By Thirdstone Properties LLC - Monday, January 23, 2023
Many investors use Conventional financing to purchase rental properties for lower rates and fees compared to private loans or non-qualified mortgage loans. It is important to understand the loan terms and approval requirements to have a smooth path to closing.
What is a Conventional Mortgage for Investment Properties?
Conventional investment property loans are for income-producing properties including single-family homes, duplexes, triplexes, and quadplexes. They are conforming loans meeting Fannie Mae or Freddie Mac requirements covering loan amount, credit score, debt-to-income ratio, loan-to-value ratio, and more.
Credit Score Awareness:
A good credit score makes it easier to qualify and lowers your interest rate. You can request your free annual credit reports at AnnualCreditReport.com.
Shop Around for Rates and Fees:
Do not accept the first offer you receive. Origination fees typically range from $800 to $1,500 and can be negotiated. When lenders are slow, they sometimes offer incentives, so comparison shopping pays off.
Down Payment Requirements:
A minimum of 20% down is required. Less than 20% typically requires PMI, which adds to monthly costs and reduces cash flow. Down payment funds can come from personal savings, a HELOC, gifts, or partnerships.
Using a HELOC for the Down Payment:
A HELOC lets you borrow against home equity for your down payment. Important: if using borrowed funds as a down payment, you must disclose this to the lender at the start of underwriting. Failure to disclose could be considered mortgage fraud.
Other Closing Costs:
Budget for prepaid costs including one year of insurance and taxes for your escrow account, plus appraisal and inspection fees. These can add up quickly.
Monthly Affordability:
Keep at least 3 months of mortgage payments in reserve. Your rental income should cover expenses, but during vacancy periods you will still need to cover the mortgage, utilities, and maintenance costs.
Conclusion: Research your options, shop for the best rate, and work closely with your lender. Ask upfront what documents are needed so you can gather them early and avoid delays at closing.
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