We have talked about how powerful it can be to invest in real estate with a mortgage loan for leverage. (Missed the article? Read it here.)
That’s all well and good, but how do you get a mortgage loan on an investment property like a turnkey rental house? Is it like getting a mortgage for your personal residence? Is the process different? Are the requirements different?
Here’s what you need to know about the process of getting your first mortgage for a turnkey rental or any 1-4 unit investment property:
1. You Will Probably Get a Conventional Loan
A conventional loan conforms with the underwriting requirements of the Federal mortgage banks, FNMA (“Fannie Mae”) and FHMC (“Freddie Mac”). By conforming to these standards, Fannie and Freddie will insure your mortgage, reducing the risk for the lender and opening you up to the best-available terms.
FAQ: Are the interest rate and terms different for an investment property loan?
Yes. The interest rates for an investment property are higher than for a primary residence. That being said, they are quite uniform across lenders. Our preferred lenders will give you the best rates, subject to your credit and qualifications, of course. Your introduction to them is part of our offering.
2. Investment Properties Aren’t Eligible for a VA, FHA, or USDA Loan
If Fannie/Freddie loans are available for investors, what about the loan programs insured by the Department of Veterans Affairs (VA), Federal Housing Administration (FHA), or the US Department of Agriculture (USDA)? Those loans have even better terms!
Unfortunately, they are also available exclusively to people who intend to use the home as their personal residence. In other words, they are off-limits to a turnkey rental or other investment property.
3. You Will Probably Need to Put 20% Down
Depending on the loan program they qualify for, most qualified buyers only need to put 3-5% down on their personal residence. Sometimes it’s as much as 10%. Sometimes, it’s as little as 0% with a VA loan.
With investment properties, however, the lender will almost certainly require you to put 20% down — and the rates get better when you put more down. Duplexes and multi-family properties require at least 25% down.
The rationale is that people will work harder and make more sacrifices to keep their personal residence. In contrast, borrowers are more likely to walk away from an investment property if the going gets tough. After all, they don’t live there.
As such, lenders want you to have more skin in the game, a bigger equity cushion, and greater security that if they have to foreclose on the house, it won’t be less valuable than the loan balance.
4. You Will Need Stable Income
Lenders only want to write mortgage loans to borrowers with stable incomes. After all, how else can they expect the borrower to make the payments?
What about the rental income from the property… does that count? Not really. On paper, you just need the kind of stable income — wages, salary, investments, pensions, annuities, etc. — that makes you look like a qualified borrower for a loan of this size.
FAQ: What if I already have a mortgage on my own home? Do I need double the income to get double the mortgages?
Not necessarily. You just need to check the boxes for a borrower on this kind of loan. As you build a relationship with a lender and a track record of success as a landlord, it will get easier. Your lender will start “rubber-stamping” your turnkey rental loans.
But, at some point — a dozen or more properties in — your lender will max you out at 10 conventional loans. At that point, it will be time to consider refinancing into a portfolio loan or expanding into commercial real estate to grow your empire.
5. You Will Probably Need a Higher Credit Score
For a personal residence, mortgage lenders can usually get a mortgage loan done with a credit score as low as 620. With FHA loans, the minimum is even lower — in the 500s. The terms may not be the best, but you can still get the loan.
For an investment property, you will probably need a higher credit score. 680 or higher is best. If that’s not you, you may need a co-guarantor with a better credit score.
Need help getting approved for your investment property mortgage loan? We can help! Reach out to MartelTurnkey and we’ll get you pointed in the right direction, including an introduction to our preferred lenders who know our business very well.