Financing Investment Properties
Should I consider purchasing a rental property?
Real estate is an attractive investment strategy to create income and diversify your portfolio. It can also carry some tax advantages you must discuss with your CPA. We are financing more and more investment properties than ever as returns from other investment vehicles often lag real estate returns. Before you get started, please read our FAQ to guide you on financing rental property.
What Does It Take to Buy an Investment Property?
- At least 20% down payment. There is no mortgage insurance or second lien.
- Reserves in the bank. This is ‘rainy day’ money. Lenders are looking for 2 to 12 months of reserves on the full PITI payment on all owned properties.
- A qualifying credit score.
- Debt-to-income ratios will need to be fewer than 45%.
What are some common preconceptions that many customers have?
The most frequent I hear is that you can use the entire rent as income. Not so fast here. Guidelines allow lenders to use 75% of the gross income, and a lease needs to be in place with proof of deposit and the first month’s rent.
Another common question revolves around how many properties can be financed. Under FNMA rules, a borrower can finance up to ten properties.
Thirdly, we can’t count rental income for first-time borrowers unless there are compensating solid circumstances. Lastly, out-of-state/out-of-area investors must have property management set in place to close a loan. Though qualifying to buy investment property is a tad more complicated than buying a primary home, the process is the same, and rates are desirable.