In parts 1 and 2, we discussed Primary Residency and Second Homes. For part 3 of this series, we look at the final type of transaction – Investment Properties.
Investment Properties are properties that are residential in nature, but the owner of the property does not occupy the property as either his primary residence or utilize the property as a second home. Investment properties may be purchased for commercial gain from either appreciation of the property or for rental income on the subject property. An investment property transaction may also occur when the property is purchased for the residency of another person where no commercial gain is expected. An example of this would be where a parent purchases a property for a child who is a college student to reside in while in school.
Because Investment Properties represent higher level of risk to the lender, the lender will usually require a larger down payment and a higher interest rate to offset the risk to the lender. Down payments are generally at least 20% of the sales price or in the case of a refinance, the borrower must have at least 20% equity in the property. Depending on the borrower’s credit history and/or the nature of the transaction (cash-out vs. no cash-out) and/or the nature of the property (1-unit vs 2-4 unit), higher down payments or interest rates may be required.
One question that comes up repeatedly for investment properties is whether the proposed rent can be used to qualify the borrower. The answer to this is yes under certain circumstances. The lender will look closely to see if the borrower has had prior landlord experience as well as whether the borrower currently owns a primary residence. Borrower’s who do not currently own a primary residence will often not be able to use the proposed rental income from the subject transaction as this can be an indicator of “reverse occupancy” fraud.
There are many considerations when reviewing an investment property transaction. Please contact one of the Loan Officers at Googain today for further information.