What Is an Investment Property Mortgage?

If you’re looking for another source of income or want to start a side hustle as a home flipper, you may be considering the purchase of an investment property. Getting a mortgage loan for an investment property can be trickier than getting one for your primary residence, and obtaining a mortgage for investment property will require you to have a stronger financial picture than your typical mortgage loan would, too.

That doesn’t mean it’s impossible, though. Knowing your options when it comes to lending types, credit and financial criteria, and funding guidelines can help you navigate the process and ensure that you’re doing as much as you can to set yourself up for success.

In this article

What is an investment property mortgage?

An investment property mortgage is a loan that is used to purchase a property for either rental income or to flip and sell for a profit. Underwriting guidelines are more strict on investment property loans when compared to purchasing a home to live in or a vacation or secondary home.

Not all lenders offer investment property loans, as the risk of default is higher compared to lending money for a primary residence you plan to call home. That’s because you’re likely to continue paying your home mortgage payments in times of financial crisis. However, if rental income isn’t coming in for some reason, and you have to choose between paying your personal mortgage and your investment mortgage, you’re likely to pay to keep the roof over your head than pay on an investment property. This is also why mortgage interest rates are higher for investment properties vs. primary or secondary homes.

To get approved for a mortgage on an investment property, you must:

  • Have a good or better credit score
  • A down payment of 10% to 25%
  • Cash reserves available
  • Stable employment

What is an investment property?

An investment property is a unit that is purchased to provide a stream of income or to flip and sell for profit. This could be a single-family home or a multi-unit building with four or fewer units. Apartment and condo buildings with five or more units are considered commercial real estate and fall under separate guidelines.

Examples of an investment property can include:

  • Single-family home
  • Duplex
  • Triplex
  • Townhome
  • Condo

While many investors seek to gain a stream of income from renting their units out to tenants, others prefer to purchase a home to update or improve and then resell to make a profit. Either way, investment properties can be a lucrative source of income if you’re smart about your investment and are able to nail down an investment property loan for your purchase.

That doesn’t mean there aren’t risks, though. As with anything, there are pros and cons to owning rental properties as well as tax benefits that make purchasing investment properties an attractive way to make money. But with mortgages at historically low interest rates, buyers with the funds, credit and the desire to invest could consider an investment property a viable source of income.

Difference between investment property loan vs. regular mortgage

While you’ll choose from the same loan types — conventional, fixed, adjustable rate, government-backed — for both regular mortgages and investment property loans, the interest rates and lending requirements vary vastly from one to the other. From a lender’s standpoint, a mortgage loan for an investment property is riskier than for someone’s home, which is reflected in higher interest rates. The average interest rate can be as much as 0.75% more for investment property loans when compared to conventional mortgage loans.

On top of higher interest rates, lenders also have stricter guidelines to follow for investment property mortgages. For example, the real estate lending standards set by the FDIC limit the loan-to-value of an investment property at 85%, whereas the LTV of an owner-occupied residence can be as high as 100% depending on the loan type and lender.

While buyers who purchase a home with a regular mortgage can get away with a much lower down payment — in some cases as low as 3.5% with an FHA loan or 0% with a USDA loan — investment property lenders want more down on the property. Depending on the property, the lender and your credit, expect to pay between 10% and 30% down on the property.

Lenders also expect borrowers to prove they have at least six months worth of cash reserves available to pay for the mortgage, whether or not they have tenants lined up yet.

Requirements for an investment property mortgage

While lender requirements vary, some general requirements you can expect when applying for an investment property mortgage include:

  • Low debt-to-income ratio. Freddie Mac’s investment property guidelines for DTI for is 45%. The lower your DTI, the better chance you have of getting a low interest rate on your loan and more lenders vying for your business.
  • Significant amount of borrower funds. You’ll need a significant amount of cash that you can prove came from your savings or investments to get an investment property mortgage. Your down payment and closing costs may not include the use of gifted funds, so plan accordingly when sourcing cash if you don’t have the money saved and ready for use.
  • Higher than average credit profile. You’ll need a relatively high credit score to qualify for an investment property loan. Most lenders will require a minimum credit score of 620 to qualify for an investment property mortgage, though some like Guaranteed Rate will go as low as 580 and others will require a much higher score to qualify. But even if you can find a lender who will work with a lower score, you may want a higher score before applying. Higher credit scores command better interest rates and lower down payments.
  • Financial documents. As with a regular mortgage, you must provide pay stubs or other ways to show employment income, as well as your prior year’s tax returns and any other information or documentation that the lender requests.

Where to get an investment property mortgage

Though it’s riskier to lend money to investors, this likely won’t limit the lender options you have to choose from. While not all lenders offer investment property loans, there are a number of mortgage lender types to consider, including:

  • Conventional banks
  • Online lenders
  • Credit unions
  • Peer-to-peer lenders

Online lenders and credit unions may offer better interest rates or have more lenient guidelines than conventional banks, so these lenders are worth checking out. Credit unions are member-owned nonprofit financial institutions that require you to join as a member, but the application process is generally simple and can greatly benefit you in the form of lower rates, flexible lending parameters and other perks.

Private investors, known as peer-to-peer lenders, are also an option, though interest rates tend to be even higher with shorter repayment terms. These types of lenders also often charge more fees, including pre-payment penalties, to borrowers.

Another option is to do a cash-out refinance on your primary residence to pay for the investment property. Depending on the amount of equity you have available, you can pay for some or all of the cost without having to find an investment property lender. This isn’t always ideal though, since you’re essentially wiping out the equity in your home for a more risky investment.

