With today’s low mortgage rates and many bargains available in the real estate market it may be an ideal time to invest in a rental property. Investment properties provide a vehicle that allows you to enjoy the potential for market appreciation while building equity each month. Whether you are purchasing or refinancing a single or multi-family home, townhouse, or condo, many of the companies on ForTheBestRate.com can help you find the right investment property financing option.
Overview of Investment Property Loans & What to Expect
- While 20-25% down payment may be required on most investment property financing products, you may be able to locate a providers with more liberal guidelines. We’re not aware of any major lenders offering no money down investment property loans. If you’re looking for a low money down solution, you may need to seek out private investors or hard money lenders who focus on this niche.
- Most lenders offer both fixed and adjustable rate mortgage solutions for investment properties. However, adjustable rate mortgage (ARM) products may have significant pricing adjustments that may make them less appealing. You’ll need to check in with your lender for more information.
- Closing costs can be all over the map. You may be able to find companies offering “no closing cost” refinances for investment properties. A no closing costs refinance typically means that the lender is going to offer you a higher rate, make more money (in their yield) and turn around and apply some of that money towards covering the costs that exist with the loan (i.e. title insurance, attorney fees, etc).
- Appraisals are typically more expensive for investment properties as rental income is added into the equation. Be sure to ask your mortgage professional for a realistic estimate of appraisal costs.
- Self employed borrowers and people who own multiple rental properties should plan on supplying some serious paperwork. The days of stated income loans for investment properties are long gone. You’re going to need to supply at least a couple of years of tax returns.
- Most lenders lend on 1-4 unit properties. Anything over 4 units is likely going to be viewed as commercial and therefore will require commercial financing which is a whole other animal.
- Investment property mortgage rates will likely be higher than what you’ll find for primary residences and second homes. Why? Lenders may view rental properties as riskier investments with a greater likelihood of default. If a struggling borrower is faced with making a mortgage payment on his or her primary residence or their rental, they’ll likely opt to stay current on their primary.
Shopping for Investment Property Mortgage Rates
You can use ForTheBestRate.com to compare mortgage rates from some of the nation’s leading mortgage lenders, brokers, banks, and credit unions. Please call the various providers directly to discuss your investment property mortgage needs. Investment property loan rates are not typically posted online due to the variables that surround these mortgages. Simply call the companies individually and someone will be able to give you an up-to-date quote in a matter of minutes. You can also find information on investment property underwriting guidelines on ForTheBestRate.com
Just to reiterate, the mortgage rates posted on ForTheBestRate.com are not for investment properties but rather for primary residences. You’ll need to ask the various lenders and brokers for pricing specifics. We are not aware of any rate table platforms that show pricing adjustments for rental properties.
Cash-Out Refinancing for Investment Properties
Underwriting guidelines may have changed since you last looked at financing investment properties. If you are planning on doing a cash out refinance on an existing rental to help pay for the down payment on another property, you may want to check out Fannie Mae and Freddie Mac’s cash out refinancing criteria on investment properties.
NOTE: Criteria is subject to change. Consult with a mortgage professional for the most up-to-date information.
Fannie Mae – At the time this post was written, Fannie showed the following LTV (loan-to-value) and minimum credit requirements in their eligibility matrix for cash-out guidelines on rental properties.
1 Unit – 75% Max LTV & CLTV – 700 min credit score
2 Units – 70% Max LTV & CLTV – 680 min credit score
3-4 Units – 70% Max LTV & CLTV – 680 min credit score
Freddie Mac – At the time this post was written, Freddie showed the following LTV (loan-to-value) requirements in their eligibility matrix for cash-out guidelines on investment properties.
1 Unit – 75% LTV w/o 2nd Mortgage, 70% LTV w/ 2nd Mortgage, 75% TLTV w/ 2nd Mortgage
2-4 Unit – 70% LTV w/o 2nd Mortgage, 65% LTV w/ 2nd Mortgage, 70% TLTV w/ 2nd Mortgage
There can be lots of variables, terms, and conditions with cash-out investment property financing. Be sure to speak with a licensed mortgage professional to review all the ins-and-outs of these products. Companies such as American Bank Mortgage, CapWest, Amerisave, Quicken Loans, and American Financial Resources offer cash out refinance mortgage programs as do many local, regional, and national mortgage companies.
