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With mortgage rates still hovering near historical lows, now is a great time to look into either getting a new mortgage or refinancing an existing one.  And this applies to your home as well as an investment property.  That said, mortgages from standard financial institutions are more difficult to obtain then they were 5 years ago, so you must have realistic expectations about what kind of financing you can get and what the major requirements are.

First, understand that bank financing on an investment property is more expensive than on a primary residence because lenders perceive that there is a higher level of potential risk of default when you are not actually living on the premises. Thus, most investment property loans will have an average 1.25%-2% higher interest rate compared to the mortgage you can get on your own home.  Of course, you could always purchase a house as a personal residence and then convert it to a rental in order to get the lower rate, but this strategy is obviously not for everybody.

Also, your down payment requirement will likely be greater than it would have been just a few years ago.  In the mid-2000’s you could find 95% LTV loans (even 100% in some cases), but in the current real estate market you’re generally looking at a 20% down payment requirement with most traditional lenders.  Banks will also often want to see the down payment funds in your account for 2-3 months prior to your application.

Some other requirements that traditional lenders may throw out at you include: a credit score of at least 680; a debt-to-income ratio of 0.45 or lower; the provision of 2 years of income documentation; proof that you have enough capital reserves; and a maximum of 9 preexisting outstanding mortgages.  Also keep in mind that traditional lenders will usually only “count” 75% of gross rental payments toward your overall income calculation.

The bottom line is that getting an investment property mortgage, while appealing in concept, is not as easy as it used to be.  If you find that you are unable to accommodate the banks’ requirements, consider some non-traditional types of financing such as a hard money loan, seller financing, a self-directed IRA, or a partner / investor.  With a little creativity and persistence, you can usually find some investor money. The only question is – how hard are you willing to work for it? Good luck and happy investing!

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