There are undoubtedly quite a few of you out there who have toyed with the idea of buying investment property. Whether you’ve played back different scenarios as a house-flipper, landlord, or proud second homeowner, the idea is especially enticing these days, thanks to rock bottom interest rates.
Because there are so many different ways to get into the investment property game, prospective borrowers often have numerous questions regarding the process. Here are some of the most frequently asked questions from those considering an investment property purchase:
Are there specific financial requirements for those applying for an investment property loan?
Why yes, there are! For starters, the minimum credit score required for such a venture is 620. For 1-unit properties a 20 percent down payment is standard. It is 25 percent for 2 to 4 unit properties. The borrower must also demonstrate that their income is high enough to handle the extra pressure an extra mortgage tacks on. The general rule of thumb is that the total debt-to-income ratio can not go over 45 percent. Please note that figure takes into account the proposed investment property loan payment.
What if I have never been a landlord, can I still obtain a loan?
Although having two years of experience as a landlord is a requirement set forth by Freddie Mac, there is an alternative. Fannie Mae and many other lenders do not hold fast to this stipulation.
When buying investment property with others, must they be family members or previous business associates?
It is not required that a group going into a joint investment property purchase have any previous ties, family or otherwise. Most lenders do put a cap on the number of parties taking out a loan together at four.
Can I obtain investment property financing for an LLC?
A Limited Liability Company or LLC, can be owned by a variety of entities, including individuals, trusts, other LLCs, and corporations. When it is set up under the proper guidelines, an LLC can be taxed like a partnership, which is an advantage. However, the parties involved may not be eligible for an investment property loan from most mainstream lenders.
May cash gifts be used towards an investment property purchase?
No. Not only that, but the borrower is responsible for proving he or she came up with the down payment of 20 to 25 percent, on their own.
Are cash reserves a requirement?
Yes, and many lenders require that prospective borrowers show proof of four months worth of principal, interest, taxes, insurance and homeowners association dues. Some require even more such as six months of house payments, which should included taxes and insurance premiums. On top of that, they may also ask to see an additional two months of house payments in reserves for every non-primary residence that a person owns.
Is the process the same when buying a condo?
Buying a condo may require a borrower to jump through a few extra hoops. For example, 51 percent of the units in the condo complex must be owner-occupied or listed as their second home. Then the HOA must prove that it is in good financial standing and has sufficient funds to cover routine maintenance and repairs. It must also show that there are no lawsuits or liens pending among the group as a whole or any individual owners.
How is the rental income taken into account?
In the case of new investment property purchases, income is calculated based on the lesser of the rental income as stated on the lease agreement. It may also be calculated based on what an appraiser’s opinion of what is typical for a specific market. After that figure is determined, the lender reduces that amount by another 25 percent to figure out the qualifying income amount. Doing so provides the lender with a moderate amount that factors in the possibility of vacant periods.
What mortgage rates do I qualify for?
This can only be determined after the hopeful investors have met with an experienced, qualified lender. Please keep in mind that the mortgage rates for investment property purchases tend to always be higher than those associated with traditional financing.
The prospect of owning investment property and enjoying the extra financial benefits it provides is certainly an exciting thing to think about! Having a little extra income from property investments is also something many aspire to and yet for whatever reason, are unable to follow through on. Now, that hopefully a few burning questions have been answered, is it time to take the next step and speak with a lender?
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