Financing Advice for Investors from Envision Mortgage
With today’s housing supply and historically low interest rates, there’s never been a better time to invest in real estate. Understanding your financing options and loan criteria before you get started can be helpful.
An investment property is like any other investment: the goal is to generate a profit. In real estate, this is achieved through rental income or through a profitable resale. The way in which a property is used has a significant impact on how a lender approves financing.
Because there’s more risk of default on a property where you don’t live, investment properties have always been considered a higher risk loan. Lenders have somewhat leveraged the risk by imposing more rigid guidelines on qualifying criteria.
Lenders offering financing on investment property will expect pristine credit and larger down payments. Verification of stable income, employment, liabilities and assets are standard requirements for any mortgage financing transaction.
With investment properties, you will typically have to put down at least 20 percent and in some cases as much as 30 percent. Investment property lenders want you to put more of your own equity into the property due to the increased risk. Many investors fail to take into consideration just how much money they are going to have to come up with out of their own pockets for this process. Credit scores of at least 680 is a minimum standard requirement compared to 620 for primary residences.
Another key difference with investment property loans is that you have to verify more income than you would with a traditional mortgage. With this type of loan, you are going to have to prove that you have enough income to pay for your primary home mortgage and the investment property's mortgage at the same time. Some lenders will allow you to count a percentage of the rental earnings, if there is any, towards your income. However, other lenders may not allow this. Most of them will also want to see that you have substantial cash reserves. They want to ensure that you have enough cash on hand to pay for the mortgages on both properties for a certain number of months. Typically, verification of 6 months reserves for both payments is required.
Another way the lender offsets the risk is by charging a higher interest rate, again taking into consideration that the property will not be your primary residence. The interest rate differential will be approximately a half percent higher.
As always, it’s important to work with a licensed member of the Association of Realtors and a licensed mortgage professional to assist you with your investment financing needs.
Coming soon….A Short Sale Can Be a Winning Proposition for Everyone