2021 Investment Property Mortgage Guide for CT, MA, ME, & NH [w/ Free Assessment!] Roger Odoardi 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. 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. Schedule a Free Assessment >>> Make the Math Work As a home buyer, you’re eligible to apply for a regular residential mortgage for an owner-occupied investment property with up to four units — any more units than that and the property is considered to be a commercial property, which comes with different mortgage restrictions. You might not have realized this but, when applying for a mortgage for a rental property, you can actually count your potential rental earnings toward your loan; this means that you can quality for an investment property mortgage for a multi-family home based on the prospective rent you’ll collect from tenants. The general formula for investment property loans stipulates that borrowers can count 75% of their total potential rental income — as determined by market rates — toward their gross income. To calculate your potential investment property ROI, multiply the number of units by the rent per unit, and then multiply that sum by 0.75. For example, if you lease three units for $800 each, the usable portion of rental income toward your mortgage would be $1,800. (# of Units × $ Rent per Unit)× 0.75=Total Rental Income Toward Mortgage ($) 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. 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 $0 down payment, no monthly mortgage insurance premiums and low interest rates. Eligible borrowers are free to purchase multiple investment properties using VA loans, until they reach their loan limit. 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. Schedule a Free Assessment >>> 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. 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. Additional Loan Options If none of the loan types listed above appeal to you, there are still other investment property loans to consider: Conventional Mortgage: Perhaps the most straightforward type of investment property mortgage, a conventional mortgage is a loan that is financed by a private entity, such as a bank, and that follows the guidelines set by Fannie Mae and Freddie Mac. In order to qualify for a conventional mortgage for an investment property, you’ll like likely have to put at least 20% down, have a minimum loan-to-value (LTV) ratio of 80% and a credit score of 740 or higher. Keep in mind that these requirements can vary from state to state, so it’s in your best interest to do some research before applying. Also, it’s important to note that most conventional mortgage lenders place a risk-based pricing adjustment surcharge on rental properties based on their LTV. Portfolio Loan: A portfolio loan refers to a mortgage that is originated by a lender and then kept in portfolio for the life of the loan, where it can accumulate interest. Unlike conventional loans, which are often originated by one lender and then sold to and serviced by another, portfolio loans stay with the original lender. As a result, they’re typically originated and serviced by small banks and credit unions. Portfolio loans also differ from conventional loans in that they aren’t subject to Fannie Mae and Freddie Mac guidelines, which makes them popular with property investors because they do not come with capital limitations or property restrictions. Hard Money Loan: A hard money loan is an asset-based loan secured by real property. Hard money loans are sometimes referred to as “bridge loans” or “short-bridge loans” because they’re issued by private lenders for a short period of time — often 1–5 years. This type of investment property mortgage is popular with house flippers and real estate developers because they’re relatively easy to qualify for and offer fast approval and funding. However, if you’re looking to take a more traditional approach to buying rental property — that is, you intend purchase the property and rent it out for a significant period of time — this loan type might not be the best fit. Whether you’re a first time buyer or a seasoned property investor, it would be wise to partner with a mortgage broker to evaluate the different types of investment property loans and determine which one makes the most sense for your particular situation. Schedule a Free Assessment >>> 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. Fund Your Future With Blue Water Whether you’re a first time home buyer seeking to reduce your monthly housing costs or a seasoned buyer hoping to become the next savvy real estate investor, purchasing an investment property can be a brilliant decision — and a mortgage for a rental property can be a great way to get some collateral under your belt for future investments or financial obligations. At Blue Water Mortgage, we have helped countless borrowers figure out how to finance an investment property. If you’re considering purchasing a multi-family home and want to leverage future rental earnings toward a mortgage, schedule a free assessment with one of our loan officers today to weigh your options and take next steps toward becoming a landlord. Investment Property FAQ As mortgage experts, ourselves, the Blue Water team gets a lot of questions about investment property loans; we’ve tried to answer some of the most common ones we receive here: Q: Can I get a mortgage for an investment property? A: Absolutely. We just need to navigate the different loan programs and guidelines to make sure we put you in the right mortgage. Q: Are mortgage rates higher for an investment property than for a primary residence? A: Yes, interest rates on investment properties are higher. That’s because they’re considered a higher risk investment on the part of the lenders, Fannie Mae and Freddie Mac, which results in higher rates. Generally speaking, you can expect to see anywhere from a 0.25%–0.50% difference in rate. Q: What is the standard mortgage rate for an investment property? A: There are many factors that go into determining an interest rate. We always recommend that you get a quote from a trusted loan officer who knows the particulars of your loan situation. Q: Is there a way to buy an investment property without putting any money down? A: No, all investment property loans require a down payment. Q: Are there any investment property loans that only require 10% down? A: The minimum down payment for a single-unit investment property is 15% — and the requirement increases from there. At Blue Water, we’re always on the lookout for new loan products that might permit a lower down payment. Q: Can I get a 30-year loan on an investment property? A: Yes, of course. All standard loan terms are available for an investment property. Roger Odoardi Roger is an owner and licensed Loan Officer at the Blue Water Mortgage office in Hampton, NH. Roger graduated from the University of New Hampshire Whittemore School of Business and has been in the mortgage industry for over 20 years. Roger has originated over 2500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.