Are Mortgage Rates Higher for Investment Property?

Are you thinking about purchasing another house to use as an investment property? If you already own a house, you may feel well-versed in mortgages. However, there are some important distinctions between property used as a primary residence versus property used to generate income. This applies directly to the investment property mortgage rate.

Before moving forward with a rental property or house flip, take some time to learn how an investment property home loan works. Knowing these particulars will help you choose the best mortgage for your circumstance. Read on to learn the difference between an investment property loan and a traditional mortgage. Use this insight to reach your investing goals.

What Qualifies as an Investment Property?

In the simplest terms, if you are not planning on living in the unit and aim to generate income with the property, it’s an investment property and therefore has different conditions. This can include a rental property and properties you plan on “flipping” by repairing and selling quickly.

Though the umbrella term “investment property” includes commercial buildings, we will focus on residential properties. To be considered residential, any condominiums must not exceed four units.

Investment Property Mortgage Rate, Is It Higher?

Mortgages for investment property typically have higher interest rates and stricter qualifications than traditional mortgages for a primary residence. Investment property mortgage rates tend to be 0.5 to 0.75 percent higher.

Investment properties are considered more of a risk to lenders so this increases the rates. A borrower living in their home is seen as less likely to default on a loan, as they usually wish to remain there. Conversely, the motivation to hold on to a mortgage when money is short is less for an investment property. For this reason, lenders tend to require larger down payments, higher interest rates, and better credit scores to compensate.

Fortunately, there are ways to get a lower investment property mortgage rate. We will look into how to offset these differences, after exploring the minimum requirements for an investment property home loan.

Requirements for Investment Property Loans

As mentioned, you’ll need to meet certain requirements to qualify for an investment property loan. Since these investments tend to be riskier for a lender, you need to show reliable financial stability.

  • Higher credit score: You will need a credit score of at least 640, though some lenders may require 700 or higher for certain investment properties.
  • Larger down payment: If you are planning on living in the unit, you can get a loan with a low down payment. However, rental properties typically require 20 percent down.
  • Prior property management experience: You may need to have documentation showing prior experience in managing properties. This varies from lender to lender.
  • Proof of rental income: A lender may ask for proof of rental income, including tax returns and copies of current leases.
  • Mortgage reserves: A lender may require two to six months of mortgage payments in reserve. The amount will vary based on the number of properties you wish to own.

Investment Property Loan Options

As with a home loan for a primary residence, there are options available when purchasing a mortgage for an investment property. The more common loan is the conventional loan. Many opt for this loan, as there are fewer stipulations to qualify. You don’t have to live in the property, and the investment property mortgage rate for a conventional loan is often lower with straightforward terms.

You may also be able to take advantage of a home equity line of credit (HELOC) or a cash-out refinance. With a HELOC, you borrow against your current home’s equity and use the line of credit to purchase an investment property. Or you can take out a new, larger loan than your current mortgage and cash out the difference with a cash-out refi. The difference in cash can then be used to invest in a second property.

If you are planning on flipping the property, some investors offer hard money loans on the condition you pay it off quickly. However, these loans tend to cost more with higher interest rates, prepayment penalties, and a larger down payment of 25 percent.

Applying for an Investment Property Loan

If you are ready to finance an investment property, fill out a loan application with the lender of your choice. Remember to have asset documentation information, such as two months of bank statements, proof of reserves, and the current lease of the rental property. Make sure to also pay for an investment appraisal. This process includes the average rent for similar properties in the area.

Once the appraisal is complete, you will receive a closing disclosure from your lender. Review the closing disclosure and make sure you understand the conditions, as well as the figures. If all are in agreement, sign the mortgage closing paperwork and pay the closing funds.

How to Get a Lower Investment Property Mortgage Rate

Shop around for lenders with the best terms and rates. Be up front with the intention of your purchase and ask questions. Not all lenders are created equal, so if one lender does not have the loan program you need, try another lender with better options and rates.

Consider making the switch to a credit union for your second mortgage. Since credit unions are customer-owned and not-for-profit, they can offer better interest rates. They typically have fewer fees and penalties and exceptional customer service as well. Choosing a credit union for better rates and terms can offset the higher rates for your second mortgage. You may find what you save in fees and interest, you can afford to take out a second mortgage.

For competitive rates, flexible loan terms, and exceptional service, choose Solarity Credit Union. They make home loans fast, easy, and affordable. Connect with a Home Loan Guide today and find a loan that fits your budget and lifestyle. You can secure a better investment property mortgage rate and secure a future of passive income with investment properties.