January 9, 2018
10 New Important Rules For Investment Property Mortgage Rates
Investment Property Mortgage Rates Are Higher
Investment property is supposed to make you money. Ten new important rules for investment property mortgage rates. NSH Mortgage has the knowledge and tools that can help you with your investment property mortgage rates in finding out how much you can save.
Ideally, its value will increase over time. Or your renters will pay your mortgage. You get tax benefits, too. So why, then, are investment property mortgage rates higher than rates for owner occupied houses?
How Much Higher Are Mortgage Rates For Investment Properties?
The reply depends on the style of investment property, your credit worthiness, and your down payment. For instance, a well qualified buyer financing a personal residence with 20% down, as of this writing, will pay a APR of 3.875%, with a Fannie Mae risk based pricing adjustment of .75%. That surcharge adds .75% of the loan amount to the fees, not the rate.
If this same borrower financed a rental home instead of a primary residence, there is another surcharge. It does not matter how good your credit is. Fannie Mae and Freddie Mac adds another risk based pricing adjustment, and it depends on the loan to value of the mortgage. Here, a 80% investment property loan comes with a 3.375% charge. Altogether, someone with a 720 credit score pays 4.125% in additional fees.
In many cases, the borrower chooses to pay a higher interest rate instead of paying all those extra points. Additionally, it has 4.125% in fees that can be covered by an extra .5% to .75% addition to the rate. That means for a prime borrower with 20% down and a 720 FICO score, he or she will pay 4.375% to 4.625% to finance investment property, as of this writing.
Keep in mind that this is for a single family residence. Buy a duplex and you get hit with another 1.0% to your fees, or a .125% to .250% addition to your rate.
The Difference Between A Home And A Business
During the housing crisis in the later 2000s, mortgage lenders got a big surprise from their good borrowers. Researchers from the Wharton School examined mortgage crisis era foreclosure statistics. They ended that even good homeowners tend to stop paying their mortgages when their house becomes a bad investment.
In fact, prime borrowers accounted for 60% of these foreclosures, that is where the term strategic default originated. Lenders know that when you think of property as a business, you are less attached to it.
Businesses Are Riskier
Lenders know what happens. Investors are one third more likely to dump mortgages than owner occupiers. Here are a few common questions that people have:
- If that many homeowners were willing to ditch the roof over their heads when values went south, then, what does an investor do?
- What happens when tenants take their rent payment to Vegas?
- How to get a cash-out refinance on your rental property.
- Or their house guests turn out to be goats? Or renters just leave without notice, taking appliances and fixtures, while squatters happily take over?
Types Of Investment Property Mortgages
When purchasing investment property, you have access too many of the same private mortgage programs as people buying their primary homes. They just cost more and are harder to get. However, you cannot buy investment property with a government backed home loan unless you choose a multi-unit (2-4) property and live in one unit.
If the home is secured by an existing VA home loan, you may be eligible to assume it, if the seller agrees. It does not matter that you plan to use the house as a rental. Portfolio lenders, who do not sell their loans to investors, can pretty much make up their own investment property loans. You may be able to put less down or finance more properties with these programs. Expect to pay more for them.
Finally, for those who want to borrow solely against the income of the property, or buy projects with more than four units, there are commercial residential loans. They can be expensive and complex to set up. You will probably have to establish a single asset bankruptcy remote entity, which prevents property owners from siphoning off the rental income without paying the mortgage.
Rules For Investment Property Loans
Sometimes dumping your mortgage is a good business decision. Therefore, expect to work with these factors when buying investment property with a conforming (Fannie Mae or Freddie Mac) loan:
- Underwriters will check out your ability as a potential landlord. If you have never owned a home or managed any property, you will have a tougher time.
- You have an option to get around this obstacle by hiring a property manager. There is nothing definitive about this in the official guidelines.
- There are limits to the number of properties you can own with mortgages on them, if you go with conforming (Fannie Mae or Freddie Mac) financing.
- In addition, you will be required to have reserves, several months of mortgage payments, in the bank to cover those months when your property is unoccupied.
Investment Property Loans Require Larger Down Payments
With conforming loans, you can get in with as little as 3% down for your primary home. That goes up to at least 15% for investment property with a fixed loan, and up to 35% for a three to four unit property with a ARM loan.
You Will Need A Higher Credit Score
When you finance investment property, lenders generally want to see better credit than they do for primary residence buyers. For instance, Fannie Mae borrowers putting at least 25% down and can get approved with a 620 FICO score for a primary home. That increases to 640 for a rental.
How To Get The Lowest Investment Property Mortgage Rates
First, you will find that much of the added cost goes away if you can put at least 20% down. It might be worth borrowing against the equity in your current home to increase your rental down payment. Or buy a cheaper house.
Or even, if this is a very good investment, borrow against your 401(k). The borrower in the example above could lower the surcharges by .5% by upping the down payment to 80%, and by two points with 25% down.
Consider Alternative Investment Property Financing
Your seller may be happy to have an income stream from you without the hassles of being a landlord. Seller financing can be cheaper than banks or brokers. The seller may be more interested in unloading the property, get it appraised and inspected! Than in profiting from your mortgage.
Alternatively, there are lenders that specialize in financing commercial residential property, from homes to apartment buildings. Since the property income is sufficient to cover the mortgage and other expenses, they may finance you for less.
Or, You Could Just Move In
If you live in one of your units in a multifamily building, you can finance it just as you would a primary residence. You even have access to low down payments and government backed loans. So now you should shop around for those rates to drop.
Additionally, one of the easiest and fastest method of getting the lowest investment property mortgage rate is simply to contact more lenders. Rates can vary by over 1% between lenders. Getting the best loan instead of the worst one could cover some or all those investments related surcharges.