Ultimately, the best way to find the right investment property mortgage is to shop around and see what different lenders offer. Each borrower has different needs and goals, so you may have to shop around to find a lender that’s a good fit for you. It’s smart to do that no matter what, though — as you should shop lenders in order to save money on rates and fees, too.

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Source: thesimpledollar.com

How Lenders Determine Your Mortgage Interest Rate

Determining Your Mortgage Interest RateWith the cost of homes steadily rising, it wouldn’t be surprising if people were looking for a way to save even the smallest amount of money on their home purchase. And between the down payment, closing costs, inspections, PMI, and more, the cost of a home can quickly add up.

Paying interest on your mortgage isn’t avoidable, but you don’t have to feel like you don’t have any control over how much you pay. As you start the homebuying process, you’ll want to consider what factors into the total cost of your loan. The reason being you can improve your chances of saving some cash, especially when it comes to your interest rate.

To ensure you can get the best deal possible, it would be beneficial to understand how mortgage interest works as well as how lenders determine your mortgage interest rate.

How does mortgage interest work?

Mortgage interest, which is a fee charged by a lender for lending money to a borrower, will vary from person to person and lender to lender. Every month when you make your mortgage payment, mortgage interest will account for a portion of that payment. In fact, a majority of the payment is used to pay down interest, while only a small portion is used to pay down the principal balance, or the loan amount.

However, as you continue to make loan payments, and the principal balance decreases, your interest will also decrease. With this change in the amount of interest that is to be paid, more of your payment will go towards the principal balance. With the mortgage interest rate having an impact on the total cost of the loan and your monthly payments, a lower interest rate is better.

What factors affect my mortgage interest rate?

Your lender determines your mortgage interest rate. They do so using a variety of factors that will ultimately help them get a clear picture of your finances and your ability to repay the loan.

Lenders will use seven different factors to determine the mortgage interest rate:

  • Credit score: Number used to confirm a consumer’s creditworthiness.
  • Home location: State of home.
  • Loan type: Conventional, VA, FHA, or other special loan programs.
  • Loan amount: The total cost of the home and closing costs minus the down payment.
  • Loan term: The time borrowers have to repay their loan.
  • Down payment: A percentage of the loan amount paid at closing.
  • Type of interest rate: Fixed interest rate stays the same, while adjustable interest rate changes based on the market.

Using the abovementioned factors, lenders will be able to determine your interest rate. Every lender will offer a range of mortgage interest rates, so before applying, you may be able to confirm the rates offered to get a better idea of what the total cost of your mortgage might be.

For example, if a lender’s rates fall between 3.40% and 9.22%, your rate will be between 3.40% and 9.22%. Using a mortgage calculator, you can calculate the cost of your loan and your monthly payments. Of course, if a lender’s rates are too high, you have the option to shop around and look into other lenders who offer something more affordable for your budget.

Next to buying a car, buying a home is likely one of the largest purchases you will make in your lifetime. You might even buy more than one, but as a first-time homebuyer, you may not be 100% sure how to get the best deal. And considering how much people pay in interest, you want to be sure you are getting the best deal.

Source: creditabsolute.com

Should You Help a Family Member in Debt?

Should You Help a Family Member in Debt? – SmartAsset

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Watching loved ones struggle with their personal finances is never fun, especially when you’re doing relatively well yourself. But before you rush to the aid of your mother, your brother or your favorite cousin, it’s a good idea to consider how that might impact your own financial situation. Check out some of the pros and cons of loaning money to a family member in debt.

Check out our personal loans calculator.

The Pros

Being able to support a family member who’s facing a financial difficulty can make you feel good about yourself. You’ll have the opportunity to work together to implement good financial strategies and in the process, you might learn something that can help you manage your own money more effectively. And since you can never be completely sure about your own financial future, helping your relative get back on track might provide you with a safety net that you can rely on if you need help from that same relative later down the line.

It’s important to take the time to sit down with your relative and discuss what has worked well for you financially in the past. You can help him or her create a tighter budget (with loan repayments to you built in) and connect him or her with a professional financial advisor or credit counselor if need be. The more comfortable your family member is with talking about money, the better the experience is likely to be.

The Cons

When it comes down to it, helping family members out of debt is a big deal financially speaking. Before you make that move, it’s best to think about how it could affect your relationship. You run the risk of turning your personal relationship into a business transaction, and you might feel like money is all you talk about. Eventually, it might create tension or lead a serious disagreement.

You could also make yourself financially vulnerable by lending a family member a portion of your wealth. If you choose to let someone borrow your money, keep in mind that you don’t want to lend any amount that could get you into trouble.

Related Article: 5 Tips for Lending Money to Friends or Family

Important Questions to Ask Yourself

As you weigh the advantages and disadvantages of lending money to a relative, there are several things you’ll need to clear up. Will this be a temporary situation or an ongoing arrangement? A gift or a loan? Can they afford to pay you back at some point? What will you do if they can’t?

You’ll also have to consider whether providing someone with a loan is a good use of your money. Instead of relying on you, could your family member turn to debt management, debt settlement or bankruptcy? Are there other ways you can help?

Related Article: 4 Signs It’s Time to File Bankruptcy

Final Word

Deciding how to assist a family member in need isn’t easy. As an alternative to becoming your relative’s sole source of financial support, (or turning down his or her request) you can always offer to fund part of the debt repayments. Managing your expectations and finding a happy medium that won’t jeopardize your chances of achieving financial success are key.

Photo credit: ©iStock.com/Ocskaymark, ©iStock.com/Christopher Futcher, ©iStock.com/SoumenNath

Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz’s articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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