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Financing an Investment Property

By Steven Roberts Updated on 12/4/2013

financing an investment propertyUpon purchasing a second home mortgage, your lender will be very speculative of your intentions to rent the property for supplemental income. If you do plan to rent the property, you may use the intended rental income to balance the debt-to-income ratio and improve the odds of approval for a property investment loan. However, some lenders will only do so if you have two years of landlord experience and only count 80% of the income. Lenders are aware of the risk that landlords face in maintaining consistent rental income and there is a chance of default on mortgage payments. The confidence a lender feels in your decision to purchase a second mortgage is entirely dependent upon your financial circumstance. Thus, there are several qualifications that must be met.

Eligibility Requirements

  • Cash reserves for a down payment that is above 20% of the loan value.
  • Credit scores must be above 740 (excellent) to qualify.
  • Income that can satisfy both mortgage payments and closing costs.
  • Property located a reasonable distance from your primary residence.

Property Investment Loans

The property investment loan is still reasonably low for interest rates. Most lenders, depending on your qualifications, will charge an interest rates .5 to 1% higher than your first mortgage loan. It is possible to obtain an FHA loan, however your new home would become your primary residence. In this case, you must have had a relocation within your job or increase in family size. Your first mortgage would become your rental property and this requires a 25% equity in that mortgage. The most common are conventional 15 and 30 year fixed rate mortgages, however some property investors select an ARM loan when they do not wish to own the property long. An ARM loan will allow for escalated payments each year or specific to the decided loan terms.

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About The Author:
Steven Roberts
Steven Roberts is an editor for Lender411. He specializes in mortgage and finance. Steven graduated from Cal State Long Beach. Contact him at Steven@Lender411com.

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