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2024 Investment Property Mortgage Guide [w/ Free Assessment!]

An investment property isn’t a one-way ticket to becoming wealthy, but purchasing one can be an incredibly smart financial decision, one that can pay off in both the short and long term. Though getting approved for an investment property mortgage might seem like a daunting challenge, with enough motivation and an in-depth understanding of the application process, you’re sure to prevail.

Let’s start with a few pointers for landlords-to-be.

What Is an Investment Property?

Simply put, an investment property is real estate that an individual or group of investors purchases for the purpose of generating income through either rental or appreciation. If you’re considering pursuing this option as a way of making some extra cash, it’s important to note that an investment property is different from a second home — you’ll need to know how to make the distinction when it comes time to look for financing or file your taxes.

The key differentiator between the two property types is that while the goal of owning an investment property is to make money, the point of buying a second home is for enjoyment and to have a place to live or vacation part time without the intent of using it as a source of income.

Do You Have What It Takes to Be a Landlord?

Becoming a landlord can be incredibly rewarding, both personally and financially, but it isn’t for everyone. It’s a role best suited for individuals who are organized, dedicated, reliable and discreet. After all, if you do become a landlord, it’ll be your responsibility to ensure that your tenants’ needs are met, that their privacy is respected and that any disputes that might arise are resolved expediently. Most importantly, it’ll be your responsibility to create a warm and welcoming space in which your tenants are excited to live.

Therefore, it’s vital that you carefully consider whether you have the necessary qualities to be a landlord before you take any additional steps in the investment property mortgage application process. If you feel confident that you’re up to the challenge, read on.

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Key Considerations Before Buying an Investment Property

The decision to purchase an investment property shouldn’t be made hastily; there’s a lot to think about before signing on the dotted line. Some of the major factors to consider include:

  • Housing trends. The state of the housing market will impact everything from available inventory to the price you’ll pay for your property, so it’s important to pay close attention to the latest developments. In April, U.S. News & World Report published their five-year housing market predictions, and the outlook is mixed. While home prices are falling year-over-year, the effects of inflation render those decreases moot. The report also finds that remote and hybrid working arrangements are reshaping the market’s status quo, single-family homes are becoming harder to find in urban markets and new homes are increasingly being built as part of homeowners’ associations.Citation
  • Rental trends. If you’re planning on renting out your investment property, keeping an eye on rental trends will help you get an idea of what tenants are looking for — enabling you to make strategic decisions that lead to the best return on your investment. When it comes to the types of rentals that are in demand, Nathan Miller, CEO of Rentec Direct, a property management software company, notes that while the market will remain unpredictable, “2023 will see a need for real estate investors and landlords to consider making upgrades to their properties to better suit the needs of multi-generational living situations, the work-from-home lifestyle and the increased demand for home technology.”Citation
  • Associated costs. In addition to what you’ll pay to purchase your investment property, you will also need to factor in the costs associated with its long-term ownership. While maintenance and repairs should be included in your planning, the two most significant expenses related to homeownership are property taxes and insurance. The price of both will largely depend on where your investment property is located, as property tax rates vary by town, and insurance premiums are calculated with the property’s location in mind. When deciding where to purchase your property, it’s important to be aware that some insurers are discontinuing coverage in certain states as the frequency of severe weather events increases.Citation
  • Buying alone or with a partner. To invest yourself or alongside a business partner? You’re likely prepared to take on an investment property on your own if you can meet the following benchmarks:
    • Your savings are in a good place (enough for a 20% downpayment and to cover at least three months of expenses)
    • You understand how to maximize your investment
    • You are ready for the responsibilities that come with being a landlord (or are prepared to hire a property management company to assume some of those responsibilities for you)

However, if you have insufficient savings, are uncertain about how to make your property profitable or are uninterested in being a landlord, you’ll need to partner with additional people who have the means or know-how you lack to make the investment worthwhile.

  • Property management. One of the many decisions you’ll need to make in relation to your investment property is whether you’ll take on the duties of being a landlord (i.e. finding qualified tenants, handling maintenance requests, etc.) yourself or passing those responsibilities off to a professional management company. If you decide to work with the pros, keep in mind that in addition to the cost of hiring the company, they may charge additional fees. When applicable, common charges include: vacant unit, new tenant placement, evictions, late payment or set-up fees.

