An investment property mortgage is a loan for non-owner occupied property. There are two main classifications of investment property mortgages. These classifications include: commercial and residential. A commercial property mortgage is for a dwelling that contains 5 or more units and/or is zoned as commercial. A residential investment mortgage is for a dwelling that is one to four units and is zoned residential. Commercial and residential mortgages are two completely different loan types and have significantly different qualification standards. The following is a basic description of each mortgage type.
Residential Property Investment Loans
Residential property investment mortgages have similar qualification guidelines as standard owner-occupied mortgages. Although, they do have higher down payment and credit score requirements. Below is a summary of the general guidelines for residential investment mortgages.
• Credit Score Requirement – The minimum credit score requirement is typically 680 or above for investment mortgages.
• Debt to Income Ratio – Typically, the debt ratio limit for an investment mortgage is 40% of the borrower’s verifiable income. Besides W2 income, the borrower’s last 2 years tax returns will be needed to calculate the income that can be used from other rental properties or other sources of income.
• Down Payment – Investment property mortgages require at least 15% down, but the down payment requirement increases with lower credit scores and the greater the number of units in the property.
• Income – Lenders typically will only use rental income if the borrower has a two-year history of owning rental properties. This is usually documented via the tax returns and schedules.
Commercial Property Investment Loans
Commercial loans typically have higher rates, greater fees, and shorter terms than residential mortgage. The two most important factors for lenders on this loan type include: a positive cash-flow for the property, and the borrower’s past commercial property management experience. Below is a summary of the general guidelines for residential investment mortgages.
• Credit Scores Requirement – The minimum credit score requirement is typically 720 to 740 for a commercial loan.
• Down Payment – The minimum down payment for a commercial mortgage is typically 30% or greater. When refinancing, the maximum equity position is usually 70% of the appraised value of the property.
• Debt Service Coverage – This is a ratio used by lenders to calculate the property’s ability to generate cash flow. It is a calculation comparing the net operating income minus the mortgage payment and the other debt payments.
Other funding sources include: hard money lenders and private loans. Hard money loans are short-term loans from private investors. Private lenders typically use the equity position in the property as the determining factor whether they will approve and fund the loan. There are usually excessive closing costs and fees (points) charged on this type of loan. Private loans are loans that a person would receive from their family or friends. The terms may or may not be similar to hard money loans. Both hard money and private lenders typically only put a lien on the property and do not report payments on the borrower’s credit report.
