Investment Property Mortgage & Rate Guide
Purchasing a home for investment purposes has been done for many years, especially in Florida where many people look to rent both long term and short term. Home prices are still good for the investor, but financing is not going to be quick nor easy since credit has been tight for some time now. With some preparation and understanding of the market, this is definitely possible as long as you are working with someone who can give you the proper advice for obtaining investment property loans.
An investment property is basically any property that is one to four units that the borrower does not occupy. Sometimes a primary residential property becomes an investment property when the owner decides to purchase another home to occupy and keeps the original home for rental income.
Investment property loans are generally conventional conforming loans which are sold to Fannie Mae or Freddie Mac. A good credit history and credit score is necessary to be approved for this type of loan. Most lenders require that at least a 20% down payment be made on an investment property for a first investment purchase and a higher down payment for two to four investment properties. Investment property mortgage rates are higher than rates for owner occupied property, however, lower mortgage rates are possible with higher down payments. Debt to income and loan to value are always a consideration when determining any mortgage rate.
The borrower who is applying for an investment property loan must submit the same documentation that is required for a regular loan. However, all of the expenses of the primary residence will be considered in the debt to income ratio for the debt to income ratio of the new investment loan. If there are previous investment properties involved, income tax returns will be used for rental income and any negative rental income will be calculated as an obligation and included in the DTI.
Other guidelines for investment property loans require that the borrower have a minimum of three months reserves available, sometimes more. The maximum seller contributions for this type of loan is limited to 2%.
In today’s market, property flipping is not illegal, but watched very carefully by lenders. An example of unacceptable property flipping is when a distressed property is purchased at a discounted price and then resold at a higher price to an uninformed home buyer. Property flipping is acceptable when a home has been improved for legitimate and verified renovations since the purchase and the higher sales price represents those improvements.
A property flip transaction will be considered for a conforming loan when the seller is the owner of record; a complete appraisal is performed; there are no interested party characteristics; the sale is within 0 to 90 days of the seller’s acquisition. If the sales prices increased 10% or more since the previous purchase, this increase will need to justified. In this case, the appraiser must take photos of any improvements and comment on the cost and contribution to the increase in value. The seller must submit all receipts, building permits and/or signed contracts to verify that the renovations took place. If the property flip is after 90 days and the sales price has increased 10% or more since the seller’s purchase, the increase must be supported by the appraisal.
Needless to say, investment property loans can be more intense than regular home mortgages. However, using a Florida mortgage broker who has experience with this type of mortgage will make this transaction much easier. If there are plans to purchase more than one investment property, it is a good idea to use the same Florida broker who already has a history of past purchases.
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