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?Click to see today's rates (Oct 20th, 2017)
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.
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.
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 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.
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.
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.
When lenders advertise their best mortgage rates, they mean rates available to pristine borrowers.
The people with big down payments, purchasing single family homes that they will live in themselves.
Every item that does not meet this perfect standard comes with a surcharge, or as Fannie Mae calls it, a "Loan Level Pricing Adjustment."
Here are the adjustments you get if you want to buy a duplex with 15 percent down and a 700 FICO:
That's $24,500 in pricing adjustments for a $400,000 mortgage.
If you choose to pay a higher interest rate and let the lender absorb the surcharges, you're looking at a rate between 1.0 and 1.50 percent higher.
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.
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.
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.
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.
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.Click to see today's rates (Oct 20th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)