Throughout the next several weeks we’ll be posting articles and info on various aspects of the home buying process. Topics will cover everything from saving for a down payment, to refinancing, to purchasing investment properties, and more. We encourage you to connect with us on any questions you might have, and to share this information with friends and family.
With mortgage rates near all-time lows, now might be a good time to consider purchasing a rental property. The process of purchasing a rental home will vary depending on your circumstances, but here are a few considerations involved with the process:
What type of down payment will you have for the property?
Your down payment will impact how much home you can afford and can influence your rate, depending on the loan-to-value (LTV) of the property. Typically, one can get a better rate with a 75% LTV ratio, compared to one of 85% (loans greater than 80% LTV will also require mortgage insurance). The interest rate will vary based on the percentage of down payment (25, 20, 15). In addition to your required down payment you will need to have the equivalent of six months of PITI (principal, interest, taxes, and insurance), based on the property, in savings as a reserve.
Is this your first rental property?
Borrowers who have demonstrated income from other rental properties in their past two years’ tax returns are treated differently than those who are purchasing their first rental property. A soon-to-be new landlord will need to qualify for the new loan using their existing resources (assets, income, etc.) and will not be able to use anticipated rental income from the new property. Those with past rental income, as demonstrated in their past two years’ tax returns, will be able to claim a portion of the income derived from the new rental property to qualify for the new loan.
I want to purchase a different home and want to rent out my current home. What do I need to know?
As mentioned in the previous question, you will need to have a certain amount for the down payment for the new primary home and that will depend in part on the purchase price of the home. Additionally, you will need to qualify for both the old payment (PITI) and the new payment (PITI) unless you have a documented landlord history. With landlord history you can use a portion of the estimated rental income from the new rental property to assist in qualifying for the new loan.
What if I am looking at a Vacation Home that I will be using as a Second Home?
There is different treatment for vacation or second homes that are not used as rental properties. Treatment for second or vacation homes tends to be more favorable and is typically treated the same as your primary residence.
I’ve heard that if I buy a home with all-cash, I can get a better deal. Is that true?
Maybe, but that is not guaranteed. Keep in mind that if you pay cash up front, you will need to wait a minimum of six months before you can potentially qualify for a loan on that property. You will need a new appraisal on the property if you choose to explore refinancing that property after you purchase it with all cash.
What is the process for getting a pre-approval for a Rental Home?
You will need to go through the same process as you would for purchasing any home. Documentation needed includes:
- Paystubs dated within the last 30 days
- W2s for two years. If you are self-employed or if you have rental income from existing rental properties, you will need to submit your tax returns for the past two years. If you are retired, you will need to submit any award letters from Social Security and/or your Government Annuity Letter
- Bank statements (savings/checking) for two months
- TSP, 403B, 401k, IRA and any other retirement account statements (last quarter)
Whether you’re considering your first investment property, or your 10th, one of the best ways to understand your lending options is for you to speak with an experienced mortgage loan officer, like Steven Raymond, VP of Residential Lending at USACU. Steven can help guide you through the process and present you with the best options for your individual needs.
Steven Raymond, VP or Residential Lending at USAgencies Credit Union, has over 30 years of experience in the mortgage industry. Steven’s seen it all, as far as mortgages go. If you have questions—about purchasing costs, getting pre-approved, or anything else mortgage-related—talk to Steven!
Vice President of Residential Lending, NMLS#: 234025
Direct: (503) 275-0329
Toll-free: (800) 452-0915 x329
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Apply for a mortgage online now.
USAgencies Credit Union