An investment property is any type of real estate property bought to generate income and eventually enjoy profits. Investment properties are an excellent tool to diversify one’s investment portfolio.
It’s, however, quite challenging for newbies who have decided to jump into real estate investments to try their luck. A critical aspect of buying investment properties is getting a mortgage. This could be a tad bit different from acquiring a mortgage on rentals and primary homes. Investment property mortgages involve more stringent requirements and generally higher interest rates, and a larger down payment.
Don’t fret because we have come with a detailed guide to getting a mortgage on investment properties. This blog will help you understand the nitty-gritty factors as well as the requirements to speed up your application approval.
How is an Investment Property Different from a Primary Home?
Before we delve deeper into understanding the mortgage approval process, here’s an insight into what distinguishes investment properties from primary homes.
Investment properties can be residential, commercial, or industrial. They can come in the form of an apartment building, a single-family home, or even multifamily units. Shops, retail stores, or commercial warehouses can also be investment property if they’re bought to generate income.
As an investor, you can generate income on your investment property by renting it or following the fix and flip method.
Getting a Mortgage on Your Next Investment Property
After the massive boom in housing prices, we think that the market is eventually slowing down. This is great news for property investors. And the best part is, interest rates are still low, which means even if you don’t have piles of cash, you can dive into the real estate market.
To get a mortgage on investment property, you get approval on up to 10 home loans at once. But mind that the more loans you take out, the more stringent rules you’ll have to follow.
Here are some things you need to know:
1. Cash Reserves
Qualifying for an investment property mortgage mandates a significant cash reserve. This is actually the money you have in the bank expressing the number and amount of mortgage payments you’ll be able to make.
2. Good Experience
Last but not least, availing a mortgage on investment properties can be a hassle-free process if you portray a solid work history. You’ll need to show W-2 documents from the past two years and your employment in the same industry.
If you’re a business owner or a self-employed person, you’ll be required to show tax returns.
3. Tougher Credit Requirements
For an investment property mortgage, your credit will be determined based on the number of loans you currently hold. While many investors qualify easily, it’s always a great idea to ramp up your credit score to fast-track your application. In simple words, your credit score enables the lenders to identify the interest rate that’s suitable for your needs.
4. A Significant Down Payment
Lenders often ask for a substantial down payment when providing mortgages on investment properties. And this amount directly depends on the number of loans you have. Putting off a larger down payment is a good idea as it gives you more stake in your investments.
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