Fannie Mae and Freddie Mac Guidelines for Investment Properties
If you are looking to purchase or refinance a rental home in the United States, there’s a strong chance that the mortgage company you are going to work with will follow the underwriting guidelines set forth by either Freddie Mac or Fannie Mac. To the best of our knowledge Freddie Mac only purchases 1-4 unit investment properties. So, you’re considering buying an investment property with more than four units, you are likely going to be in need of commercial financing.
Below are some other Freddie Mac investment property financing guidelines. Please note that the loan criteria are subject to change. You’ll want to check out Freddie Mac’s web site to make sure that you have the most up-to-date information and we encourage you to consult with a licensed mortgage professional to make sure that both you and your property may be eligible for financing.
Here are some basics….and as previously stated, these are subject to change.
- Minimum credit score: 620
- Maximum DTI (debt -to-income) ratio for manual underwrite: 45%
- Borrower/s must not own or be obligated on more than four 1-4 unit properties.
Below is a list of some resources that may help real estate investors learn about the programs available to them through lenders who sell their loans to Fannie Mae and Freddie Mac. Keep in mind that each lender may tweak their qualifying criteria so be sure to ask a mortgage professional for additional information on their product guidelines.
- Freddie Mac’s guide to investment property financing – Defines eligible types of properties and mortgage products which are and are not available. Explains where to find LTV (loan-to-value) requirements and spells out some of their underwriting guidelines.
- Fannie Mae investment property financing guideline updates – In February of 2009, Fannie Mae updated some of their eligibility criteria including loan-to-value ratios and underwriting and delivery requirements in the following pdf.
As previously mentioned, interest rates for investment properties are typically higher than that of primary residences and second homes. Both Fannie and Freddie have adjustments in their matrices which your mortgage lender should be able to explain to you. How big of an impact these adjustments may have on your principal and interest payments may depend upon a number of variables including your loan amount and the coupon spread between various rates for the programs that you are considering. For instance, the coupon spread may not be large enough with an adjustable rate mortgage to have an ARM make much sense. Pricing and spreads for 30 year home loans, 15 year mortgage loans, and other products will vary by investor. The only real way that we know to get accurate quotes is by speaking with mortgage professionals as most online rate tables do not take into consideration adjustments for rental properties.
Can Your Get an FHA Loan for an Investment Property?
One requirement of FHA loans is that they typically have to be for owner-occupied (see exceptions below). This means in most cases investment properties are ineligible for FHA financing. One way to take advantage of an FHA loan in an income producing property however is to by a multi-unit home.
FHA loans are available for properties with one to four units. You can live in one of the units and rent out the others to help offset the mortgage costs. With an FHA thirty year fixed rate home loan your monthly mortgage payment will remain the same throughout the loan term (though escrow payments for taxes and insurance can increase over time) rental prices in your area will likely rise over the years.
HUD’s web site does say that “Investment properties (properties which the borrower does not occupy as his or her principal residence) may only be refinanced without an appraisal.” So, it looks like if you own an investment property which may have been originally financed as an owner occupied property, you might be eligible for a streamline FHA refinance. With FHA streamline refinancing a borrower’s mortgage must already be insured by the Federal Housing Administration. The borrower must be current on their mortgage payments. The borrower’s payment must go down as a result of the refinance or the consumer must be moving from an adjustable rate mortgage to a fixed rate solution. Also, FHA streamlines do not allow for cash-out refinance transactions.
It also appears that HUD may allow exceptions for purchasing HUD real estate owned (REO) properties.
You can dig into the details a little further by looking at the following pdf on HUD’s web site. We suggest speaking with a licensed and knowledgeable mortgage professional in your area to make sure that guidelines have not changed since this post was created as they are updated frequently.
Are There Any No Money Down Options For Investment Properties?
It wasn’t long ago that no money down mortgage options for investment properties were widely offered. Today however, most home loan programs require a decent down payment even for owner occupied homes, with greater equity requirements for investments.
- Find other investors to go in on the purchase with you. By splitting the investment you’ll also be sharing any potential return and the risk that goes along with it.
- Buy a multi-unit property, live in one unit and rent the other(s). Many programs will allow up to a four unit home to be financed as a primary residence. Buildings with 5 or more units are generally considered commercial and require commercial financing.
- Use the equity in your current home to pay for the investment property, or to cover the down payment. If you have enough equity you could use a cash out refinance to come up with the funds needed. Be sure you understand the risks and implications of putting your own home on the line for the investment.
- You may be able to find private hard money lenders out there willing to offer zero down financing. If you are able to track them down, you’ll likely be looking at significantly higher interest rates.