Not sure what price range to begin your search?
When you’re starting out looking for an investment property to purchase, you just don’t have time to waste looking at houses you simply can’t qualify for. It’s a humbling experience to spot a great investment opportunity – and ultimately realize it’s way over the price range you can comfortably afford.
Whether you’re an employee, or whether you’re part of the growing number who’ve joined the ranks of the self-employed, lenders have become more adept at tailoring investment property mortgage programs. And with the meltdown in the mortgage industry over the last several years, these programs, while more onerous to obtain, are still out there. There are three basic types of programs you can use to gain access to investment property mortgages.
The three basic types of mortgages
The first of these is the “full income verification” loan. As it implies, you’ll have to document with either W-2 statements or tax returns for the self-employed (of several years worth of self-employment at the income level you’re representing). You can expect loans in this category will feature, at a minimum, a 20% down payment. But many now carry 25% to 30% down payment requirements for investment property, due to the current state of the financial credit markets. Also, lender’s products will feature interest rates comparable to standard loans issued to homeowners.
The second program, available to self-employed individuals, is known as the “non-income, full asset verification” loan. Here the down payment required is higher: starting now at 30%, but it can go up to 35% or sometimes, 40%. However, lenders will usually only require documentation of only two years’ worth of actual self-employment. The down payment must be verified, and shown that it is not (or will not be) borrowed. Interest rates in these packages usually run slightly higher than the full income verification loans.
The last mortgage avenue, also open to the self-employed, is known as the “no-income, no asset verification” loan. These were the types of loans that in the recent past got so many individual borrowers, and their mortgage companies, into such dire financial straits as real estate values began going down precipitously. These types of loans have recently made a comeback, but only for those with the absolute best credit scores. Typically, because of the risk a lender is about to take, these loans are the most onerous for borrowers of investment property. They typically require a minimum 40% down, but can go up to 50% down. And the rates that accompany these loans are typically higher than full income verification loans. However, as the name implies, no verification is made of the borrower’s income or assets.
Remember though, that an applicant’s credit history will be looked at critically when being considered for these programs. Loan underwriters will analyze these type applications more rigorously to help assuage their risk.
Once you know how much you can reasonably put towards a down payment on an investment property, and have gotten pre-approved for your mortgage, you will have successfully backed into a price range you can afford, and are qualified for. Not only will you be looking at correctly priced houses, but you’ll be golden to any seller looking for qualified buyers.
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