Investment property mortgage rates: How much more will you pay?
Sorry: Investment property mortgage rates are higher
Investment property is supposed to make you money. 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?Verify your investment property mortgage options (Feb 25th, 2018)
How much higher are mortgage rates for investment properties?
The answer depends on the type of investment property, your credit-worthiness, and your down payment.
For instance, a well-qualified buyer financing a personal residence with 20 percent down, as of this writing, will pay an APR of 3.875 percent, with a Fannie Mae risk-based pricing adjustment of .75 percent. That surcharge adds .75 percent of the loan amount to the fees, not the rate.
If this same borrower financed a rental home instead of a primary residence, there's another surcharge.
It doesn't matter how good your credit is. Fannie Mae and Freddie Mac add another risk-based pricing adjustment, and it depends on the loan-to-value of the mortgage.
In this case, an 80 percent investment property loan comes with a 3.375 percent charge. Altogether, someone with a 720 credit score pays 4.125 percent in additional fees.
In many (if not most) cases, the borrower chooses to pay a higher interest rate instead of paying all those extra points. And 4.125 percent in fees can be covered by an extra .5 to .75 percent addition to the rate.
That means for a prime borrower with 20 percent down and a 720 FICO score, he or she will pay 4.375 percent to 4.625 percent 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 percent to your fees, or a .125 to .250 percent 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 concluded that even "good" homeowners tend to stop paying their mortgages when their house becomes a bad investment.
In fact, prime borrowers accounted for 60 percent of these foreclosures -- that's where the term "strategic default" originated.
Lenders know that when you think of property as a business, you're less attached to it.
Businesses are riskier
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 (and it stays in Vegas)?
Or their house guests turn out to be goats? Or renters just leave without notice, taking appliances and fixtures, while squatters happily take over?
Lenders know what happens. Investors are one third more likely to dump mortgages than owner-occupiers.Verify your investment property mortgage options (Feb 25th, 2018)
Types of investment property mortgages
When purchasing investment property, you have access to 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 of the units.
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 don't 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.
For this reason, expect to deal 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've never owned a home or managed any property, you'll have a tougher time.
You may, say some lenders, be able to get around this 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.
And you'll 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 three percent down for your primary home
That goes up to at least 15 percent for investment property with a fixed loan, and up to 35 percent for a three- to four-unit property with an ARM loan.
You'll 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 percent down can get approved with a 620 FICO score for a primary home. That increases to 640 for a rental.Verify your investment property mortgage options (Feb 25th, 2018)
How to get the lowest investment property mortgage rates
First, you'll find that much of the added cost goes away if you can put at least 20 percent down.
It might be worth borrowing against the equity in your current home to increase your rental's 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 percent, and by two points with 25 percent 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.
As long as 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.
Shop 'til that rate drops
One of the easiest and fastest method of getting the lowest investment property mortgage rate is to simply contact more lenders.
Rates can vary by over one percent between lenders. Getting the best loan instead of the worst one could cover some or all of those investment-related surcharges.
What are today's investment property rates?
The best way to find out what current mortgage rates are is to ask lenders. Rates change all the time, so contacting lenders online is the quickest way to get a fistfull of rates to compare.Verify your investment property mortgage options (Feb 25th, 2018)
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