Facebook
X
Pinterest
Copy Link
You don’t have to be a financial whiz to make smart moves in real estate investing.
Owning residential investment property in the Washington Metropolitan area provides multiple advantages: steady cash flow, solid appreciation, and a hedge against inflation. Rental properties, which command a high enough monthly rent to cover a mortgage payment, may be viewed similarly to a blue-chip stock where the monthly principal curtailment is akin to a regular dividend payment. And while a stock can theoretically lose all of its value, “dirt does not go to zero.”
For some, acquiring residential investment property is a function of converting an existing primary residence into one that brings cash flow. For others, the acquisition requires purchasing property and obtaining financing for that purchase. The good news is that underwriting guidelines for residential investment financing have loosened in recent years, and Fannie Mae and Freddie Mac investment property loans no longer require down payments of 20%. A purchaser may put down as little as 15% of the purchase price, making the acquisition more attainable for some. If the down payment is less than 20% then mortgage insurance is required, which increases the monthly payment. Interest rates are more favorable if the down payment is at least 20%, and even more so if the down payment is at least 25%. Note that investment property loans do not allow for the use of gift funds to cover down payment, closing costs or reserve requirements.
For most individuals, qualifying for an investment property loan from an income and debt standpoint has also become easier. Lenders will generally use 75% of the expected rental income to offset the proposed mortgage payment. For instance, if the proposed mortgage payment on an investment property purchase is $3000 per month and the anticipated rent as determined by the lender’s appraiser is also $3000 per month, in most cases, the lender will give the mortgage applicant credit for $2250 (75% of anticipated rent) to offset the new monthly payment. This results in a new debt for qualifying purposes of only $750 per month. Standard conforming conventional loans do not require a lease to be in place for the property to be purchased and borrowers do not need to show a history of managing rental property.
Investment property loans do require the borrower to show reserve assets in the form of savings, brokerage, or retirement assets. The guidelines differ somewhat between Fannie Mae and Freddie Mac loans; Fannie requires reserve assets calculated as a percentage of the unpaid balances on all real estate loans held by the borrower, while Freddie requires a certain number of months of principal, interest, taxes, insurance, and HOA/Condo dues (PITIA) for all financed property held by the borrower. Neither set of guidelines is too onerous as Fannie requires reserves to be as little as 2% of outstanding balances on all mortgages held and Freddie requires as little as 2 months of PITIA on all properties owned and encumbered by mortgages.
The borrower’s application process for investment property loans is identical to that for a loan to purchase a primary residence, and there is no significant additional time needed by the lender to complete the underwriting process. The lender’s appraisal of the property will include one additional component referred to as a comparable rent schedule, which is used to determine the likely gross monthly rental income of the property. Other than that, the overall lender process and documentation requirements of the borrower are no different than for other residential loan applications. A borrower can ratify a contract for an investment property purchase and proceed to settlement just as quickly as they could for the purchase of a primary residence.
Ownership of residential investment property does not require advanced financial education and financing the purchase of residential investment property is generally just as easy as financing a primary residence.
Brian Bonnet, SVP, Sr. Loan Officer, NMLS ID 224811
Atlantic Coast Mortgage, NMLS ID 643114
O: 703-766-6702 | M: 703-304-0188
Email Me
Notice: This is an advertisement and is not a commitment to lend. Contact a loan officer today to explore the financing options specific to each borrower.
Visit corcoranmce.com to search listings for sale in Washington, D.C., Maryland, Virginia, and West Virginia.
Don’t miss a post! Get the latest local guides and neighborhood news straight to your inbox!