If You’re a First Time Home Buyer…

If you’re a first time home buyer looking to strike out into the world of investment property ownership, your best move is to apply for a low down payment government loan, such as an FHA loan or a VA loan. Let’s take a closer look at these loan types:

  • Compared to other loans, which are insured by agencies, FHA loans are insured by the Federal Housing Administration. FHA loan terms are very generous and include a down payment of only 3.5% on properties with one to four units, a minimum credit score requirement of 500 (though 620 is preferred) and the ability to pay for closing costs with cash gifts.Citation
  • VA loans are home loans provided by private lenders and guaranteed by the U.S. Department of Veterans Affairs and the federal government. Founded in 1944, the VA home loan program is designed to honor veterans, active duty service members and their spouses by enabling them to secure affordable home loans with favorable terms, such as a $0 down payment, no monthly mortgage insurance premiums and low interest rates.Citation Eligible borrowers are free to purchase multiple investment properties using VA loans, until they reach their loan limit.Citation

Most low down payment government loans require borrowers to occupy one of the units in the building for a minimum of one year, and that they establish occupancy within 60 days of purchasing the property.

Although the idea of purchasing a multi-family home as a first time home buyer might seem far-fetched, for those with the right qualities to be a good landlord, an investment property makes perfect sense.

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If You’re a Seasoned Home Buyer…

If you’re a seasoned home buyer who already has other investment properties within your real estate portfolio, a home equity loan or a cash-out refinance could be the right move.

A home equity loan, also known as a home equity line of credit (HELOC), is a type of mortgage that uses your home as collateral, thereby enabling you to borrow against the value of your home, minus your remaining mortgage. After determining how much you’re eligible to borrow based on your home’s value and your outstanding debt, a bank will present you with a lump sum that you must repay at either a fixed or adjustable rate.

HELOCs typically offer lower interest rates than unsecured loans, which result in lower borrowing cost; these interest rates are fixed over the life of the loan, which makes budgeting for monthly payments more convenient. There’s also the added benefit that, since mortgage interest rates are tax deductible, a home equity loan could lower your taxable income. Note that the draw period — that is, the stage during which you’re able to draw from the line of credit — typically lasts between 5–10 years. Once the draw period is complete, you enter the repayment stage.

Cash-out refinancing refers to the act of leveraging your home’s equity to borrow more money than is owed on your existing mortgage and receive the difference in cash. Note that a cash-out refinance is, effectively, a new mortgage, so standard application requirements apply. There are three types of cash-out refinance: conventional cash-out, VA cash-out and FHA cash-out. If you choose to pursue a cash-out refinance to fund your investment property, you could end up paying a lower interest rate on your existing home.Citation Also, similar to home equity loans, the interest on a cash-out refinance mortgage is tax-deductible, so you could see a larger tax refund.

Investment Property Loan Requirements

When it comes to the requirements for your investment property loan, you’ll have to meet certain thresholds in order to qualify. While specific requirements may vary between lenders, you’ll more than likely need to provide details about the following in your loan application — no matter what financial institution you want to work with.

  • Debt-to-Income Ratio (DTI): This is a measurement of all your monthly debts compared to your gross monthly income and is a metric that lenders will use to determine whether you’ll be able to make your monthly payments. The lower your DTI, the better, as most investment property lenders will accept a maximum of 45%.
  • Credit Score: Your credit score tells potential lenders whether or not you’re a high-risk borrower. To financial institutions, a lower score indicates that you’re more likely to miss payments or default on your loan, which is why it’s important to make sure that your credit is in good standing before applying. To qualify for an investment property loan, you’ll typically need a credit score of at least 700.
  • Down Payment: A down payment is the amount of money you have available to pay — or put down — upfront when purchasing an expensive good, such as a home. Not only does this figure determine how much you’ll ultimately need to borrow, lenders will also use it to help determine your interest rates. The minimum you can put down on an investment property is usually anywhere between 15%-25% (and sometimes even more, depending on the lender).
  • Cash Reserves: Also known as “mortgage reserves” or “liquid financial reserves,” your cash reserves are made up of assets (namely money) you have on hand to cover your loan payments if you fall on hard times. For investment properties specifically, the recommended amount is 6 months-worth.Citation

