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Health & Fitness

Q&A with a Mortgage Expert: Investment Properties

Chip Poli, CEO of Poli Mortgage Group, explains how to obtain a mortgage for an investment property.

I’d like to buy an investment property. How much of a down payment will I need?

If you plan on financing a multifamily, expect to put down approximately 25% for a 2-4 unit property. Lenders, after the financial crisis, are skeptical about lending money to real estate investors.

Lenders want to make sure that you, as an investor, will have enough financial equity and ability in this property to keep it going, regardless of what obstacles occur while you own it. Expect that interest rates will be a bit higher for an investment property than for a property that is owner occupied.

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Will the rents I expect to get be enough to show the bank that I can cover the mortgage? 

Unfortunately, no. Your income will have to be high enough to cover your primary housing expenses in addition to being able to cover the investment property that you are buying. I am sure you are thinking that if you have renters under contract lined up to give you a fair market rent for that property, you should be able to use that as income, thus helping your debt to income ratio when applying for a mortgage. While that may sound like reasonable thinking, it likely won’t be sufficient for the lender unless you have prior experience managing rental properties, meaning, at least two documented years of history to show your lender. We can usually use 75% of the fair market value that is reported on the appraisal, however, the prior rental experience is crucial. If you do not have this, you will have to show sufficient income from your own resources. A property is rarely able to stand on its own from an underwriting standpoint.

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What kind of cash reserves will I need to be able to get a loan on an investment property?

In the lending industry, the amount of cash or cash like assets you have after closing is considered your reserve. You will need to show the lender reserves that amount to six months of the full payment of the rental property. This is called PITI, and includes principle, interest, taxes, and property insurance. So, if your expenses are $1,500 per month, you will need to show reserves of $9,000 in addition to your down payment when you apply for the mortgage. For some investors you need to have six months reserves for the subject property and two to six months on every other property the borrower owns plus rent loss insurance for each property.

Don’t forget that in addition, your credit profile will have to be in good standing if you are going to apply for a mortgage on an investment property. Depending on the Fico, some banks will allow you as low as a 620 credit score, but the majority of investors want to see at least a 660 score. If you have any recent bankruptcies, short sales, and/or foreclosures on your credit report, you may be waiting for some time before you are able to apply for a mortgage on rental property.

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