The Mortgage Porter

Mortgage Rates for Buying Investment Property

I recently wrote about how to buy your first investment property in the greater Seattle area.  Here's a follow up post with rates based on some of the programs I featured.

Mortgages rates and pricing quoted below are subject to change and are effective as of September 28, 2011 as of 10:00 am.  Rates below are based on credit scores of 740 or higher closing in 35 days.  Quotes for Homepath Mortgages are only available for eligible Fannie Mae Homepath properties.

Conforming 30 year fixed detached single family dwelling with 20% down payment of $40,000 and loan amount of $160,000:

4.750% (apr 4.969) with net closing cost (after rebate credit) of $4400. Principal and interest payment of $834.65.

4.375% (apr 4.552) with net closing cost (after rebate credit) of $3855. Principal and interest payment of $798.86.  FANNIE MAE HOMEPATH.

Conforming 30 year fixed CONDO with 20% down payment of $40,000 and loan amount of $160,000:

5.000% (apr 5.185) with net closing cost (after rebate credit) of $4425. Principal and interest payment of $858.91.

4.625% (apr 4.806) with net closing cost (after rebate credit) of $3765. Principal and interest payment of $822.62.  FANNIE MAE HOMEPATH.

Conforming 30 year fixed Detached Single Family Dwelling or CONDO with 25% down payment of $50,000 and loan amount of $150,000:

4.375% (apr 4.559) with net closing cost (after rebate credit) of $3665. Principal and interest payment of $748.93.

4.250% (apr 4.433) with net closing cost (after rebate credit) of $3900. Principal and interest payment of $737.91.  FANNIE MAE HOMEPATH.

NOTE: with 25% down payment, condos lose the 0.75% hit to fee on mortgages with terms greater than 15 years (generally priced into the rate as you see here).

Conforming 30 Year Fixed Fannie Mae Homepath 10% Down Payment of $20,000 with a loan amount of $180,000:

5.250% (apr 5.427) with net closing cost (after rebate credit) of $3850. Principal and interest payment of $993.97. Detached Single Family Dwelling.

5.500% (apr 5.679) with net closing cost (after rebate credit) of $3700. Principal and interest payment of $1,022.02.  Condo. 

NOTE: Net closing cost differs partially due to the amount of varying rebate credit currently availalbe (subject to change, just like the rates posted here) based on each scenario.  Remember, with investment properties, Sellers can contribute up to 2% of the sales price towards your closing cost.

For your personal quote for a home located anywhere in Washington state, please contact me.

Buying Your First Investment Property

With real estate becoming more affordable and mortgage interest rates at an historic low, it's easy to see why some people are considering buying their first investment property.  Financing an investment property has more requirements to it than buying an owner occupied property because it carries more risk to the lender. However if you have enough income, plenty of reserves set aside and good credit, you may be surprised how easy the process can be and what programs are available.  

"Traditional" Conventional Financing. 

Plan on at least 20% down payment and know that the more you are able to use as a down payment, the better your interest rate may be. With your down payment, the funds must only be your "seasoned" funds, they cannot be a gift.  The seller may contribute up to 2% towards closing cost and prepaids.  You *might* be able to have a second mortgage (seller financing, for example) up to 85% combined loan to value however, be prepared for a round of extra scrutiny from underwriting.

Just like buying your primary residence, your credit score will impact your mortgage rate. You don't have to have 740+ scores, some lenders will go down to a 620 score however be prepared to be scrutinized.  There are price breaks with interest rates based on a 75% and 70% or lower loan to value.  

In addition to the down payment and closing cost, conventional guidelines on investment properties requires six months reserves (your total proposed mortgage payment including any home owners association dues x 6) in savings at the end of the transaction.  If those reserves are your retirement or stock, lenders will discount them to 60 or 70% of the ending balance shown on your statement.  Additional properties owned will require additional reserves, for example, if you own a vacation home, an additional 2 months reserves will be required.

A typical debt to income ratio is 45% and as a first time landlord, you will need to qualify with both mortgage payments (no credit for rent).

Click here if you would like a rate quote for a investment property located in Washington.

Special programs.

