Buying an investment property can be a great vehicle for investing your money. You may want to purchase rental property for the purpose of increasing your wealth, developing income or saving for retirement. Securing a mortgage for an investment property is a bit different than for a primary or secondary residence. Due to the wide range of programs that are available, it is best to involve your lender in your thought process as early as possible, to ensure an acceptable financing program is available, as well as to help identify the price range for your investment property purchase. You may have heard about parents that buy a home for their children to stay in during their college years, later selling the investment and using the proceeds to offset the education costs. This is sometimes referred to as a “kiddy condo”. An FHA mortgage makes this possible.
Qualifying
Qualifying for an investment property mortgage is very similar to the standard process of qualifying for a home loan, with one additional consideration; the rent income that is expected from the investment property you plan on buying. The expected rental income is generally set (for lending purposes) as part of the appraisal process, in some special cases a two-year rent history of the subject property is also requested (information the seller provides). Once an expected rent amount is determined, 75% of that number can be used to offset the proposed mortgage debt for the purpose of qualifying for the new mortgage (debt-to-income ratios).
Incremental Costs
You can expect to pay a higher interest rate or higher closing costs for an investment property mortgage. This is a function of the increased risk factors associated with a non-owner occupied mortgage, and the resulting charges from the investor (Fannie Mae, Freddie Mac, or some other private investor for alternative programs). These charges can show up as discount points in the transaction. You should also have the option of premium pricing these costs to avoid extra out-of-pocket expenses.
Turning Your Current Home Into an Investment Property
One idea that may be worth considering as you evaluate your investment property plans is turning your current primary residence into an investment property. This allows you to keep your current financing in place, perhaps even tapping the current equity in your home for the purpose of buying your new primary residence, without paying the higher rates/closing costs associated with an investment property mortgage. Understanding the income and appreciation potential for the properties you are evaluating is critical in making smart investment property purchases. Please talk with your lender or Realtor, who can help educate you about these considerations.
Conventional Investment Mortgage Programs
Fannie Mae and Freddie Mac have specific rules concerning down payment, available LTV?s, loan amounts and credit requirements. Conventional loan approvals for investment properties are often rendered by an automated underwriting system. Fannie Mae and Freddie Mac offer fixed rate, adjustable rate and interest only mortgages for investment properties.
Alternative Investment Mortgage Programs
This category offers additional investment property financing solutions. The programs include a full selection of mortgages that provide for the limitations imposed by conventional mortgages. These alternative solutions are stated income, stated asset, no documentation and 1st and 2nd mortgage combinations that allow for a higher LTV. Because of the many limitations, it is very important that you talk with your mortgage company about your plans before you start identifying potential investment properties.”discount points in the transaction. You should also have the option of premium pricing these costs to avoid extra out-of-pocket expenses.
Turning Your Current Home Into an Investment Property
One idea that may be worth considering as you evaluate your investment property plans is turning your current primary residence into an investment property. This allows you to keep your current financing in place, perhaps even tapping the current equity in your home for the purpose of buying your new primary residence, without paying the higher rates/closing costs associated with an investment property mortgage. Understanding the income and appreciation potential for the properties you are evaluating is critical in making smart investment property purchases. Please talk with your lender or Realtor, who can help educate you about these considerations.
Conventional Investment Mortgage Programs
Fannie Mae and Freddie Mac have specific rules concerning down payment, available LTV?s, loan amounts and credit requirements. Conventional loan approvals for investment properties are often rendered by an automated underwriting system. Fannie Mae and Freddie Mac offer fixed rate, adjustable rate and interest only mortgages for investment properties. Alternative Investment Mortgage ProgramsThis category offers additional investment property financing solutions. The programs include a full selection of mortgages that provide for the limitations imposed by conventional mortgages. These alternative solutions are stated income, stated asset, no documentation and 1st and 2nd mortgage combinations that allow for a higher LTV. Because of the many limitations, it is very important that you talk with your mortgage company about your plans before you start identifying potential investment properties.
