Your Guide To Investment Property Mortgages
Currently, the mortgage rates for investment properties are higher than they are for loans for owner-occupied properties. Still, an investment property can be highly profitable. If the home is purchased at a great price and properly financed, it can lead to an immediate revenue stream.
Unfortunately, getting a cheap mortgage for a rental property can be a challenge. Lenders typically charge more for properties that aren’t going to be occupied by the owner.
Even though the rates can be high, it’s still smart to invest in real estate. Read on to learn more about potential mortgage rates for these properties.
What Are Mortgage Rates Like For Investment Properties?
There are a number of things that can impact interest rates for an investment property, including your credit score, the down payment, and the type of property that’s being purchased.
Most modern mortgages are governed by Fannie Mae and Freddie Mac rules. The fees associated with a loan impact your final interest rate. As fees rise higher, the mortgage rate rises along with it.
There’s a specific set of fees for owner-occupied properties, and there is another set of fees that are associated with investment properties. As an example, a loan for an investment property with 20% down would have a free that’s equivalent to 3.375 of the loan. That means the borrower will be paying an additional $3,375 for every $100,000 that they borrow.
More often than not, borrowers opt to pay more in interest rather than pay more during closing. How do these fees impact the final mortgage rate? In a situation like this one, the required 3.375 percent in fees can be covered by adding between 0.5 and 0.75 percent to the final rate.
What does all that mean? If you would have had a 5% interest rate when purchasing a property for yourself, you can expect to pay an interest rate between 5.5 and 5.75% when purchasing an investment property.
Of course, all of this applies to single-family residences. If you were to purchase a duplex, you could wind up paying an additional 1% in fees.
You can start looking for the best investment property mortgage rates here.
Why are the interest rates higher for investment and rental properties?
Data shows that borrowers are more likely to abandon rental properties than their own home if they have financial difficulties.
In fact, a report conducted by the Wharton School found that some investors will cease paying the mortgage for a rental property if the property is a poor investment for them.
Lenders look at this data when they’re making loan decisions.
They know that people are significantly more likely to stop making mortgage payments if they are not living in the property.
Different Kinds Of Rental Investment Property Mortgages
Investors still have access to most of the same mortgage programs available to people purchasing a primary resident. However, interest rates are higher and mortgages are more difficult to qualify for.
Conventional Loans: It’s possible to use a conventional or conforming loan to purchase an investment property. These loans require a minimum down payment of 15%. In order to avoid mortgage insurance, a 20% down payment is recommended.
Government-Backed Loans: It’s possible to purchase an investment property using a VA or FHA loan as long as you purchase a multi-unit property and choose to live in one of the units. The minimum down payment for a VA loan can be as low 0%, while the minimum down payments for FHA loans can be as low as 3.5%.
A portfolio lender is free to set their own rules for investment property loans. It’s possible that these programs will give you the opportunity to finance a greater number of properties or make a smaller down payment. That said, it’s more likely that you’ll have to pay higher rates.
Lastly, people that are interested in buying a property with five or more units or people that want to borrow against a property’s potential income have the option of applying for commercial residential loans. These loans can be complicated, and they can also be costly.
It’s likely that a sole asset bankruptcy remote entity will have to be established, which means property owners won’t be able to avoid paying their mortgage while keeping their rental income.
Investment Property Loan Guidelines
Loan underwriters will consider your capacity to be a landlord. If you don’t have any property management experience and you haven’t owned a home before, things are going to be challenging for you.
In some cases, you may be able to overcome this obstacle by hiring someone to manage your property. That said, official guidelines don’t say anything specific about this.
If you stick to Fannie Mae or Freddie Mac financing, then there will be a limit on the number of properties with a mortgage that you can own.
You will also need to have several months worth of mortgage reserve payments in the bank to ensure that you’re covered when your property doesn’t have a tenant.
The down payments for investment property loans are required to be larger.
In the majority of cases, people purchasing rental properties will use conventional loans for financing. Below, you’ll find the down payment requirements for purchasing a rental property.
The Best Ways To Lower Mortgage Rates For Investment Properties
Put down a larger down payment: Many of the additional costs associated with rental properties will disappear if you make a down payment of 20% or higher. You may want to borrow against the equity of your own home so that you can make a larger down payment. You may also want to purchase a house with a lower price. If you have a stellar investment opportunity, you may even want to consider borrowing against your 401(k).
Work on your credit: Conventional loan rates are highly dependent on a person’s credit rate. If a property is being financed with a conventional loan, this is going to be an issue. Below, you can see a comparison of the interest rates of a buyer with a credit score of 650 as compared to a buyer with a score of 720.
The buyer that has the higher credit score can afford to charge less in rent and will have an easier time creating a revenue flow.
Explore your options: According to recent reports, anyone buying property can save 0.50% or more off of their interest rates by shopping around and seeking multiple quotes. Check out our rate shopping guide.
Look Into Alternate Investment Financing Methods
Seller financing is a potentially cheaper option that could work well for you. Many sellers are happy to avoid the stresses of managing a property.
Some sellers might be more interested in getting a property off of their hands then making a profit from buyers. Of course, in situations like this, it’s always important to be sure that the property is inspected and properly appraised.
Another option is working with a lender that specializes in commercial residential property financing.
If the income from the property will be enough to cover mortgage payments and any additional expenses, affordable financing options may be available
Rental Property Mortgage FAQ
The mortgage rates for investment properties are higher. Usually, they are approximately 0.50% to 0.75% above the loan rates for personal residences.
This is one of the more common financing options for rental properties. Of course, they aren’t the only option available. Loans with terms of 10, 15, 20, or 25 years are also an option.
It is. Although more documentation is required, the process is actually fairly similar to the process for obtaining any type of mortgage. The process will be simpler and more affordable if you have a credit score of 700 or higher and a down payment of 20% or more.
When it comes to conventional loans, the minimum down payment for a single-unit property is 15%. This down payment rate means your rates will be higher, and it also means you’ll have to pay mortgage insurance. If you want to lower costs, you’ll want to put down 20% or more.
The minimum down payment for a property with 2 to 4 units is 25%.
However, if you plan on living in one of the available units, you can secure an FHA loan with a down payment as small as 10%.
If you plan on purchase a 2 to 4 unit property and live in one of the units, you can secure an FHA loan for 10% down. If this isn’t an option, you’ll want to look for banks and lenders that may have programs with a lower required down payment. You could also ask the seller to carry the financing, which means a lower down payment would be possible. When it comes to Fannie Mae and Freddie Mac loans, putting 10% down isn’t an option.
It’s possible to find options like this, but it isn’t easy. You can purchase a multi-unit property and live in one of the units. If you do this, you can secure an FHA loan and cover the 3.5% down payment with gift funds that come from an eligible donor. Other options include lease-to-buy properties, hard money loans, or working with an investment partner that can cover the down payment?
The simplest way to obtain a rental property is to purchase a primary residence and live there for a minimum of one year before converting the property into a rental. From there, you can move out and rent the home to a tenant. Since the property was owner-occupied when you purchased it, you’ll be able to maintain your lower interest rates.
The risks associated with investment property loans are higher, which is why mortgage rates are higher as well. In spite of that, rental properties can be an excellent investment option.
What Are Investment Property Rates Like Today?
Things vary based on the applicant. To figure out what mortgage rates would be like for you, you’ll want to seek quotes from several different lenders and compare your options. Rates are always changing, so you’ll have to reach out to lenders for accurate information.
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