How much down payment for a rental property?
Now
is the time to buy a one to four-unit investment or rental
property. Interest rates are at an all time low. And
unfortunately, due to the number of foreclosures, you might be
able to purchase a great investment property at an affordable
price.
According to Warren Buffett, "Opportunities come infrequently.
When it rains gold, put out the bucket, not the thimble."
Purchasing an investment (rental) property is not unlike
purchasing a home; the rules are just a bit tighter.
Investment-property minimum down payment
The government backed loans, FHA, VA, and the USDA
loan programs do not permit
investment financing, however, the Federal National Mortgage
Association, better known as Fannie Mae provides funding to
participating lenders for investment properties. The minimum
down payment requirement for investment loans that are
underwritten by an
automated
underwriting is 15% for a single-family dwelling. Two to
four-unit dwellings require a 25% down payment. Down payments
less than 20% will require
private mortgage insurance (PMI).
SOURCE:
Fannie Mae Eligibility Matrix
Manually underwritten down payment
The down payment requirement for investment mortgages that are manually underwritten is determined by the applicant's debt to income ratio and credit score. This calculator will calculate the minimum down payment.
| Debt to Income | 36% (or less) | 36% (or less) | 45% (or less) | 45% (or less) |
|---|---|---|---|---|
| Credit Score | 640 | 680 | 680 | 700 |
| Minimum Down Payment Percentage | 25% | 10% | 25% | 10% |
Minimum reserves
Fannie Mae requires the equivalent of 6 mortgage payments in reserve post closing/settlement
Seller paid closing costs (seller assist)
Fannie Mae will permit the seller to pay up to 2% of the sales price to the investor's closing costs. The seller assistance can take the edge off the private mortgage insurance with down payments less than 20%.
Frequently
Asked Questions About Second Home Mortgages
Q. Are interest rates higher for rental properties?
A. Interest rates are higher for investment properties
because there is more risk of default
Q. How many investment properties can I own?
A. Fannie Mae will permit as many as 10 financed investment
properties, however, you will have to meet a long list of
requirements to be eligible for the 10-mortgage limit. In
reality, the limit is 4-investment properties.
Q. What are the interest rates for investment
properties?
A. Investment properties pose a greater risk for lenders. A
borrower who is dealing with financial difficulties is more
likely to default on an investment property loan than their
personal residence. Because of the risk, interest rates and
private mortgage insurance premiums for down payments less than
20% is somewhat higher. The interest rate on investment
properties is about .50% higher than owner occupied interest
rates.
Q. Why are interest rates higher for investment
properties?
A. As stated previously, there's more risk to the lender. The
higher the risk, the greater the interest rate.
Q. What is an investment property?
A. An investment property is real property that is purchased to
produce revenue through appreciation or rental income.