In late October of 2012, we learned that some solid signs of recovery were appearing in the housing markets. Foreclosure rates were down by 62% in United States cities and urban areas, mortgage rates showed small bumps upward (both the 30 and 15 year loans), and even issues like short sales were on the decline.
So, what does all of that mean to someone considering an investment in real estate? After all, if money is available for viable real estate, and at substantially lower rates than ever before, doesn’t it make sense for a consumer to get into this lucrative market? And when you consider that home buying is on the decline while home rentals are on the rise, it makes even more sense, right?
That is actually a tough question to answer. This is because the mortgage market has become a very different place since the year 2008. No more “easy money” loans are available, and it is pretty challenging to get access to the vast sums required for investment properties unless you prove you can handle the repayment plan.
So, let’s take some time to answer a very frequently asked question: Is this a good time to get a mortgage for an investment property?
First things first; mortgage rates for traditional loans are different than rates for investment properties. Here is what we mean: you own a home with a 30-year mortgage on it. You see that a condominium in your city is up for grabs and would create a great financial return for you. If you went to the bank to discuss a 15-year mortgage on this home (which you would use as a rental property), you would be a bit stunned at the result.
Why? The following factors impact the loan:
- Under no circumstances can you get 100% financing, even if you can prove how financially viable the investment property is a rental or income generator;
- Loan to value ratios are extremely restrictive for investment properties and you will find that you need a hefty down payment if you are to even qualify;
- Qualifying for an investment loan also means showing your financially stability in terms of your pre-existing debts and mortgages. A FICO of 795 or more may be the bank’s absolute minimum!
- Interest rates will be higher on any investment property mortgage. We cannot give a fixed amount, but you can anticipate at least one or more percentage points higher. Don’t think for one moment that a loan with a 5% interest rate is not that different from one at 2.7%…it is.
- The type of property plays a huge role in determining just how much you pay in interest as well. Condominiums, for example, demand the highest rates, multiple units also demand much more from the borrower, and any sort of refinancing can also impact the loan.
Why is it so challenging for a serious investor to get their hands on the funding needed? Well, that too is a complicated issue. The banks want to do business, but there is the lingering fears of the subprime problem. This means making money tighter and asking more of the borrower in terms of credibility and long-term stability. Just look at how few “interest only” loans are now available compared to ten years ago.
Additionally, owner occupied premises are far more likely to remain in good condition, and this means less risk to the institution holding the note on that asset.
So, the long and the short of it is that now is a great time to find an investment property and to seek a very affordable loan, but you must be well prepared to meet the bank’s or lender’s demands if you are to get the funding.
Jack Chien is a money expert, author and personal finance journalist who specializes in explaining complex subjects in an accessible and engaging way. He is the cofounder of PersonalFinanceNews.com, an aggregator of the top personal finance news, stories and advice. You can find more articles by Jack on the Personal Finance News Blog… he contributes regularly there.