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Finding the Best Mortgage for an Investment Property

If you are considering buying properties either to hold as investments or to sell then you need to look at mortgages and mortgage rates differently. In order to make the most amount of profit you need to borrow as little as possible. Remember: the most important aspect in the process is retaining the capability to turn the property around to the buyers without causing you payments in the. Thankfully, there are several ways you can mortgage these investment properties to your benefit.

What Can You Afford?

Take a moment to review your current financial status. If you can afford to make the down payment on a property, you may want to go ahead and do so. You will be able to use the equity to both build your profits and the number of subsequent investment properties.

Finding The Best Mortgage

Since you want to spend as little money as possible when buying properties to sell, you will want to acquire a mortgage that requires minimal financial output during the time period in which you are trying to sell the property. This means looking for loans with low initial interest rates or loans that pay off the interest first too. For example, if qualified, you may want to go with a no deposit loan through which you would be lent 100% of the property value provided that you can demonstrate a solid savings history. The initial mortgage payments will be smaller than they would be in a traditional mortgage agreement and you will be able to purchase the property a lot sooner.

Also, a hybrid loan- one in which the interest is fixed for a period of time and then becomes adjustable- is another good option for investment property holders, and works well for those either concerned about the future movement of interest rates or investors that don’t want to take a particular stance.

How to Get the Best Loan for Your Needs

When you find a property that you want to invest in, it is important to discuss financing options with a variety of banks and lending institutions. Be sure to explain your plan for the property as well as what you are prepared to contribute monetarily. Keep in mind that it is best to work with a lender that has a background in working with investment property holders as they will often be better suited to serve your needs.

When a homeowner buys a new home, he has 3 options of what to do with his current residence:

1. Sell the home, paying off the mortgage in full
   
2. Keep the home as a second/vacation home
   
3. Convert the home to an investment property

The most common action plan is the first one -- sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".

Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy.

Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.

Among the highlights of Fannie Mae's Changes:

Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.

Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.

Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.

If it seems like mortgage rules are getting strict, that's because they are. And they're expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.

Mortgage rates may rise through 2009, or they may fall. We don't know. But what we do know is that borrowing money to buy a home will be tougher.

If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead. Guidelines for jumbo mortgage programs are likely to follow as Fannie/Freddie set the tone for the overall market. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.

Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

• Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.


• With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement.

Investment Property Guideline Changes

• With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.


• Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:

1. The demand for homes reduces because fewer buyers qualify for mortgages


2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.