While many people consider owning a primary residence a feather in their cap, there are folks out there who want to take the next step and own an investment property as well.
If you’re a novice, it’s likely you have questions. If you’ve done it before, it doesn’t hurt to review some investment property basics and sharpen your property-owner skills.
Below, we address some frequently asked questions about buying an investment property. Once you’ve read the list, if you still have any questions please ask them in the comment section, and we’ll be happy to answer them:
How Much Down Payment Do You Need?
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).
What Credit Score Do You Need to Buy an Investment Property?
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.
What Are the Income and Debt-to-Income (DTI) Requirements?
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.
How Much Should You Have in Reserves?
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.
Do You Have to Have Previous Landlord Experience?
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.
Are There Rules About Real Estate Investing Partners?
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 tinvestment 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. Quicken Loans places a cap of four borrowers on a loan application, but there is no limit to the number of people on the title.
Are There any Specific Requirements for Investing in a Condo?
There are some added hurdles in the loan process if you’re considering a condominium. First, many lenders will require a minimum 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 finance 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.
What Mortgage Products and Terms are Available for Investment Properties?
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.
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 a Quicken Loans mortgage banker to obtain an accurate interest rate and mortgage payment.
We hope this info helps investors wishing to take advantage of the great opportunities and deals available in today’s real estate market. Still have questions? Leave us a comment and we’ll be in touch!
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