Financing investment property is different from a home mortgageBuying real estate for investment is different from getting a mortgage for your own home. Financing investment property require special preparations.
Banks consider financing investment property a riskier loan and will charge a higher interest rate or more points than for a traditional mortgage. If money gets tight and a person has to choose between paying his own mortgage and making the monthly payment on his investment property, he's going to keep the roof over his own head every time. Depending on how much you put down and your personal credit rating, expect to pay from 1.5% to 2.5% more than the going rate for owner-occupied mortgages. You should also be prepared to make a much larger down payment than was required for your own home. As a rule, banks will be looking for at least 20% down. The bank is the third choice for financing investment property.
Seller financing is the first choiceThe seller financing is for the 10% part of down-payment, when the deal is structured 80% bank mortgage and 10% buyer own money - may come from buyer home equity. This is a deal I would accept as seller myself. The seller financing will always be cheaper, because the seller will not charge points, PMI or loan origination fees. Seller will be thrilled to get 6% or 7% on a first mortgage. That is lower than you get from the bank. Seller will let me make interest-only payments and a balloon payment in 60 months. You can always prepay the principal with a seller financing. This is a Tip. When you offer a balloon note with the full payment within 60 months, you have got five years for your investment to appreciate. There is enough time to make sense for a refinance for cash out with a bank before the balloon is due. You pay the balloon and make payments for just one commercial mortgage after that.
The private lenders are the second choice. These are the people with cash who are losing money in the stock market or making 1% to 2% in certificates of deposit. An investment that returns 7 percent to 8 percent with a house as collateral is a better alternative.
Prepare for your loan's applicationRegardless of who is providing the financing, you will need to put together a loan package that outlines the viability of the investment. "The investment will pay for itself" is what the lender wants to hear! The bank will provide 80% for a good credit applicant. The appraisal of the property will include information on comparable sales in the neighborhood and a rent survey of the area. Application should includes a photograph of the property, a rent survey, projected income and expenses, and a projected vacancy factor based on the area's vacancy rate. All the estimates are conservative, because that is how bankers asses risks.
That is especially important if you're going to the traditional lending market because the requirements have tightened for banks that sell their mortgages to secondary market Fannie Mae and Freddie Mac.
Lenders appreciate management skillsThe more experience you have in managing rental property, the stronger your application for a traditional loan will be. Your level of management experience may determine how much of the rental income they include as your income for the loan application. They also want to see sufficient reserves to cover the payments if it is not rented for an extended period or they may require rental-loss insurance. You need the skill and experience to manage rental properties. To get ideas about management read
"Invest and Manage Properties Successfully" e-book
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