People buy investment properties usually to establish a monthly cash flow, long-term appreciation, and for tax deduction purposes. Rental prices have risen in most the major metros across the country and owners are enjoying the increased cash flow. However, investment property mortgage rates are higher than primary residences.
Reasons why mortgage rates for investment properties are higher are based on the lender having more risk since an owner-occupied property is generally maintained better than investor owned properties. Lenders add a fee since it is an investment property. The fee is based on the loan amount ranging from .75 to 1.5 percent. On certain loan products, the adjustment is simply added to the rate instead of it being a fee.
As an example, an 80 percent investment property loan comes with a 3.375 percent cost or fees. Altogether, someone with a 720 credit score may pay up to 4.125 percent in additional fees. Sometimes it is lot less.It really depends on various factors such as credit score, derogatory credit, loan-to-value ratios, property type, and the loan product
In many (if not most) cases, the borrower chooses to pay a higher interest rate instead of paying all those extra points. Fees of 4.125 percent can be covered by an extra .50 to .75 percent addition to the rate.
That means for a borrower with 20 percent down and a very respectable 720 FICO score, he or she will pay 4.375 percent to 4.625 percent to finance an investment property, as of this writing. Keep in mind that this is for a single family residence. If buying a two- to –four-unit property, the fee is usually higher.
Portfolio lenders, who service their own loans for the entirely of the term, can make up their own fee or no-fee guidelines for investment properties. They might even have less down payment requirements and other flexible rules. Usually when that is the case, you should anticipate paying a higher rate for a customized loan program.
There are even loan programs for those who want to qualify based only on the property's income. You will need a 20-30-percent down payment your lender may request to see the lease agreements and then review the appraiser's comparable rental schedule. This will either make the deal or break it. The lender uses only 75 percent of the rental income, and then uses the monthly mortgage, taxes and insurance to calculate if the property is self-sustaining.
How much of a down payment on an investment property?
When buying a home as your primary residence, the down payment can be zero or just 3-percent.
With an investment property, the minimum down payment on a conforming loan is 15 percent on fixed-rate loans, and as much as 35 percent for a 3- to 4-unit property using an adjustable-rate loan.
However, for portfolio lenders, 15-25 percent down on a two- to –four-unit investment property is possible on loans up to $1 million.
One way to make the down payment less is if you able to live in one of the 2- to -4 units. Thay way, more attractive financing options are available similar to a primary residence. You may be eligible for a low down payment and government-backed loans such as FHA, VA as well as conventional mortgages. If you want to live in a 5 or more unit building, you will need to get commercial financing for an apartment building.