Home values across the country appear to have not only stabilized but increasing at various rates from such diverse markets as Texas, Illinois, Arizona and nearly everywhere in between. In fact, the most recent Case-Shiller report, a research company that tracks housing data, recently reported a 12.2 percent year-over year value increase. It appears real estate has indeed hit bottom and bouncing back up. Is it time to buy an investment property?
Buying investment property today might very well be a welcome addition to any retirement portfolio. When you combine low real estate prices compared to just a few years ago with low interest rates, it might well be the best time to invest in real estate in well, ever. If you do think you’re ready, what can you expect from a mortgage lender?
Lenders consider investment property a greater risk compared to financing someone’s primary home. That said, a conventional investment property will require a minimum 20 percent down payment before a mortgage loan will be evaluated. There are no 3.5 percent or 5.00 percent investment property loans.
Interest rates for investment property are also higher compared to a primary residence. How high? For a 30 year fixed rate mortgage, you can expect an interest rate to be up to one-half percent higher compared to an owner-occupied residence. However, if your down payment represents 25 percent of the sales price instead of 20, the interest rate increase for an investment property is closer to one-quarter of one percent, maybe a bit more in some instances.
Lenders will also ask for additional cash reserves when approving an investment property loan. Reserves are represented by a certain number of mortgage payments left in an account after the loan is closed. This amount, called PITI reserves, for Principal, Interest, Taxes and Insurance asks for a minimum of six months’ worth of PITI in a borrower’s account verified. This is an additional amount needed for a down payment and closing costs. For example, if the mortgage payment including taxes and insurance is $2,500 and the loan requires six month’s reserves, an additional $2,500 X 6 months = $15,000 will be needed. Remember, these are reserve accounts, not funds that you have to give to the mortgage company.
One final note: if you can show that you already own rental properties, evidenced by a copy of schedule E from your federal income tax return, lenders may use the rental income from the subject property to help qualify you on the new mortgage. However, if this is your first rental property, you may have to qualify for the new mortgage using your current gross monthly income.
Different lenders may have additional lending guidelines, called overlays, used to approve an investment property loan. However, the approval process is similar to any other mortgage. Complete the application, provide your documentation and show up at closing. Oh, and congratulations, you’re a landlord!