It is getting harder and harder to qualify for an investment property mortgage. Mortgage insurance is no longer offered, and borrowers must put a minimum 20%-25% down to purchase a non owner occupied investment property. Lenders add risk factors to mortgage interest rates based on borrower’s fico score, type of property (SFR, duplex, 4plex), down payment percentage, and type of occupancy (primary residence, second home, or non owner occupied investment property). Additional liquid cash reserves are also required for an investment property mortgage, and total debt ratios must not exceed 45% of gross income.
Borrowers must have a minimum 740 fico score to get the best conventional interest rate. The risk factor for a non owner occupied 80LTV single family residence (SFR) mortgage adds three discount points to a par rate. What does this mean? A borrower must pay an additional three discount points in order to have the same rate as a primary residence. A discount point is equal to one percent of the loan amount.
If investor purchases a $125,000 rental property and puts 20% down, the loan amount would be $100,000 ($125K x .80). The borrower would pay three discount points, or $3,000 to get the same rate as if they were purchasing a primary residence property. This translates into an interest rate that is almost 1% higher. So, if the rate for an owner occupied property is 5%, the rate for an 80LTV SFR investment property mortgage would be about 6%.
The risk factor drops to 1.75 discount points if a borrower puts an additional 5% down and obtains a 75LTV SFR investment mortgage. Paying an additional 5% down payment will save about .5% on the mortgage interest rate. An investor would pay a mortgage rate only .5% higher than a primary residence with a 75LTV SFR mortgage. Putting 25% instead of 20% will drop rate .5% and increase the ability for the property to cash flow.
Lenders add a risk factor for the type of property being purchased. The above mentioned risk factors are for single family resident properties. Most lenders will require a minimum 75LTV for a multi-family property such as a duplex or 4plex. Borrowers must put a minimum of 25% down to purchase a duplex or 4plex. Lenders add an additional 1.0 risk factor for a multifamily property. In a 75LTV scenario for purchasing a 4plex, the borrower will pay a 1.75 risk factor (same as SFR) plus a 1.00 risk factor for a multi-family property. In this scenario, the total discount points add to 2.75%, similar to an 80LTV SFR property which adds 3.00 discount points.
Current landlords looking to refinance their current investment property can apply for a 75LTV rate/term mortgage. Landlords will need close to 30% equity in property to roll in closing costs. Closing costs can be added to new mortgage, assuming appraisal supports a 75LTV scenario. For example, if borrower owes $100,000, and closing costs are $4,000, the appraisal must come in at $138,667 ($104,000 / .75 = $138,667). Any appraisal shortage must be paid by borrower at closing. So, if appraisal comes in at $136,000, borrower must pay the difference of $2,677 at closing. For landlords who have 1-2 years experience owning rental property, the lender will count 75% of the rental income, but total debt ratios must not exceed 45%.
In addition to type of property and type of occupancy, lenders add a risk factor for borrower’s FICO credit score. The credit risk factor is added to the type of occupancy and type of property risk factors. For example, a fico score of 680-700 adds a risk factor or 1.00, and a fico score in the 660-679 range adds a risk factor of 2.0. As you can see, a borrower with a lower fico score can pay 1.75-4.00 discount points to purchase an investment property.
Six months of liquid reserves are required for investment properties. Six months reserves equal 6 times the monthly mortgage payment (PITI- principle/interest, property taxes, and insurance). If the mortgage payment is $1,200 per month, borrower must have and additional $7,200 in checking or savings account (liquid). An IRA or 401K may not be considered as reserves for investment property.
We are a full service real estate company offering sales, leasing, property management, and mortgage services. If you have any questions about debt ratios, fico score, refinance scenarios, or market value, please call our office at 512-257-9836.