Fannie Mae Homepath.  Fannie Mae Homepath Mortgage will allow for as little as 10% down payment on designated Homepath properties (owned by Fannie Mae) with credit scores of at least 660.  There is no appraisal required and no mortgage insurance with credit scores of 660 or higher.  I've written more the Fannie Mae Homepath program for investment properties here.

FHA. If you are getting ready to buy your first home, did you know that you can buy a 2-4 unit property (duplex - fourplex) using an FHA insured mortgage with owner occupied rates?  You DO have to occupy one of the units. Financing a duplex is very similar to buying a 1-unit home as far as underwriting requirements are concerned. When you step up to a 3-4 plex, the reserves requirements are increased to three months.  When buying a 2-4 plex home that you're going to occupy using FHA for your financing, you receive competitive rates (owner occupied because you are occupying one of the units) with minimum down payment.  Plus projected rents may be used for qualifying!  As with buying a single unit home with an FHA mortgage, upfront mortgage insurance (can be paid as a closing cost or financed) and monthly mortgage insurance do apply.

Click here for more articles I've written about financing residental investment property.

If you're interested in buying your first rental on a home located anywhere in Washington, including Renton, Redmond, Seattle or Snoqualmie, please contact me. I've been originating mortgages since 2000 at Mortgage Master Service Corporation and have all the programs mentioned above.

Please click here if you would like me to provide you with a rate quote for property located in Washington.

Financing a "Kiddie Condo" for your College Student

A few weeks ago, I helped a Kent couple purchase a condominium located in Seattle for their daughter to live in while she attends college at Seattle University. They were prequalifed with their credit union, however the credit union was treating the transaction as if it were an investment property even though the couple (we'll call them Mr. and Mrs. Kent) were not going to rent the property.

You see most lenders require that a home be located at least 50 miles away before it can qualify as a second home.  The city of Kent is just over 20 miles away from Seattle. Some lenders may even require that a second home meet conditions that one would consider a "vacation" property. It can really boil down to the underwriters interpretation of the actual scenario.  If a home does not qualify to be treated as a second home, then it's likely to be considered an investment property which has higher interest rates, closing costs and tougher underwriting criteria.  

The Family Opportunity Mortgage is a special Fannie Mae/Freddie Mac program that we have available at Mortgage Master Service Corporation. It allows for this type of scenario to be treated as a second home as long as:

• the property is a reasonable distance from the parent's home
• the parents may not own a second (or vacation) home near the subject property
• the child is enrolled in a nearby college
• the property may not be rented or used as an investment property
• the child occupies the property for a minimum of one year

We were able to provide Mr. and Mrs. Kent with an "owner occupied" rate for the condo they purchased for their daughter where the credit union could only offer a non-owner occupied rate.

Here's what the difference would look like based on today's pricing for a condo* based on a sales price of $435,000 with an 80%* loan to value (down payment of $87,000) and 740 or higher mid-credit scores:

Family Opportunity Mortgage:

30 Year Fixed: 4.625% (apr 4.790).  Principal and interest payment (P&I) = $1789.

15 Year Fixed: 3.750% (apr 3.962).  P&I = $2531.

Non-Owner Occupied/Investment Property: 

30 Year Fixed:  5.125% (apr 5.311).  P&I = $1895.

15 Year Fixed: 4.250% (apr 4.489).  P&I = $2618.

*NOTE: Condo's have a "hit to fee" of 0.75% with conventional pricing if the loan to value is over 75% or the mortgage term is over 15 years.  An additional 5% down also helps with pricing when you are financing an investment property.

Here is the same scenario as above except with 25% down payment ($108,750):

Family Opportunity Mortgage:

30 Year Fixed: 4.375% (apr 4.544).  Principal and interest payment (P&I) = $1738.

15 Year Fixed: 3.750% (apr 3.970).  P&I = $2373.

Non-Owner Occupied/Investment Property: 

30 Year Fixed:  4.750% (apr 4.900).  P&I = $1815.

15 Year Fixed: 4.125% (apr 4.426).  P&I = $2434.

Mortgage rates quoted are effective as of 8:00 a.m. June 2, 2011.  Rates can and do change often.  For your personal rate quote on a home located anywhere in Washington, please contact me.

