|Why income property mortgages cost more
Own an investment property? Thinking about buying a property for income producing purposes? It’s going to cost.
For years, Fannie Mae and Freddie Mac have charged premiums for individuals purchasing property for the purposes of generating income more than for primary residence homes and rightfully so, the higher the risk, the higher the cost. Conversely, opposite holds true, the lower the risk, the lower the cost.
In mortgage finance, perception creates reality for the bondholders holding these securities tied to homes not occupied by the owners of record.
A mortgage banking institution looks at an investment property the following way: “In a foreclosure situation, which property is he more than likely going to give up, his primary home or the investment property?” This is the sole reason why investment property financing costs more. Investors understand there is always a degree of risk associated with an opportunity.
Because the emotional concerns are not as prevalent as they are when buying a primary residence, transaction becomes more of a data driven decision. This is precisely why weight is given to the higher probability an investor would be more willing to lose an income property over a primary home.
How much more are investment property rates?
This varies based on daily market fluctuation, but generally expect investment property financing to be at least .5 percent higher in rate when compared to primary home financing. In mortgage finance, there are pricing adjusters which are “assessments of risk” added to a loan that have the ability to change the structure and/or associated fees.
Typical loan pricing adjusters that affect interest rate include: occupancy, i.e. investment property; credit score; loan-to-value; loan program; and property type-single-family residence, multi-family etc.
The biggest pricing adjuster is occupancy, the adjustment is 1.75 percent of the loan amount. That’s right, in every investment property financing scenario, this figure is always accounted for.
In other words, a lender prices a mortgage by raising or lowering the interest rate based on any applicable adjusters such as loan-to-value and credit score in addition to property occupancy.
Let’s say, for example, a consumer desires to pay the upfront overhead premium to generate a lower rate of interest. Assuming this individual had excellent credit and extremely low loan-to-value such as 60 percent or lower, they would pay 1.75 percent of the loan amount in the form of discount points to secure that rate. Want to avoid the premium? Take a higher interest rate, and the lender can absorb this percentage by raising the interest rate upwards of at least .5 percent.
Common characteristics of investment property loans
Mortgage financing for income property is certainly tighter than primary residence home financing. The financial markets want to promote home ownership and have a larger appetite in originating primary residence mortgage loans than income property loans because of the potential credit risk. However, while this remains, successfully securing investment property financing is absolutely achievable.
What to know
• Consumers financing investment properties typically have excellent credit at least 740 or above.
• Fair market rents can be used to offset the housing payment. On a purchase, 75 percent of gross rents can be used to offset housing payment liability. On a refinance, if the property has been rented for the last 12 months, 75 percent of gross rents charged can be used to offset the house payment.
• Gift money cannot be used to acquire an income property, but cosigners, aka multiple investors, can all apply for the mortgage at the same time.
• Eighty percent financing for single-family residences/ condos/ PUD’s.
• Seventy-five percent financing for multi-family properties.
• No loan-to-value restriction on Harp 2 refinances.
Finance Tip: Two credit characteristics carry the most weight of reducing cost than any other facet. Excellent credit score combined with a very low loan-to-value, can help offset the inherently higher premiums associated with financing an income property.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.