Financing Investment Properties

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EDITORS NOTE: This post was written during the subprime era and may not apply to current lending.

Many folks are taking advantage of this market by purchasing investment properties.  Before you do, I strongly recommend getting preapproved with a Mortgage Professional and reviewing your options.  There have been serveral changes to guidelines.

Effective October 10, 2008, private mortgage insurance companies pulled out of insuring investment properties.  This means if you’re planning on using conventional financing, the loan to value is limited to 80%.

Both conventional and FHA financing have newer guidelines if you’re planning on converting your existing home to an investment property.  You’ll need significant equity in your existing residence or 6 months PITI of both properties for reserves in order to factor credit for rent with prequalifying for your mortgage.  Leases must be supported with proof of a security deposit.  FHA may make exceptions to this rule if the home buyer is renting out their existing home due to relocating.

Conventional financing will not lend on more than four properties that are currently financed.  So if you have a mortgage on your primary residence, you can only finance 3 investment properties.  Do you have a mortgaged vacation home in addition to the one on your residence, then your limit for financed investment properties is reduced to 2 homes.

In mid-December, investment properties will become more expensive with the following adds to fee (credit scores will have additional adds to fee):

Loan to value 75% or less: 1.75% add to fee (minimum 620 credit score)

Loan to value 75.01 – 80%: 3.00% add to fee (minimum 680 credit score)

Note: lenders are actually all ready factoring these adds to investment properties.  As we approach Decemeber, more will follow in order to be able to provide Fannie properly priced mortgages by the deadline.

Obviously you’re going to want to cough up that extra 5% to have 25% down and a better rate.  Here’s an example of rates I quoted today for an investment property priced at $275,000 for clients with credit scores above 740 for a 30 year fixed:

20% down (LTV 75.01 – 80%) at 7.375% at 1.25 points (apr 7.605)

25% or more down (LTV 75% or less) at 7.000% at 1 point (apr 7.202)

Just for comparison, an owner occupied property with the same criteria would have a rate of 5.875% priced with 1 point (apr 6.052) based on this afternoon’s rates.

It’s unfortunate that guidelines and pricing for investment properties is being hit hard. During these times, investors buying bank owned properties or short sales would stimulate the markets and alleviate the property from the banks.  Lenders are hesitant to taking on any type of mortgage that has additional risk during this climate.

Related article I’ve written:

More Fannie Changes for Investment Properties and Second Homes

Financing an Investment Property

Comments

  1. Rhonda – Thanks for this article. So, on investment properties, currently are there any other financing options other than conventional? I have seen something called ‘Espress Path financing’ available – what is that? Is it the bank owning the property offering a package?

  2. Di, I’ve done some preliminary research and that’s what appears to be (financing packages on the bank owned property).

  3. I’m interested in investing in properties throughout the world. I live in australia, but every time a property is purchased here, I am hit with stamp duty which is a very large government tax – I can often pay $50,000 just in tax for one property. This is needless to say unfair, and it substantially reduces profits. I would therefore like to buy property offshore where the tax is at least reasonable. I am a professional roulette system player so I travel extensively and can visit any country. What countries jurisdictions are best for property investing? Anyone with any appropriate advice of information can contact me through my site or email me. thanks.

  4. I have 5 financed SFR investment properties – all very profitable with records going back 6 years. Is there no way I can finance a 6th? I understand the <4 restriction, but it seems that with my proven track record there should be some avenue by which I can get a mortgage for the 6th.

  5. Darren, as you found out, there is now a limit of 4 financed properties with convetional guidelines. You may have to try commercial or non-conventional financing to finance any properties beyond 4.

  6. Hi Rhonda:

    Real Estate Investors need to learn about new first private mortgages.

    With the stock market so turbulent, and CDs paying so poorly, RE Investors can find small business and 55+ highly paid employees to give them a Private First Mortgage (at http://REIEntrepreneur.com/blog). Most times these funds are from retirement plans, such as IRAs and 401(k)s.

    Many Private First Mortgage Lenders will accept:
    * 80% of Loan to Value, not purchase price
    * 10% simple interest
    * no payments made to Lender until 60 months
    * assurances of mortgage payments with fire insurance and life insurance to mortgagee

    If an investor can buy with full cash offers with private mortgage funds, and quickly lease optioning the property, many times the PITI Payment is covered.

    Ethics from the RE Investor to protect the Private Mortgage Lender is necessary.

    Rhonda, I enjoy you blog very much.

    Brian Gibbons, http://REIEntrepreneur.com/blog

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