How to Buy an Investment Property with a 10 Percent Down Payment with no PMI: Fannie Mae Homepath Mortgage

Seattle area investors are taking advantage of current lower home prices and are buying rental properties.  One of the issues with investment property is that it often requires a larger down payment and more stringent underwriting guidelines.  However, if you buy a qualified property that is owned by Fannie Mae, the Homepath guidelines will allow as little as 10% down for an investment property with NO private mortgage insurance and NO appraisal.

Mortgage Master Service Corporation's program requirements for the Fannie Mae Homepath Mortgage Program for investment properties:

• Purchase transactions only
• Single Family Dwellings, PUDs and Condominiums allowed
• Home must be designated a Fannie Mae Homepath property (Fannie Mae Renovation Financing is not allowed).  Make sure properties have the logo shown on this post to be eligible.
• Minimum mid-credit score of 660.  Risk based pricing (LLPA) applies...the higher your credit score, the better your rate may be.
• Maximum LTV of 90% (1-Unit properties)
• Full documentation of borrower (income, employment, assets, etc.). 
• Gift funds not allowed with investment property
• Maximum financed properties allowed: 4

Here are some highlights of Fannie Mae's Homepath Mortgage Program for non-owner occupied properties:

• No mortgage insurance required
• No appraisal.  Property value is accepted as the sales price.
• Fixed rate and ARMs available
• Loan amounts up to $417,000 
• Seller/Interested Parties may contribute up to 2%
• Borrower may qualify with rental income of the proposed property with a bona fide signed lease.

Here's an example of current rates (effective April 26, 2011 as of 8:30 a.m.) utilizing a 30 year fixed conforming based on a low-mid credit score of 720-739 purchasing a qualified property using Homepath Mortgage with a sales price of $300,000 and 10% down payment:

• 5.75% priced with 0.498 rebate/credit (apr 5.871).  Principal and interest: $1575.65*
• 5.50% priced with 0.420 discount points (apr 5.704).  Principal and interest:  $1533.03*

*Property taxes and home owners insurance are additional and there is NO mortgage insurance.

At 20% down payment, if you are purchasing a qualified Homepath property, the pricing is currently better than what you would have available using a standard conforming mortgage.  It's worth checking out this program.

For more information or to find an eligible Homepath property, visit www.homepath.com.  King County alone currently has 629 properties listed on Fannie Mae's Homepath site!  

If you're interested in a Fannie Mae Homepath Mortgage on homes located anywhere in Washington state, please contact me - I'm happy to help you with your financing.  Click here if you would like a mortgage rate quote.

 

Determining Net Rental Income when Qualifying for a Mortgage

Rental income is generally not fully credited when qualifying for a mortgage.  Lenders will "discount" the rent because of the cost and risk associated with owning investment property.  If someone does not have at least two years history as a landlord, they may not be able to use the rental income at all and may have to qualify with the full mortgage payment.

Conventional financing allows a qualified investor to receive credit for 75% of the gross rental income.  From this figure, property taxes, insurance, home owners association dues and any mortgage payments are deducted to create the amount of rent (positive or negative) that the lender will use for qualifying purposes. 

For example, a property has a $2,000 total mortgage payment (PITI) with no HOA dues and receives rental income of $2,000 per month. 

$2,000 rental income x 0.75% = $1,500.  $1,500 less the mortgage payment of $2,000 creates a net rental income of negative $500 per month.   This would be factored as a debt and not a credit or "breaking even" on the loan application for qualifying.

Of course if there are multiple investors involved, the net rental income is split accordingly.

FHA does not have the same two year history requirement for existing rentals as conventional loans do.  The vacancy factor in the Seattle area is 15% which means that 85% of the rent is allowed to be factored as income.  FHA loans may use future rental income (no 2 year history) when converting an existing home into a rental if the borrower is being relocated or if there is enough equity in the subject property.

To document rental income, be prepared to provide tax returns and signed lease agreements.  When you have rental properties, be prepared to have additional reserves (savings) required based on how many properties are owned.

If you have questions about qualifying for a mortgage for a home located in Washington State, please contact me.  If you would like a personal rate quote from me for an home located in Washington state, click here.

