Getting a mortgage for an investment property
Getting a mortgage for an investment property works a bit differently from an owner-occupied property.
That is because lenders have a lot more restrictions associated with an investment property loan. We discuss many of the restrictions below along with the reasons why they are there.
The interest rates for an investment property tend to be higher than those for mortgages on primary homes.
The main reason is that the default rates (or foreclosure rates) on investment property mortgages are historically higher. And to account for the additional risk that lenders take by making investment property loans, they demand additional return in the form of a higher rate of interest.
Higher down payment
While one can get a conventional loan with only a 5% down payment when they buy a primary home (or as little as 3% down with Freddie Mac Home Possible and Fannie Mae Home Ready programs), for an investment property, the down payment required is at least 15%.
With investment properties, multi-family homes with 2-4 units are quite popular and sought after. There the down payment requirement is even more, at 25%.
Some borrowers have explored owner-occupied duplex, triplex and quadruplex as a potential investment property route, renting out the non-owner-occupied 1-3 units.
FHA mortgages allow owner-occupied duplex, triplex and quadruplex properties with 3.5% down payment options. However, FHA mortgages carry significant upfront mortgage insurance premiums and monthly mortgage insurance costs, so it might not be ideal for your scenario. Reach out to discuss your scenario in detail.
Minimum credit score requirements
Fannie Mae and Freddie Mae do not have specific restrictions on the minimum credit score required for investment property mortgages.
But lenders often impose overlays on that and may have higher credit score requirements for investment property mortgages.
More reserves required
On a mortgage for a primary home, there are no minimum reserves requirements.
On the other hand, when you get a mortgage for an investment property, you’ll need 6 months of reserves.
If you have more than properties that you have financed, then depending on how many such properties you have, you could be required to have 2%, 4% or 6% of loan balance. Review Fannie Mae guidelines for more details on that.
Higher rates for PMI (Private Mortgage Insurance)
Because investment properties entail more risk for the lender, they can come with higher rates for PMI.
For the same down payment on two different properties (one being primary and the other being investment), the rates for PMI can be different, mainly because of the extra risk that investment property mortgages have
As far as taking cash out against a property you own, Fannie Mae guidelines allow you to take more cash against a primary home vs an investment property.
You can get a loan of up to 80% of the value of the property for a primary home. That same number is 75% for an investment property.