EDITORS NOTE: This post was written in 2011. Some of the programs, like Fannie MaeHomePath, may no longer be available.
With real estate becoming more affordable and mortgage interest rates at an historic low, it’s easy to see why some people are considering buying their first investment property. Financing an investment property has more requirements to it than buying an owner occupied property because it carries more risk to the lender. However if you have enough income, plenty of reserves set aside and good credit, you may be surprised how easy the process can be and what programs are available.
“Traditional” Conventional Financing.
Plan on at least 20% down payment and know that the more you are able to use as a down payment, the better your interest rate may be. With your down payment, the funds must only be your “seasoned” funds, they cannot be a gift. The seller may contribute up to 2% towards closing cost and prepaids. You *might* be able to have a second mortgage (seller financing, for example) up to 85% combined loan to value however, be prepared for a round of extra scrutiny from underwriting.
Just like buying your primary residence, your credit score will impact your mortgage rate. You don’t have to have 740+ scores, some lenders will go down to a 620 score however be prepared to be scrutinized. There are price breaks with interest rates based on a 75% and 70% or lower loan to value.
In addition to the down payment and closing cost, conventional guidelines on investment properties requires six months reserves (your total proposed mortgage payment including any home owners association dues x 6) in savings at the end of the transaction. If those reserves are your retirement or stock, lenders will discount them to 60 or 70% of the ending balance shown on your statement. Additional properties owned will require additional reserves, for example, if you own a vacation home, an additional 2 months reserves will be required.
A typical debt to income ratio is 45% and as a first time landlord, you will need to qualify with both mortgage payments (no credit for rent).
Fannie Mae Homepath. Fannie Mae Homepath Mortgage will allow for as little as 10% down payment on designated Homepath properties (owned by Fannie Mae) with credit scores of at least 660. There is no appraisal required and no mortgage insurance with credit scores of 660 or higher.
FHA. If you are getting ready to buy your first home, did you know that you can buy a 2-4 unit property (duplex – fourplex) using an FHA insured mortgage with owner occupied rates? You DO have to occupy one of the units. Financing a duplex is very similar to buying a 1-unit home as far as underwriting requirements are concerned. When you step up to a 3-4 plex, the reserves requirements are increased to three months. When buying a 2-4 plex home that you’re going to occupy using FHA for your financing, you receive competitive rates (owner occupied because you are occupying one of the units) with minimum down payment. Plus projected rents may be used for qualifying! As with buying a single unit home with an FHA mortgage, upfront mortgage insurance (can be paid as a closing cost or financed) and monthly mortgage insurance do apply.
If you’re interested in buying your first rental on a home located anywhere in Washington, including Renton, Redmond, Seattle or Snoqualmie, please contact me. I’ve been originating mortgages since 2000 at Mortgage Master Service Corporation and have all the programs mentioned above.