According to the National Multifamily Housing Council, 37 percent of American households are occupied by renters. With average rent rates for a two-bedroom hovering around $1,100, rental property owners therefore have the opportunity to make a great profit off their properties. Prior to buying your first (or second) rental property, however, it’s important to understand how you get a mortgage for this purpose. Here are tips for buying an investment property.
Keep track of your loan count
Fannie Mae only allows investors a maximum of 10 loans to be used at the same time; however, it may take some time to find a lender that follows this 10-loan limit. Many prefer to loan up to 6 mortgages at a time.
Know the credit guidelines
As you apply for more loans, the credit guidelines will change. In fact, there are two qualification groups:
- 1-4 loans: Credit score of at least 630
- 5-10 loans: Credit score of at least 720
Prepare for a larger down payment
Mortgage insurance will not cover investment properties, so it is important to prepare for a larger down payment prior to requesting a loan. The down payment required will depend on the type of property, as well as the number of loans you have:
- 1-4 loans for single family property: down payment of 20 percent
- 5-10 loans for single family property: down payment of 25 percent
- 1-10 for multi-family property: down payment of 25 percent
Build up your cash reserves
Mortgage lenders typically require investment property borrowers to have at least 6 months of cash reserves per property. Cash reserves refer to cash saved in the bank to cover any vacancies or maintenance. The amount you’ll need to save will depend on several factors, including how old the property is and how much cash flow your rental properties have produced. A great way to prepare is to simply discuss cash reserves with your local lender.
Work directly with a lender
Buying an investment property is slightly different from purchasing a primary residence. In this case, you will not want a middleman (broker) between you and the lender. This will help reduce any miscommunication between lender and borrower and prevent the underwriter from changing lending standards, which can occur during escrow. To learn more about the advantages of choosing a mortgage lender, see here.
Find a lender with experience in investment properties
Lenders with experience in investment properties have a better understanding of your overall goals and objectives. They are crucial to buying an investment property, as they not only speed up the mortgage process itself, but can also reduce mortgage stress along the way.
Overall, if you are interested in real estate investing, it’s a great time to begin discussing your options with a local lender. For more information about buying an investment property, or to learn more about home buying and financing in general, contact one of our mortgage specialists and download our eBook today.