9 Tips for Financing Investment Property
The United States housing market hasn’t quite recovered from the 2008 crash. However, the rising house prices and low interest rates are giving people a reason to believe once more that investing in a real estate property can be good option. Realty payers such as Wentworth Estate are offering affordable investment properties which today promise a host of benefits including increasing your cash flow, building investment portfolio and much more. The downside to it is that many banks still consider investment properties riskier than owner - occupied homes. In addition to this, new lending rules have made it more difficult for buyers to purchase investment properties. But the good thing is that it is possible for buyers to invest in property even while playing by tough rules. All it takes is some patience, vigilance and proper guidance to make the most of your investment. Here are some tips to financing in an investment property--
1. Increase the size of your down payment
One cannot opt for mortgage insurance on investment properties. As a result, banks want confirmation that the buyer is committed to his / her purchase even though he / she does not intend to occupy the property. They, therefore, ask for a larger down payment in the region - of about 20%. And if a buyer is capable and financially strong, 25% is an even stronger claim for your intentions. Down payments in the region can even qualify the buyer for more attractive interest rates. However, coming up with that sort of cash isn’t easy and the buyer may have to dip into his / her savings (including retirement savings), or borrow funds from family and / or friends.
2. Monitor your credit score
Banks want their borrowers to have a higher than average credit score. Credit scores below 740 can cost them a lot more money in the long run. In fact, the borrowers will have to pay more in order to enjoy the same interest rate. Potential borrowers must monitor their credit scores considering the impact they have on the borrowing rate. This means disputing entries that threaten the buyer’s score. In addition to this, banks want to see that the borrower has sufficient cash in the bank that will cover his or her expenses, for at least a period of six months.
3. Try to avoid national banks
Chances are that your credit score and down payment are not quite perfect. If this is the case, approaching large national banks may not be in your best interest. You may have an easier time approaching a small neighborhood-oriented bank which will be more flexible with their regulations. Neighborhood banks also have a greater willingness to invest locally and they also know the local real estate market giving you a slight advantage. However, as will all banks, the onus is on the lender to do proper research before approaching the bank or signing off a loan.
4. Utilizing your home equity
If you are already a home - owner, you may consider utilizing the equity you have already built up in order to help augment your down payment. Whether it’s through a home equity loan, cash out financing or HELOC, drawing on your home equity may be a way to go since this could help borrow up to 80% of the value.
5. Inquire about owner financing
Owner financing refers to a situation wherein the seller of a property provides a loan to the buyer. With investment property financing becoming increasingly more difficult to secure, sellers are becoming more open to the prospect. However, the buyer must approach the seller with a concrete plan fleshed out with solid terms. He / she must be able to convince the seller of the viability of their plan.
6. Monitoring your debt to income ratio
Because financing an investment property essentially means that you must qualify for two houses, it is important to pay attention to your debt to income ratio. This means being temperate in buying your first house as well. Purchasing the most expensive house on the block will put you at a disadvantage when shopping for a second loan as lending agencies will be wary of your ability to repay both loans.
7. Solid W-2 Income
Lenders will want to make sure that you’ve held the same job for at least two years. Your longevity at your place of work will indicate that you are a stable borrower. The lender will calculate the average of your last two yearly salaries to come up with your annual income. For self-employed individuals the process is different. Potential borrowers need to submit two years of tax returns, profit and loss statements for the years as well as proofs from of the validity of their tax returns from their CPA.
8. Join Forces
If coming up with a deposit is difficult for you or if you would rather just share the burden with another investor, you might want to consider teaming up. Investors who choose to team up can opt to share costs 50 : 50 or whichever split ratio suits them better. Depending on the percentage of funds each partner invests, investors can choose to divvy up responsibilities such as property management and maintenance.
9. Owner Occupy
If all else fails there is one last ditch effort that you can take in order to make borrowing terms more suitable to you. The buyer can choose to occupy the property. For buyers who purchase a single or multiple family dwellings, they can take advantage of a conventional 5% down payment or a 3.5% down payment by the FHA. Of course this could mean you will have to move out of your current house which also means uprooting your family. However, as with all options, it is worthy of consideration.
Getting financing for your investment property is now harder than ever. Tight controls on lending mean that potential buyers have to work harder and be more creative in order to secure much-needed financing. It is important for buyers to be prepared when approaching lending agencies. Do not expect the same requirements as when you purchased your first home. Purchasing an investment property is decidedly more complicated than that and the large number of requirements may leave you feeling exasperated. However, it is still possible to invest in rental property even if it does mean jumping through a few more hoops.