Investment Property Financing Needs a Different Mindset

House with Paved Walkways

If you are looking to purchase and finance an investment property, here’s what to expect:

In order to qualify as a residential real estate transaction under the Real Estate Settlement Procedures Act (RESPA), an investment property must be four units or less, and it must be sold to an individual rather than a company.

Conventional mortgages: Most investors prefer conventional mortgages. With rare exceptions, neither FHA nor VA offer financing for anything other than primary residences. 

Stringent rules: Investors looking to finance investment properties should expect to put down 20 percent. Rules regarding credit scores and debt ratios will be more stringent than those buying residential properties. Someone with a recent credit event likely won’t receive financing for an investment property.

Projected rent: Depending on the specific mortgage program you plan to use, you may be able to qualify using projected rental income. Fannie Mae does allow the use of projected rental income; Freddie Mac allows it only if two years of that type of income can be documented on a federal tax return. Allowable rental income is calculated at an occupancy rate of 75 percent, and a rent schedule must be included on the appraisal when it is done.

Asset reserves: Asset reserves are also more stringent on rental properties. Lenders want six months of liquid reserves for each property you plan to invest in to help offset the projected 25 percent vacancy rate.

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