Over the past few years the basic guidelines for lending money on investment properties has changed greatly. At one time, during the late 1990’s and in to the early 2000’s, multiple mortgage lenders offered various loans designed specifically for buying a rental property. However, with the real estate crash all of that has changed. Listed below are the basic rules for buying investment properties in the current economic climate.
Type of Loan
For the vast majority of people, getting a loan on a rental house will result in the borrower getting a conventional loan. While it is possible to secure a commercial loan, these loans are generally reserved for large properties such as an entire condo building or an apartment complex.
Type of Terms
Investment property loans are offered with either a fixed term for the duration of the loan or an adjustable rate that will usually have a short fixed period from 1 to 5 years. After that adjustment period the rate will be fixed for the remaining life of the loan.
Maximum Number of Loans
It is possible for a borrower to have up to 4 individual conventional loans. The borrower must document their income and prove that they can afford the payments on all of the mortgage loans. Already Own 4 Investment Properties? Financing is STILL Available for More
In order to protect borrowers from buying more than they can afford, the income rules are a bit conservative. If a person is buying their first investment property, one of the two rules will be applied:
- The person’s current income must be sufficient to pay for the investment property loan and all other debt; the borrower cannot use potential rental income to qualify for the loan
- If the borrower is buying a property that is currently rented out and there is a rental agreement in place, 70% of the rent can be used as income for the borrower.
It is possible for a current investor to refinance an existing loan on a rental property. However, the borrower must provide the rent receipts from the previous 2 years and the income must be reflected on the person’s tax returns. The rent income is once again limited to only 70% of the net rent, but the depreciation may be added back.
In order to purchase a rental property the borrower must pay at least 15%-25%, depending on a number of factors including number of units, of the purchase price in a down payment. This money must come directly from the borrower’s own funds (savings, checking, retirement account, stock and bond investments, etc.). If the borrower is using money that was gained due to the sale of some other item, the money must remain in some type of account for at least 60 days before it can be used for the investment property purchase.
Loan to Value limit on Refinance
There are different limits for a refinance loan, based on the type of loan and the type of property.
- If the borrower has a property with 2-4 units, the maximum loan amount for a cash-out refinance is limited to 70% of appraised value.
- If the borrower has a 1 unit rental property, the maximum loan amount for a cash-out refinance is limited to 75% of appraised value.
- If the borrower is only refinancing in order to lower the rate or improve the term, the maximum loan amount is limited to 75% of appraised value.
Investment Properties Reserve Requirements
Another hedge designed to protect the borrower is the reserve requirements. In order to qualify for a loan on any rental property, the borrower must show that they have an amount equal to 6 months of the proposed mortgage payment. The mortgage payment must include property insurance and property taxes as well. The reserve requirements must be document for every home or property that the borrower intends to finance. For borrowers who are buying a property, the reserve requirements are separate from the down payment requirements.
For example, if a borrower wished to buy a rental property that was selling for $165,000, here is the breakdown of the numbers.
|Money required for down payment||$33,000|
|Reserve Requirements (approximate)||$5,700|
|Total cash needed from borrower||$38,700|
We make every effort to explain loan scenarios to potential loan investors and provide them will all the information they need in order to make the best decision for their needs. We take pride in our experience with investment loans and we want to make sure you have a successful journey as a landlord.
Jumbo investment property loans are also available.