Q: What is the cost of investor money?
A: Compared to an identical loan for purchase as owner occupied, an investor loan will cost approximatley 2% in origination. (That doesn't mean you have to come to closing with 2% because you can raise the interest rate and still have a no-points, no-origination loan.)
Q: Is there any relatively easy way to drive that cost down?
A: If the property could reasonably be seen as a second home AND you do not require the income from the property to qualify for the loan, then you may want to talk with your loan officer about applying for a second-home loan instead of a straight investment loan. This will save you approximately 1 to 1½% in origination costs.
Q: Can I just check the checkbox on the loan application that it will be owner occupied?
A: Lying on a loan application is considered fraud, and that would include applying for a second home loan for an investment property. Ethics aside, if the loan is, for whatever reason (and that can include the random draw from the hat), audited by the lender, they will determine whether the property IS actually being occupied by the owner. If the lender concludes that it is not, then the lender may call in the note on the basis that fraud was committed.
Q: How much will I need to put down?
A: Loan programs will vary, but most investor programs these days require a minimum of 20% down. However, the amount of the downpayment will usually affect the origination cost (or corresponding rate if one wants to not pay an origination), with 20% down costing about 2 points. Less down will usually make for a higher origination, and more down will reduce it.
Q: Why are investors penalized?
A: Actually, they aren't. The higher downpayment and increased origination reflect that the lender is taking on additional risk with the investor loan. Ask yourself the question: If you lose your job and funds get tight, will you pay the mortgage on your residence or your investment property first? The banks (and you) know the answer to that question. The increased downpayment ensures that there is some distance between the amount loaned and the market value of the property so that the bank won't get burned in the event of foreclosure/trustee sale. The increased origination offsets the increased number of foreclosures that occur with investor loans.
Q: What can I do to get the money I need to buy a property?
A: The bank wants to loan money, but it wants to see that you are financially sound and that foreclosure won't occur. Good assets, a high downpayment, etc. help to do that. In addition, the investor bearing the risk that the cost of money goes up (i.e., getting a fully indexed loan) can also mean that you are able to borrow the money you need at a rate which is acceptable.
Q: How much of the income from the property can be used for qualifying for the loan?
A: Lenders will usually allow you to claim 75% of the rental value. Why only 75%? This factors in the fact that vacancy will occur from time to time.
Q: Do I have to show prior rental experience?
A: Underwriting requirements can vary, and you may have to show 2 years of rental experience to claim any income. Why? Without prior history, the lender has no way of knowing whether you will be effective at selecting reliable tenants and/or what the vacancy rate will be. If you need the prior rental experience (but don't have it) for your particular loan program, you can hire a property management company and satisfy the requirement in this way. However, you will have to offset the income by the cost of the property management company's fees.
Q: Should I use a property management company?
A: If you do not live close by, then a property management company is probably necessary because you need someone on-the-ground to address any issues that come up. If you live in the area, then using a property management company is a convenience that frees you up to focus on other matters. The cost is usually around 10% of the monthly rents.
Have questions? Call us!
Margaret Hokkanen, 760-942-4242
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