Learn What Are the Options for Investment Property Mortgage: Some easy, Other Not So Easy

If you have already checked with your lender, you know that securing Investment Property Mortgage is stricter than the conventional mortgage.

In both, the US and Canada, conventional mortgages are secured one way or other by Govt-backed Insurance. Which encourages first-time home buyers. Easier conditions like low down payment, the low-interest rates are in place.

Securing Investment Property Mortgage is Difficult
Securing Investment Property Mortgage is Difficult

Not the same with Investment Property Mortgages

Investment Property Mortgages are riskier. They can only be insured in case of owner-occupied investment property. Some of the stricter conditions are as follows –

  • Most lenders demand a minimum of 20% down payment. Can go as high as 35% depending upon other credentials
  • For investment property without the rental income, your income should be enough to service all the mortgage
  • If the property is rented, the lender would consider the lesser amount of the rent to service the mortgage to factor in the vacancy.  It could be as less as half the rent.
  • Some lender would assess the lesser value of the property than the prevailing assessment value in the area
  • Interest rates are a lot higher than the conventional mortgages

In this article, we are going to see some creative ways landlords use to finance their investment properties.

1. Conventional Mortgage

You can still get convention loan for your investment property, provided you have the income which can service your existing mortgage and the one you are applying for. You may still be asked for higher down payment because the mortgage insurance would not be available for the investment property. The requirement of income is very difficult to meet in most cases.

Usually, the new landlord use this option.

2. Refinance Your Primary Residence

If you have lived in your home for a long period, you’d have accumulated a huge amount in terms of equity plus appreciation. This capital growth can help you buy another property. For an example, Let’s say the market value of your home is $500K. Your remaining mortgage balance, at this point, is $100K. In this scenario, the lender would keep 20% of the equity in the home and refinance your home for $400K. You would receive $300K in your pocket, which you can use to buy an investment property. Alternatively, One can also refinance an investment property.

Used by both, new and already successful landlords.

3. HELOC – Home Equity Line Of Credit

This option also uses the capital growth(equity + appreciation) in your home to create another resource to buy investment property. If you are locked into your 1st mortgage for a long period, usually to break that mortgage, to do the refinance, would be a costly affair. In which case this is a better option to u.se the same resource. Technically, HELOC is the 2nd mortgage if you have an existing first mortgage.

This option is for both the new and experienced landlords.

4. 2nd Mortgage off of the existing property

Seasoned Landlord takes out a short-term and high-interest 2nd mortgage on their appreciated property to finance for another property. It may be to finance down payment or to buy the whole property depending upon the circumstances. Usually, the interest rate starts at 7% -8% can go as high as 12%. In most cases, the landlords who are into the landlording for long and who have a much higher amount accumulated in capital growth takes this kind of risks of investment property mortgage.

Not recommended for the novice landlords.

5. Hard Money Lending

This option of the investment property mortgage is for the experienced Landlord. Circumstances such as good rental property available for a good price and may not remain in the market for long would warrant, quick loan, without the qualification process. The landlord has to be highly confident about the perceived risk. The landlord would require the strong collateral for this kind of investment property mortgage.

Not recommended for the new landlords.

6. Seller-financed Mortgage

Sometimes seller agrees to hold part of the sale amount for some period or for a long period of time. That is seller take-back or seller hold-back or seller-financed mortgage. Let’s say the property sale amount is $250K. And the seller has agreed to hold back $50k for 3 years. You can go ahead and take the investment property mortgage as a conventional or whatever option available to you. The seller hold-back of $50 will go onto the title as the 2nd mortgage. You have to negotiate the interest rate and amortization period with the seller and stuck the deal. Many a time, your realtor may help you stuck a smart deal.

This option is for both the new and experienced landlords.

Conclusion: Investment Property Mortgage is one of a fascinating aspect of landlording. At the initial stage of your career, you should go with a more traditional way of financing. As you grow in experience and capital growth of your acquired properties, you have to start finding different options for financing. Smartly negotiated deals with private lenders can make you rich. And you may end up in a hot water for the bad deal.

 

 

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