Have your eye on an investment property, but need a little help to make your dream become a reality?
Even if you own or have owned an apartment, owning an investment property is quite a bit different. And similarly, getting a mortgage on an investment property is different from getting one for a home that is your primary residence. But that should not be a deterrent, especially in the current market.
Assuming the property can command enough rent, interest rates are still low enough—despite recent increases—to make financing an investment property an attractive proposition. At NCB, we offer investment loans on co-ops, condos, and single-family homes.
Here’s what you need to know about getting a mortgage on an investment property:
1.) 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, so you’ll likely be offered a 5/1, 7/1 or 10/1 adjustable rate mortgage (ARM). That means rates remain fixed for five, seven or 10 years, respectively, and then adjust annually up to a certain percentage cap. Typically, there is a margin set (for example, 3 percent over LIBOR rates with a cap of 5 percent over the initial interest rate).
2.) 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 mortgages on a primary residences. But rates are still appealingly low.
Annual adjustments after the initial five- or seven-year period are based on LIBOR plus a margin (for example, 3 percent) and can’t exceed an additional 5 percent above the original interest rate.
3.) It’s harder to qualify as a borrower—and your down payment will be bigger
You’ll need a minimum FICO credit score of 720 (versus 680-700 if the property was your primary residence). The maximum loan-to-value ratio is 75 percent—meaning if the property you have your eye on costs $1 million, you’ll need to come up with at least $250,000. (For primary residences, some banks lend up to 90 percent with mortgage insurance.)
4.)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 percent owner-occupied. This is actually a lower threshold than the 51 percent needed to obtain a federally-guaranteed mortgage
5.) 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.
6.) Big-time investors need not apply
If you already own a lot of investment units, financing your next purchase is probably not an option. For example, at NCB there’s a 10-unit cap on investment financing.