Your Mortgage: Investment property purchase rundown

Mike Miles

By Mike Miles
One of the most frequent questions we hear deals with buyers asking how they can qualify for purchasing homes to be used as investment properties. Purchasing investment property is becoming increasingly popular. Rents are going up and have been year after year. It’s not uncommon for rent to increase up to 8 percent annually. If renters are willing to pay that expense … more and more buyers will look to add investment properties to their real estate portfolio.

New mortgage loans for investment properties follow conventional guidelines. There are some instances where an investment property could have other types of financing (FHA, VA … etc.) but that is only if someone lived in a home with that financing type and then moved out turning it into a rental without redoing the loan. Otherwise, plan on doing a conventional loan to purchase investment properties.

So, what does that mean? It means that we qualify based off the following criteria:

  • Credit scores of at least 620
  • Minimum down payment of 15 percent
  • Debt-to-income ratios of 45 percent

Most investment property buyers apply a 20 percent down payment at closing. Yes, you can do 15 percent, but you will have private mortgage insurance (PMI). The PMI on investment properties is for the life of the loan versus it falling off once you achieve 20 percent equity.

We see the down payment being the biggest barrier of entry for newer investment property buyers. Back up about 15 years ago, you could purchase an investment property without putting any money down. That ludicrous allowance was a major influence on the housing bubble bursting. Now, buyers need to put some skin in the game.

On occasion we will have a new buyer that may be cutting it close on qualifying. While we aren’t fans of buyers extending themselves … we know it can happen. If a buyer is pushing the limits of qualifying, it most likely is related to the debt-to-income ratios. Something that helps in these situations is adding a market rent schedule to the property’s appraisal. If the rent schedule for the home shows enough to offset the new payment that’s due … the debt-to-income ratio concern is eliminated.

In last week’s post, I discussed the idea of pairing up with someone/people to buy a vacation home. That can work with buying investment properties as well. We see this quite often. You share the burden of the down payment, cash for renovations, mortgage payments not covered by rents and you can double the marketing efforts when looking for renters.

Buying investment properties is a great way to build net worth and to generate cash flow. Make sure you do your research and work with the right people. This is when experience matters most.