Reader Question: Converting Current Home to Rental

I enjoy receiving email like this from my readers:

I currently own a condo as my primary residence and am getting married soon.  The mortgage and title is in my name only.  We will soon like to look at moving to a bigger place and would apply for a mortgage on our new primary residence together while still keeping the condo to rent out.  How will this situation affect getting approved for the new loan?  Are there any changes that will need to be made to my current condo mortgage since it will no longer be my primary residence?  Thanks in advance for your help! 

Unless you're planning on refinancing your existing condo, there shouldn't be any changes that you need to make that mortgage because you are renting it out.  If you are currently refinancing or planning to refinance the condo, you should let your mortgage originator know of your intentions to use the property as an investment property.  On a side note, you may also want to check with your Home Owners Association or condominium bylaws to make sure that investment properties are allowed.

Qualifying for the new home will be impacted by the type of financing you select and the amount of home equity you have currently in the condo.  If you have less than 30% home equity, you'll need 6 months reserves for all of your mortgages (your current residence/future rental and the new home) if you're considering conventional financing or you must qualify with both mortgage payments.  FHA does not have this guideline at this time. 

In addition, if you do not have a documented current two year history as a landlord, you may find that the entire mortgage payment (including the home owners association fees) may be factored into your debt with no credit for any rental income you receive on the new home.

Lenders are looking for extra reserves and making sure that people who are leaving their current homes have enough "skin in the game" (equity) so that they're less likely to walk away from their former residence once they've closed on their new home.

By the way, if the home you're buying with your future bride is located in Washington state, I'm happy to help you with your mortgage!

 

Buying a Home with Owner Occupied Financing After Refinancing Your Home as Owner Occupied

I'm seeing a trend where home owners are refinancing their current home as "owner occupied" and then after closing, try buying another home as "owner occupied".  You cannot have two owner occupied homes.   It's really that simple. 

I've had a couple of surprised people contact me who thought they could buy a home just following a refinance only to learn by their mortgage originator that they have to finance the new home as an investment property.   Financing an investment property not only offers a slightly higher interest rate than a mortgage for a primary residence, it also has tougher guidelines with higher down payment requirements and greater reserves (savings).  

If you are considering refinancing your primary residence and possibly buying another home, you should discuss this with your mortgage originator as soon as possible.  You will be signing a deed of trust which has language that you intend to occupy that home for 12 months.  Some folks might feel that the "intending to occupy" means that they can refinance as owner occupied and a couple months later buy "owner occupied" and odds are, they will be caught.  It may be purely unintended for this to happen, but be prepared for the new purchase to be treated as an investment property, even if you're going to live there.  

If you're considering taking advantage of the lower home prices and lower rates, you may want to delay your refinance of your current "primary residence" or talk to your mortgage originator about refinancing your current home as an investment property.  Your next purchase might qualify as a second home, however the property typically needs to be about 50 miles away from your primary residence (the one you just refinanced) and it is the underwriter's call on whether or not the second home "makes sense"...this can be a real grey area.  

Be upfront with your mortgage professional if you're thinking about buying a home.  You may want to ask them to verify with your personal scenario with an underwriter.  Finding yourself in the middle of a transaction to buy your next home and having it declined as owner occupied can be an expensive experience.

Related post:

Is it a Primary Residence, Second Home or Investment Property

Can I Convert My Existing Home to an Investment Property to Buy My Next Home?

 

Can I Convert My Existing Home to an Investment Property to Buy My Next Home?

This is a common question I'm asked these days...mostly because many home owners don't have as much equity as they would need in order to sell their current residence.  With home prices being at their lowest in years, many want to take advantage and buy their next home and simply rent out their current residence.

Here are a few considerations:

CONVENTIONAL

With Conventional financing, if the borrower does not have a minimum of 30% equity (70% loan to value or lower) in the property they are converting into a rental they will need 6 months reserves for both properties.   For example, if their current residence (to be converted to an investment) has a mortgage payment (PITI) of $1800 and their proposed new home has a mortgage payment (PITI) of $2000; they will need a minimum of $22,800 (3800 x 6)  left in reserves after closing. 

