Investment property is a popular way of generating income for people who want to escape the rat race and start living their lives. But before you jump in, there are some things that borrowers need to know about financing an investment property. The article will touch on key things that borrowers must keep in mind such as the difference in down payment required, the pre-approval qualifications, credit score needed, and the size of the monthly mortgage payment.
When buying investment properties, lenders often require a much higher down payment than what is required for family homes. Most mortgage lenders require that you have at least a 15% down payment for investment properties, which is not usually asked for when you're looking to buy your first home.
Depending on the property type and your qualifications, when buying an investment property, lenders usually want at least a 640 FICO or above before they approve a mortgage for a single-unit investment property. That is if you put 25% down, have six months' worth of liquid reserves, and a debt-to-income (DTI) ratio of 36% or less. If your DTI is closer to 45% then your credit score requirements can go up to a minimum of 700. The main rule of thumb here is the higher your credit score is, the better your chance of approval.
A lot of borrowers may not know this, but if you're planning on buying an investment property that you will later lease out, you have the option of using your rental income (or any other supplemental income) to qualify for a mortgage. You have the option of using the expected rental income to offset the monthly mortgage payment of the property you are buying. This would work for the investment property that you want to finance or even your primary residence. You do not have to have a renter in place for this to work. The market rent is determined by an appraiser, not by the amount on a lease.
Fannie Mae allows borrowers to use 75% of the market rent amount to calculate the net cash flow of a property. If the monthly mortgage payments amount to $1,000, then the market rent would multiply the monthly payments by 0.75 to arrive at the monthly rent of $750.
In this case, the net cash flow would equal -$250, which will be used when calculating your debt-to-income (DTI) ratio instead of the full amount of $1,000 each month.
This is great news! Because in the case that the market rent was higher than the monthly mortgage payment, you would be able to totally exclude the entire monthly mortgage payment when qualifying for the mortgage; you would instead pass that on to the renter.
If you’re considering investing in a rental property, this article may have helped clarify some key considerations that you need to keep in mind. Interested in learning more about what it would take for you to invest in a rental property? Call us today!