Investment properties can generate rental income and capital appreciation, but getting financing for them can be challenging. This article summarizes recommendations for securing mortgages on investment properties, key considerations when applying, and tax implications. Multiple financing options like FHA loans are unavailable, so a 20% down payment is often required. Lenders also want borrowers to have good credit, low LTVs, and ample reserves. Capital gains and rental income may need to be reported to the IRS. Overall, investors should research lenders and prepare their finances before seeking investment property mortgages.
Down payments of 20% or more are frequently needed
Unlike primary residences, investment properties generally cannot use mortgage insurance. This means borrowers need down payments of at least 20% to qualify for financing. Some lenders may require 25% to 30% down. Having a higher down payment signals having more equity in the property.
Documentation of ample reserves is important
On top of down payments, lenders want assurance that borrowers can pay the mortgage and other expenses if tenants stop paying rent. Many lenders ask for 6 to 12 months of reserves. This involves bank statements proving you have savings to cover taxes, insurance, vacancies, maintenance, and other costs.
Good credit history increases approval odds
Lenders view borrowers with excellent credit as less risky. Before approving investment property mortgages, most lenders check credit scores and reports. They want to see low debt-to-income ratios and a responsible credit history. Anything below a 680 FICO score may lead to denial or higher interest rates.
Reporting taxes includes rental and capital gain income
The IRS requires investors to report rental income, deducting related expenses like repairs. If the property sells at a profit, capital gains taxes apply too. These taxes on investment properties are generally higher than on primary residences. Consultation with a tax professional can maximize write-offs.
Getting mortgages on investment properties involves hurdles like large down payments, reporting rental income, and capital gains taxes. Working with specialized lenders and preparing finances can lead to approval. However, costs and risks are higher than with primary home loans.