going to be.
There are several factors that determine what your down payment needs to be. Some of these include your income, credit score, debt-to-income ratio, and if it’s going to be an owner-occupied investment property.
If you’re not planning on living in the property, a 20% down payment is usually the minimum. This would give the property a loan-to-value (LTV) of 80%. Occasionally you can put down just 15% (85% LTV) if you have a credit score over 720. If you’re planning on buying a multi-family investment property, it’s likely you will need a down payment of 25% (75% LTV).
The minimum credit score needed to finance an investment property through Quicken Loans is 620. However, the interest rate will start to increase as your credit score falls below 740. At that point, you can choose to either pay the higher rate or pay for points to lower the interest rate you’ll pay.
When purchasing an investment property it’s best to have a low DTI. This will help ensure the lowest rates possible. Ideally, your DTI will stay at or below 36%. If you start to creep past that number, lenders can start looking at you as a risky borrower. That means you will start paying a higher interest rate. If your DTI climbs up to 45%, it’s likely you will be denied for a mortgage.
While some lenders require investors to show four month’s worth of principal, interest, taxes, insurance, and homeowners association dues, some lenders require more. Quicken Loans requires six months of house payments (including taxes and insurance) plus an additional two months of house payments in reserves for every non-primary residence that a person owns.
Freddie Mac and Fannie Mae differ on this rule. Freddie requires a borrower buying an investment property to show two years of landlord experience, through tax returns, in order to count projected rent as income. Fannie Mae says it’s still possible to buy an investment property and use a portion of income to qualify without having a two-year history. Quicken Loans does not impose the two-year rule on the majority of investment property purchase transactions.
Real estate investing can be a lot of work. Unless you’re purchasing a turnkey property, you might need to oversee renovations once the property is purchased. And unless you’re planning to hire a property manager, you will be responsible for placing tenants in the home and for all maintenance required.
It might make sense to bring on a real estate partner to split the work. Plus, they will also be able to cover a portion of investment costs. But are there any restrictions on who can be a partner and how many partners you can have?
There are no restrictions on who can be your real estate partner. You could choose a relative or a close friend.
There are some added hurdles in the loan process if you’re considering a condominium. First, many lenders will require a minimum of 51% of the complex to be either owner-occupied or a second home. It’s also important to check the HOA bylaws before putting in an offer on a condo. Some buildings will require you to occupy the unit for a year before renting it out. Plus, some buildings forbid rentals altogether.
The condo association must also prove that it’s in good financial standing and that it has enough money in reserves if any repairs are needed. In addition, a statement from the condo association is required to show no lawsuits exist among current owners and/or the association.
Because lenders are taking on additional risks when they lend to investors, there are different lending rules involved. Higher risk means higher interest rates and down payment requirements. But what about the actual mortgage products available to investors? Here are a few of the options to consider.
Conventional Loans
These tend to be the most basic type of loan. They are not backed by the government, instead, they are eligible to be purchased by Fannie Mae and Freddie Mac because they meet certain requirements.
FHA Loans and VA Loans
Both FHA and VA loans are available to investors but with one stipulation. Investors will usually need to purchase a multi-unit property and occupy one of the units. VA loans are only available on primary residences, so as long as the investor plans to live in one of the units, a VA loan can be used.
Other Loan Options
If you currently own a home, you can choose to take out either a home equity loan or a home equity line of credit. This would allow you to use the equity in your current home to cover the down payment on the new investment property. Quicken Loans currently does not offer home equity lines of credit but homeowners could refinance and take cash out of their primary residence if they have enough equity to do so. Another option for financing an investment property is to take out a generic personal loan.
Keep in mind each mortgage lender may tweak their qualifying standards so be sure to ask about their guidelines. As we mentioned earlier, mortgage rates for investment properties are typically higher than that of primary residences and second homes. Both Fannie and Freddie have adjustments that could affect your principal and interest payments depending on your loan amount and other factors.
Since most online information does not take into account rental property adjustments, it’s best to speak directly to us to obtain an accurate interest rate and mortgage payment.