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Investment property mortgage rates: How much more will you pay?

Gina Pogol
The Mortgage Reports editor

Investment property mortgage rates are higher than for owner-occupied loans

Investment properties can make you a lot of money.

If you acquire the house at the right price, and finance it correctly, it can cash flow for you immediately.

But getting an ultra-cheap mortgage on a rental property is tougher than for a primary residence. That’s because lenders charge more for “non-owner occupied” transactions — loanspeak for a property you don’t plan to live in.

Despite higher rates, investing in real estate is a good idea long-term. Here’s how much you can expect to pay to finance that future cash cow.

Check today's investment property mortgage rates here. (Dec 9th, 2018)

 


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How much higher are mortgage rates for investment properties?

The answer depends on the type of investment property, your credit-worthiness, and your down payment.

Fannie Mae and Freddie Mac set rules and fees for most mortgages today. Fees directly affect the final interest rate you pay. The higher the fees, the higher your rate above current mortgage rates.

The agencies have one set of fees for personal residences, and an additional set for investment properties.

For instance, a 20-percent-down investment property loan would require a fee equal to 3.375 percent of the loan amount.

This is the same as $3,375 for each $100,000 borrowed.

In most cases, the borrower chooses to pay a higher interest rate instead of extra dollars at the closing table. So, how do these fees translate to your final rate?

In this case, 3.375 percent in investment property loan fees can be covered by an extra 0.5 to 0.75 percent addition to the rate.

Bottom line: If you would have received a 5% interest rate buying a primary residence, you would get a 5.5-5.75% rate when buying an investment property.

Keep in mind that this is for a single-family residence. Buy a duplex and you might pay another 1.0 percent to your fees, or a 0.125 to 0.250 percent addition to your rate.

Start shopping for investment property mortgage rates here. (Dec 9th, 2018)

Why are investment / rental property loan rates higher?

In short, mortgage borrowers tend to “bail”on rental properties before their primary residences if the going gets tough.

Researchers from the Wharton School concluded that even “good” homeowners tend to stop paying their rental property mortgages if that residence becomes a bad investment.

Lenders know that when you think of property as a business, you’re less attached to it.

The math doesn’t lie: Investors are one third more likely to dump mortgages than owner-occupiers.

Verify your investment property mortgage options (Dec 9th, 2018)

Types of rental property mortgages

When purchasing investment property, you have access to many of the same mortgage programs as people buying their primary homes. They just cost more and are harder to get.

Conventional loans: You can use a standard conventional (aka “conforming) loan for an investment property. The minimum down payment is 15%, but 20% is recommended to avoid mortgage insurance.

Government-backed loans: You can buy an investment property with an FHA or VA loan loan IF you choose a multi-unit (2-4 unit) property and live in one of the units. These come with minimum down payments as low as 3.5% for FHA and 0% for the VA loan (when you meet eligible military service requirements).

Portfolio loans: Portfolio lenders can make up their own investment property loan rules. You may be able to put less down or finance more properties with these programs. Expect to pay more for them.

Commercial loans: Finally, for those who want to borrow solely against the income of the property, or buy projects with more than four units, there are commercial residential loans. They can be expensive and complex to set up.

You will probably have to establish a single asset bankruptcy remote entity, which prevents property owners from siphoning off the rental income without paying the mortgage.


Guidelines for rental / investment property loans

Underwriters will check out your ability as a potential landlord. If you’ve never owned a home or managed any property, you’ll have a tougher time.

You may, say some lenders, be able to get around this by hiring a property manager. There is nothing definitive about this in the official guidelines.

There are limits to the number of properties you can own with mortgages on them, if you go with conforming (Fannie Mae or Freddie Mac) financing.

And you’ll be required to have reserves (several months of mortgage payments) in the bank to cover those months when your property is unoccupied.

Investment property loans require larger down payments

Most rental property buyers will finance their homes via conventional loans. Following are down payment requirements to buy a rental property.

Loan Type 1 Unit 2-4 Unit
Fixed rate 15% down 25% down
Adjustable rate 15% down 25% down

Investment property credit score requirements

When you finance investment property, lenders generally want to see better credit than they do for primary residence buyers.

