The state of the current US housing market is marked by contradictions. Home purchases are up, but mortgage applications are down. Mortgage interest rates are extremely low, but some projections suggest a rise is imminent. The list goes on, compounded by worries that the nation will fall over the fiscal cliff and lose the mortgage interest deduction prized by property owners of all kinds. Mixed messages aside, it’s still a pretty good time to invest in income property, and the mortgage application process can favor investors in some important ways.
Some aspects of applying for a mortgage hold true whether a buyer is seeking a residential home loan or financing income properties, such as income and credit information. But lenders also consider other factors related to how the property will be used and existing conditions there in deciding whether to approve an investment mortgage.
Applicants for residential mortgages typically have to provide proof of income, with the debt to income ratio a major factor in getting approval. But for investors, income verification means not just a buyer’s own income, but the income-generating potential of the property itself – and some lenders may not ask to see a potential buyer’s personal income documentation at all. If the property is occupied, a potential buyer may be
asked to show rental receipts, net income statements and any income tax documents that reflect the property’s use as an investment.
As everyone knows, residential home loans require a down payment that depends on factors such as the overall cost of the property and requirements specified by the loan originator or servicers. But investors may not be required to put a down payment on property intended for investment, because the property itself secures the loan. What’s more, properties with tenants in place present a better credit risk than a vacant property that needs work to realize its potential. With tenants in place on the property, lenders have reasonable assurances that the buyer can meet the payments on the loan.
Depending on the lender and the type of loan, investors also have the advantage in bargaining for terms and rates. Since an income property represents the potential of a consistent cash flow capable of covering loan payments, lenders may be more flexible in creating loan terms for an investment buyer, especially if that buyer has plans to add more properties to their portfolio.
Unlike buyers interested in purchasing a home for residential purposes, investors also have the option of purchasing multiplexes of up to four units under the same terms as single-family homes. With more possibilities for rental income, these properties may offer better options for financing than a single family home.
Certain lenders are more willing to handle investment mortgages than others. FHA loans, with their more lenient lending criteria, are available only for residential mortgages, as are some loans offered by other government entities such as Fannie Mae. Refinancing, too, may not available to investors from all lenders; for refinancing options the income property investor may need to shop around for rates and terms.
In some ways, the current lending landscape may be friendlier to investors than homeowners. For investors who are following Jason Hartman’s recommendations for taking advantage of current low interest rates to invest in income property, an investment property loan may be easier to get than a typical home mortgage for a primary home. (Top Image: Flickr/JBarton)
The American Monetary Association Team
