INVESTORS + MULTI-FAMILY HOME LOANS
For lending purposes, the term ‘investment’ simply means you are looking for purchase a property that you do not intend to live in or use as a secondary residence. I lump investment and multi-family properties together for the most part, but keep in mind the requirements will be somewhat looser if you are purchasing a multi-family property with the intent to live in one of the units. This is one area where FHA provides a huge benefit. Even if you are purchasing a 4-unit property, FHA will allow you to make a low down payment. Conventional loans will require a higher down payment.
The minimum down payment for an investment property loan depends on the amount of units in the property. On a single family property, you can put minimum down, but you’ll face a higher interest rate – A higher down payment will be required to avoid private mortgage insurance (PMI). For 2 to 4 unit properties, you’ll need a larger down payment.
In addition to relatively high down payment requirements, current loan guidelines require significant cash reserves after your down payment is taken into consideration. You will need to budget 6 months of payment reserves for principle, interest, taxes and insurance for the property you are looking to purchase PLUS any other investment properties you own. Additionally, you’ll need to show another 2 months of reserves in most cases for your primary residence. This can add up to a big number pretty fast.
Finally, the debt-to-income, or DTI, requirements are stricter for investment and multi-family properties. In general, you cannot exceed 41% in order to meet approval guidelines. In many cases, the automated underwriting system will determine how high your DTI can be for approval. If you have a reported 12 to 24 month history of receiving rental income you CAN include any projected rental income from the new property to qualify. You’ll also need to account for the fact that the income associated with any other investment properties is not based on the leases you have in hand, but on the performance of those properties from a tax return standpoint averaged over the last 12 to 24 months. Therefore, if you take losses on your rentals, they may hurt your DTI and not help.
Joe owns 2 investment properties in addition to his primary residence.
The monthly PITI payments on his rental properties total $3,000.
The monthly PITI payments on his primary residence are another $2000.
(6 X $3000 = $18,000) (2 X $2000 = $4,000)
The projected payment on his new investment property is another $1,500.
(6 X $1,500 = $9,000)
This means Joe would need to show $31,000 in reserves after accounting for his down payment in order to qualify.