A Primer on Investment Property Mortgages
The idea of purchasing an investment property can be enticing.
Investment properties allow you to build equity, pay your mortgage with a tenant’s rent payment, and possibly even put some extra money in your pocket. In addition, you may also qualify for some nice tax benefits.
Before you jump in and become a landlord though, you should fully understand everything that is involved in qualifying for an investment property mortgage and owning an investment property.
Second Home vs Investment Property
Some people use the terms “second home” and “investment property” interchangeably, but they’re actually two very different things.
A second home is a place dedicated to your family’s enjoyment. While you may occasionally rent it out for short periods of time, you are still likely to use it more than anyone else.
This is a fundamental difference between a second home and an investment property—the sole goal of the latter is to generate income and equity.
What Do I Need to Know About Investment Property Mortgages?
Since an investment property mortgage is still a mortgage, lenders will start by looking at some of the same information they would for a regular mortgage. This includes your credit report, your debt-to-income ratio, and the LTV (loan-to-value) ratio of the home.
But because you are purchasing the property as an investment, you have to meet different standards to qualify for this type of mortgage, and it is often more difficult to do so than for your traditional or even second home mortgage.
With a typical mortgage, you can purchase private mortgage insurance, so the lender takes on less risk and will be compensated in the event of a default. Unfortunately, private mortgage insurance is not available for investment property mortgages.
The fact that you will be renting the property is also taken into account. If your investment property becomes vacant, you will still need to pay the mortgage, even without the additional rental income.
Investment properties usually require a minimum of 20% as a down payment and have higher interest rates. Putting more money down on the home will help get you a better rate. Minimize risk by saving enough money to cover at least 6 months of expenses for the home in case you have trouble renting it out.
In some cases, landlord/investment property experience can also help you qualify for a loan. If this is your first time purchasing an investment property, it may be harder to qualify.
Lenders will often work with more experienced investors, taking rental income into account when evaluating whether or not they qualify for a mortgage.
Investment properties can be a great way to build a strong financial future, as long as you are prepared. They are a long-term investment that can provide income for years to come.