For instance, Fannie Mae borrowers putting at least 25 percent down can get approved with a 620 FICO score for a primary home. That increases to 640 for a rental.

If you don’t have great credit and plan to live in one of the units, you can try FHA, which is much more lenient.

Verify your investment property mortgage options (Dec 9th, 2018)

How to get lower investment property mortgage rates

Make a bigger down payment: Much of the added cost goes away if you can put at least 20 percent down. It might be worth borrowing against the equity in your current home to increase your rental’s down payment. Or buy a cheaper house. Or even (if this is a VERY good investment) borrow against your 401(k).

Improve your credit score: As stated above, most rental property buyers will finance the purchase with a conventional loan. Rates for these loans are ultra-sensitive to credit score. Following is an example of a buyer with a 650 score compared to a 720-score buyer.

Credit score Home price Down payment Rate P&I Payment Savings
650 $250,000 25% 5.75% $1,095
720 $250,000 25% 5.125% $1,020 $75/mo

The buyer with the better credit score can offer a better rental price, or be much closer to getting the tenant to pay the full mortgage or even creating cash flow.

Shop around: Recent studies have shown that home buyers of all types can shave a huge 0.50% off their rate by getting multiple quotes from lenders. See our guide on rate shopping.

Shop multiple lenders now. Get started here. (Dec 9th, 2018)

Consider alternative investment property financing

Your seller may be happy to have an income stream from you without the hassles of being a landlord. Seller financing can be cheaper than banks or brokers.

The seller may be more interested in unloading the property (get it appraised and inspected!) than in profiting from your mortgage.

Alternatively, there are lenders that specialize in financing commercial residential property — from homes to apartment buildings.

As long as the property income is sufficient to cover the mortgage and other expenses, they may finance you for less.

Rental property mortgage Q&A

Are mortgage rates higher for investment properties?

Yes. Investment property mortgage rates are about 0.50% to 0.75% higher than for owner-occupied residence loan rates.

Can you get a 30-year loan on an investment property?

Yes. 30-year loans are the most common way to finance rentals. However, terms of 10, 15, 20, or 25 years are available as well.

Can I get a mortgage for investment property?

It’s entirely possible. The process is the same as getting any mortgage, although you may have to supply more documentation. Generally, high credit scores (700+) and a large down payment (20%+) will make the process much cheaper and easier for you.

How much do you have to put down for investment property?

The minimum down payment for a 1-unit investment property is 15% for conventional loans. However, it will come with mortgage insurance and higher rates. Make a 20% down payment to bring down costs.

For a 2-4 unit home, the minimum down payment is 25%.

If you are buying a 2-4 unit and can live in one of the units, you can use an FHA loan with as little as 3.5% down.

Are there investment property loans available with 10% down?

You can buy a 2-4 unit home and live in one unit, and use an FHA loan for 10% down. Otherwise, there may be individual banks and lenders that offer proprietary programs at 10% down. Additionally, the seller could carry the financing and allow a 10% down payment. There are no conventional (Fannie Mae / Freddie Mac) options at 10% down.

Are there zero-down rental property loans?

These exist, but will be tough to get. One option is to buy a multi-unit home and live in one unit. Use an FHA loan, then get gift funds from an eligible donor for the 3.5% down. There are also hard money loans, lease-to-buy options, and going in on the home with a investment partner who has a down payment.

Is there an easier way to own an investment property?

Perhaps the easiest way to obtain a rental is to buy a primary residence, live in it for at least a year, then convert it into a rental. You move out, rent the home, then rent or buy a separate residence. You keep your lower interest rate, since you originally acquired it as an owner-occupied residence. It’s much easier to cash flow a property with this method.

The bottom line

Investment property mortgage rates are higher than those for primary residences because they are viewed as higher risk. Still, rental properties are usually a great investment in the long run, and a slightly higher rate might not make that much of a difference in payment.

What are today’s investment property rates?

Every applicant is different. The best way to get your current mortgage rates are is to get quotes from multiple lenders and make them compete. Rates change all the time, so contacting lenders online is the quickest way to get a fist full of rates to compare.

Request investment property rate quotes here. (Dec 9th, 2018)

 

 

 

Verify your new rate (Dec 9th, 2018)