By Sabrina Karl
If you’ve ever considered buying a property to rent out, or a home to renovate and flip, today’s historically low mortgage rates might have you tempted to take the leap.
But before you do, it’s important to know this: mortgages for investment property do not look the same as what you’re used to for primary residences.
Some things will be familiar. For instance, you can still choose a conventional mortgage or an FHA, VA, or USDA mortgage, depending on your qualifications. And 30-year fixed terms are certainly available for income properties (as are 10-, 15-, and 20-year terms and adjustable-rate mortgages).
However, loans on investment properties are riskier than those made on homes people will occupy themselves, as payments on one’s own mortgage tend to receive high priority when finances get tight.
Consequently, the best rate you can get for a rental property will always be higher than you can get from the same lender on a primary home. A good rule of thumb is that investment property loans tend to have rates 0.50% to 0.75% higher, with the rate premium going up if you’re buying a multi-unit investment property.
You’ll also face stricter qualification guidelines. For one, you’ll need a larger down payment. Fifteen percent (15%) down is generally the lowest threshold, and the requirement can go up to 25%, particularly for multi-unit properties.
In addition, minimum credit scores are also higher for investment properties. Whereas you can qualify for a primary residence mortgage with a score as low as 620, income property mortgages will require scores of 640 to 680, depending on loan type and number of units.
Also be aware that the lender will require you to have a cash reserve on hand that is sufficient for covering 6 to 12 months of mortgage payments.