Given today’s low housing prices and interest rates, it is easy to understand why so many people are considering purchasing an investment property for the first time in their lives. While you will have to take a few extra steps when purchasing an investment property versus an owner occupied property, buying investment property can certainly be quite rewarding. Before you take this step, however, it is important to learn a bit more about what purchasing an investment property entails.
Financing Your Purchase
Financing the purchase of an investment property can be a bit trickier than purchasing a home to occupy. When purchasing an investment property, you should be prepared to make a down payment that is equivalent to 20 percent of the cost of the home. Furthermore, the funds you use for your down payment cannot be a gift. In some cases, the seller can contribute up to 2 percent toward the closing costs an you may be able to have a second mortgage of up to 85 percent of the cost, but taking advantage of these offers will make it more difficult to obtain a loan. The same is true when it comes to your credit score, as those with low scores will be hit with higher interest rates.
Having Funds in Reserve
In addition to having enough money to put down as a down payment, most guidelines also require you to have six months reserves in your savings account by the time the transaction is complete. The six months reserve includes the amount needed to cover your mortgage payment for six months as well as any home owners association dues. Retirement funds and stocks can count as your retirement reserve, but lenders will discount the value of these to 60 or 70 percent when determining their reserve value.
Using Special Programs
For those who need a little help with purchasing an investment property, there are two options available: Fannie Mae Homepath and FHA. With a Fannie Mae Homepath Mortgage, you can put as little as 10 percent down on a property that has been designated for the program. No
appraisal is required and you do not have to purchase mortgage insurance when purchasing a property through this program. You do, however, need to have a credit score of at least 660 to qualify.
You can also purchase an investment property with the help of an FHA loan, though you will need to occupy part of the property. This is a good option for those who are interested in purchasing a 2-4 unit property in order to live in one of the units and to rent the others. When going this route, you still receive owner occupied interest rates and you only have to pay a very small down payment. Furthermore, the rent that you expect to receive from the property can be put toward helping you qualify for the loan. As with any FHA loan, you will have to pay upfront mortgage insurance as well as monthly mortgage insurance, though the upfront insurance can be financed as part of your loan.