Have your eye on an investment property, but need a little help to make your landlording dream a reality?
“Assuming the property can command enough rent, interest rates are still low enough to make financing an investment property an attractive proposition,” says Robbie Gendels, a senior loan officer in the New York City office of National Cooperative Bank. “Just be aware that getting a mortgage on an investment unit is a little bit different than getting one for a home that is your primary residence.”
Here’s what you need to know about getting a mortgage on an investment property:
It will probably be an adjustable-rate mortgage: The federal government doesn’t back mortgages for investment properties, which means you’ll need to shop around for lenders who’ll loan the money on their own books. These so-called “portfolio” loans are rarely offered at fixed rates, says Gendels, so you’ll likely be offered a 5/1 or 7/1 adjustable rate mortgage (ARM). That means rates remain fixed for either five or seven years, respectively, and then adjust annually up to a certain percentage cap. Typically, there is a margin set (for example, 3% over LIBOR rates with a cap of 5% over the initial interest rate).
Interest rates will be slightly higher than a residential mortgage: “Most banks will charge around a half a point more on loans for investment purchases than for a mortgage on a primary residence,” says Gendels. “But rates are still appealingly low.”
Currently, for instance, National Cooperative Bank is offering a rate of around 4.125% for a 5/1 ARM and 4.375% for a 7/1 ARM on an investment purchase. Annual adjustments after the initial five- or seven-year period are based on LIBOR plus a margin (for example, 3%) and can’t exceed an additional 5% above the original interest rate.
It’s harder to qualify…: You’ll need a minimum FICO credit score of 720 (versus 680-700 if the property were your primary residence). The maximum loan-to-value ratio is 65%— meaning if the condo you have your eye on costs $1 million, you’ll need to come up with at least $350,000. (For primary residences, some banks lend up to 90% with mortgage insurance.)
…But it’s easier to meet the owner-occupancy test: If you’re buying a co-op or condo, the building will need to be at least 30% owner-occupied. This is actually a lower threshold than the 51% needed to obtain a federally-guaranteed mortgage.
You’ll need a healthy reserve fund: Most lenders will want to see that you have six months worth of principal, interest, taxes and insurance stashed away in savings. For larger loans, some lenders may require 12 months of reserves.
Big-time investors need not apply: If you already own a lot of investment units, financing your next purchase is probably not an option. At National Cooperative Bank, says Gendels, there’s a 10-unit cap on investment financing.