Buying overview -> Investment Property

Investment Property

Loan options are more limited for a residential investment property,
and the qualifying process is more complicated.

Residential investment properties range from one to four units; properties with more than 4 units are classed as multifamily and require commercial loans and a commercial lender. Financing a residential investment property is relatively easy for conforming loan amounts on one or two unit properties. For three and four unit properties, and for jumbo loan amounts, a borrower will face some combination of more restrictive loan terms, lower loan-to-values, and higher interest rates. Because of such sharp differences in availability, price, and terms for different types of investment loans, I recommend speaking with a lender early in the process.

Investor conforming loans:

Financing an investment property with a conforming mortgage gives a borrower more flexibility than using a high-balance conforming mortgage or a jumbo mortgage. The loan-to-values are higher, generally up to 75%, and the interest rates and fees are lower. Thirty-year fixed rate mortgages, difficult to find for jumbo investor loans, are the norm. The maximum conforming loan amount is higher for duplexes, triplexes and fourplexes.

The maximum conforming loan amounts for properties in the lower 48 states are:

  • 1 unit property, whether a single family residence, or condominium: $417,000
  • 2 unit property, also called a duplex: $533,850
  • 3 unit property, also called a triplex: $645,300
  • 4 unit property, also called a four-plex: $801,950

Alaska and Hawaii have higher conforming limits.

Investor High-balance Conforming Loans:

The maximum loan-to-value on an investor high-balance conforming mortgage, subject to many factors, will only go as high as 70%, and the interest rates and fees are substantially higher than for a regular conforming mortgage. Thirty-year fixed rate mortgages and ARMs are available. High-balance conforming loan limits vary by the county where the property is located. If the county where the property you are purchasing or refinancing is not listed here, then high-balance conforming mortgages are not available.

Investor Jumbo Loans:

Interest rates, fees, maximum loan amounts, and maximum loan-to-value for jumbo loans on investment property vary greatly from lender to lender. If you are having difficulty finding a jumbo loan for an investment property, widen your search by checking with multiple banks and brokers. There are very few lenders offering thirty-year fixed rate jumbo investor mortgages. Most jumbo investment properties are financed with 30-year adjustable rate mortgages, or ARMs, which have an interest rate fixed for the first five, seven, or ten years.

 

Additional notes on investment property financing:

When qualifying you for the purchase or refinance of an investment property, the lender will add your income to a portion of the investment property income. Most lenders use a formula to determine how much of the property income may be used for qualifying. As a general rule, lenders will take 75% of the property income and add that amount to your income, while the cost of owning the property – mortgage payment, property taxes, insurance and/or HOA dues – will be added to your debt. The lender will then figure your debt-to-income ratio using these new numbers from the investment property to see if you qualify. It is impossible to be preapproved for an exact purchase price on investment property, because rental income and expense, which determine the debt-to-income ratio, can be very different for two properties which have the same purchase price.