Investment Property Loan Process

Now that you have a better understanding of the different loan types available for financing your investment property and how to qualify for them, the next step is to apply. But what goes into getting a loan? Increase your chances of a successful application by taking these four steps:

  1. Get your finances in order before you apply — whether that means improving your credit score or paying down debt to decrease your DTI. This step may take some time, especially if you have a lower credit score or larger debts, so it’s important to start working on these improvements as early as possible.
  2. Choose the loan that makes the most sense for you. Whether you’re a first time buyer or a more seasoned home buyer, there are plenty of options available. Take your unique circumstances into account when deciding which loan type is the best fit and go with the one that is most advantageous.
  3. Track down documentation and make sure to include all necessary statements, tax forms, pay stubs, etc. when you submit your application. Missing documents or incomplete paperwork can lead to a delayed closing or even denial.
  4. Opt for a larger down payment. This not only helps you secure a better interest rate but also signals security to potential lenders. With a more substantial down payment, financial institutions have less to lose if the investment goes poorly, making applications with higher down payments a more attractive option.

A Note About Investment Property Mortgage Rates

Lenders consider rental properties to be a riskier investment than primary residences, and for good reason: If things go south and they’re unable to make payments, a borrower is more likely to default on a loan for an investment property than on their primary residence. As a result, investment property mortgage rates are generally higher than those for residential mortgages. That said, by working with a mortgage broker — versus, say, a bank — you can ensure that you get the lowest rate possible on your rental property loan.

What to Expect From Underwriters

Once you’ve settled on which investment property loan type is right for you, you’re ready to apply. Again, a mortgage broker can be a valuable asset at this stage in the game because they can walk you through each stage of the application process and offer expert advice every step of the way. One of the key ways a mortgage broker can assist you is by helping you gather the necessary application materials.

Any time you apply for a loan, whether it’s a mortgage for a rental property or a residential one, you’ll need to receive approval from an underwriter before you can proceed to closing. It is the underwriter’s job to assess your creditworthiness — that is, whether you’re likely to be able to repay your debt — as well as to determine whether the sale price of the property you’re interested in accurately reflects its appraised value.

In order to determine your creditworthiness, an underwriter will review your credit score, credit history, employment history, income stability, debt-to-income ratio, assets and so on. When it comes to investment property loans, underwriters will also assess your suitability as a prospective landlord; borrowers who have owned or managed a property in the past are viewed more favorably. You’ll also need to demonstrate to the underwriter that you have reserves on hand that you can use to make mortgage payments during periods when your property is unoccupied.

Tips for First Time Landlords

Once you’ve secured a loan, you’re officially ready to take on the mantle of landlord. If this is your first time around the block, we have a few basic pieces of advice to help you get started:

  • Choose the right tenants. There’s no way to guarantee that you find the perfect tenants for your rental units, but by reviewing each tenant’s rental history, verifying their income, running a background check and trusting your instincts, you’re more likely to find tenants who are the right fit.
  • Build a budget for maintenance. Pipes burst, appliances malfunction, fixtures need repairing — as a landlord, it’s your responsibility to ensure that any issues that crop up in your rental units are dealt with quickly and efficiently. Make sure you have sufficient funds on hand to resolve any maintenance-related problems your tenants bring to your attention.
  • Get everything in writing. Painstakingly document everything related to your relationship with your tenants, including the rent payment schedule, tenant responsibilities, how to file tenant complaints, how to submit work order tickets and so on. For more tips on what to include in your rental lease agreement, Zillow offers a helpful guide.
  • Read up on tenants’ rights. From a tenant’s right to privacy to anti-discrimination laws, be sure to educate yourself on tenants’ rights by conducting independent research and consulting a lawyer to prevent legal woes down the road.
Roger Odoardi

Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.