Without the 30% home equity, the borrower will need to qualify with both mortgage payments (no credit for rent).

FHA

Currently FHA does not have the same reserves requirement as conventional financing.  I've found that after down payment and closing costs on the new home and factoring in the 6 month reserve requirement of both mortgage payments, many home buyers wind up leaning towards FHA loans unless they have plenty of funds saved up or significant home equity in the proposed rental.

FHA will allow rent to be considered as income if the borrower is being relocated to an area "not within reasonable commuting distance" or if the borrower has "suffient equity" in the home that is being vacated to become a rental (75% loan to value) which will also require documentation.   FHA credits 85% of the rental payment towards the borrowers monthly income.

For both conventional financing and FHA, equity in the residence that is being converted to a rental is documented with either an appraisal, AVM or broker price opinion at the lenders discretion.  The borrower must also be able to provide a fully executed lease agreement and conventional financing requires documentation to show the security deposit from the tennant has cleared the borrowers account.

Before you convert your home to a rental, be sure to discuss the pros and cons with  your tax advisor.

If have questions about a mortgage scenario for a home located in Washington state, I'm happy to help.

Calling All Seattle Flippers

If you have flipped 10-12 house in the Seattle area, A & E's "Flip This House" is looking for YOU!   Read all about it here.

A tip of the hat to ARDELL.

Financing an Investment Property

Update 7/31/2008: Fannie Mae guidelines have been updated for investment properties since this post was written.

This post is originally from Rain City Guide.  I thought I would share it with you while I'm on a blogging vacation.  To read the original post with comments, click here.

Obtaining a mortgage for a non-owner occupied propery is much different than buying one you will reside in.  For starters, qualifying is tougher and mortgage interest rates are higher as it’s a riskier transaction for the lender.   Here are some quick tips to help get you started if you’re considering buying an investment property.

Plan on using at least 20% for your down payment plus closing costs.   With a 25 or 30% down payment, you will receive a slightly better interest rate.   Just to give you an idea, here is a sample of some current rates based on a single family dwelling with a sales price of $450,000 for a 30 year fixed mortgage and a minimum 720 credit score:

Owner Occupied with minimum 20% down:  5.75% priced with 1% origination/discount point (APR 5.904%)

Non-Owner Occupied (NOO) with 20% down: 6.375% with 1% point (APR 6.537%)

NOO with 25% down: 6.250% with 1% point (APR 6.413%)

NOO with 30% down: 6.125% with 1% point (APR 6.289%)

Of course, you can always pay more in points to have a lower rate.   This is just to provide you with an apples to apples comparison.

There are two camps for qualifying for an investment property:  those who are proven at managing rentals and those who are buying a rental for the first time or who have less than 2 years history.  If you have less than a 2 year history, then it’s likely that you will not be able to use rent credit from the proposed purchase.  Lenders allow 75%  of the rent to be used for qualifying purposes.   Proving you’re a financially successful landlord to the underwriter will take your last two year’s complete tax returns including the Schedule E’s.   If you can qualify for the full PITI payment on the investment property along with your current PITI payment on your residence, then the underwriter may only require a regular appraisal.  Otherwise, count on the appraisal costing almost twice as much as a typical appraisal for conventional financing.   Fannie and Freddie also require a minimum of 6 months reserves (cash assets after closing) for NOO borrowers. 

Odds and Ends

• FHA can be a great way for first time buyers to get into the investor market when they’re buying a 2-4 unit home.  The buyer must occupy in one of the units and the mortgage will be treated as an “owner occupied” transaction.   You will have upfront and monthly mortgage insurance and can buy with as little as 3% down payment.
• Second homes are sometimes treated as investment properties.  This is really up to the underwriter.  Typically if the home is located within 50 miles of the borrowers residence or if it does not make sense as a second or vacation home, the underwriter may determine that it’s an investment which means tougher underwriting and the NOO rate.
• Fannie Mae programs exist that help family members buy properties that don’t meet the second home requirements without treating it as an investment purchase (Family Opportunity Mortgage).

As always, I highly recommend that you meet with your local Mortgage Professional as soon as possible if you’re even just considering obtain a mortgage for any reason (investment property, residencial purchase or refi, vacation home, etc.).