Purchasing a home for investment purposes has gained popularity, especially in Florida where many people look to rent both long-term and short-term.
An investment property is basically any property that is one to four units which 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.
What are the standard downpayment requirements?
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 required for approval when seeking a investment property mortgage. Most lenders require a minimum downpayment of 20% for an initial investment property purchase and even higher downpayment on properties two through four.
How do investment property rates differ from primary home rates?
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 (DTI) ratio and loan-to-value (LTV) 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 (3) months reserves available, sometimes more. The maximum seller contributions for this type of loan is limited to 2%.
What if I plan on flipping my investment property?
In today’s market, property flipping is not illegal, but monitored and regulated very carefully all mortgage 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 via legitimate and verified renovations with the higher sale price representing 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 sale price increased 10% or more since the previous purchase (this increase will need to justified)
In the case of a 10% or more increase in sale price, 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 problematic than owner-occupied home mortgages. However, using a Florida mortgage broker experienced in funding investment properties will always make the experience less of a headache. Additionally, if you plan to ultimately purchase more than one investment property, it is a good idea to use the same Florida broker who handled your previous past purchases as they will already be familiar with your scenario.