What are my loan options for a rental property?

Question

My husband and I bought our home one year ago using a FHA loan here in Los Angeles. Our home only cost 2/3 of the amount we were approved for. We are now looking to buy a rental property in Grand Junction, CO. I'm wondering if we would qualify for a second loan for the 1/3 of the amount "we didn't use." I'd like to know what kind of conventional loans would be available to us and what is the minimum down payment for those loans. We are both employed full time and our credit is still good.

What would be the best way to find a lender? Is it best if they are local?

Jon Holdman · Answer

@Yesenia C. let me try to give more direct answer. When you first start buying rentals the income from the rentals will be ignored for qualifying for the loans. The qualification will be based strictly on your existing income. If you have money "left over" from qualifying for your residence that indicates your DTI is adequate to cover an additional loan. Further, investor loans often allow a higher DTI than residence loans (residences are just expensive doo-dads, not investments, and lenders are aware of that.) So, you may actually qualify for a larger loan than the "left over" amount from the residence loan After two years of landlording, that is, rental income on two tax returns, the rental income will start being included. If you've bought good rentals, they will improve your DTI and allow you to buy more. Plan for 20%, minimum, down payments on rentals. And you will need cash reserves - six months PITIA (A is anything else like HOAs) for the new property, two months for existing ones. After four mortgaged properties, its six months for all properties. Please do spend some serious time reading about landlording before jumping in. Especially with out of state rentals where the "50% rule" will come into play because you're using a PM. Many new investors fall for the "cash flow = rent - PITI" myth. That will not be the case, and if you make a plan assuming it is you will be in deep trouble.

Aaron Montague · Answer

@Shaun Reilly , @Yesenia C. re: Homepath. I have yet to figure out how the Homepath program is supposed to help investors. I've tried 4 different banks and all have said 25% down for investment properties. They are more than willing to loan big money for rehab loans, but all at 25% down. The only programs I have seen with less than 25% down are SFH investment properties that only require a 20% down payment. To Yesenia's original question: Your 2nd mortgage will be based on your ability to pay it off. You shouldn't have too much trouble getting a 2nd mortgage so long as your down payment is there. There are certainly no guarentees in the RE business however.

Shaun Reilly · Answer

Hi @Yesenia C. the basics have already been laid out for you. So as more of a recap. 1) Will not be able to get another FHA loan unless you live there. (Doesn't sound like that was the intention anyway) 2) Unlikely to get a "Low Down" mortgage. For an investment property you will likely be looking at a minimum of 20% and quite possibly 25-30%. 3) As others pointed out you won't be able to automatically qualify for the difference between you previous pre-approval and what you actually bought. However this IS good because you should have a much bigger cushion in what the bank thinks you can afford on an investment purchase than if you had maxed that out. 4) What @Rob Fegan pointed out was good info on the investor buying process for HomePath. However I had the impression you were asking about HomePath financing. First the disclaimer that I have never gotten a HomePath loan. However I have talked with a lot of guys that have or have tried to. My understanding is that these loans ARE available to investors too. After that I have gotten mixed messages. Some guys said they were going to be able to get the low down and easier qualifying and others said they didn't get any lower down payment and qualifying was a PITA. What I am pretty sure of is that it is like an FHA loan where you go to a bank to get the loan but Fannie just backs it so you can get some of these better terms. My guess is the differences I have heard are based on individual bank requirments since they don't have to conform to the best case terms HomePath would allow.

Michael Wentzel · Answer

@Yesenia Cortez Like Diego said, you are probably looking at 20% to 25% down for conventional finances. If you and your husband have good jobs and receive W-2's, you should have a problem getting approved. If you're self-employed, it becomes a bit harder to qualify for these loans, but still possible. I would try to meet with two or three lenders. My personal experience has been local/ regional banks are much better for investors than the big national banks. But meet one or two in each category and see what they can do for you. I have a great local lender here in Colorado if you'd like me to put you in touch with her. Mike

Diego A. · Answer

@Yesenia Cortez An FHA loan is for owner occupied properties. So you will not be able to use an FHA loan for the property in Colorado unless you move and live in it. In this case you can have two FHA loans. In fact you can have more than one FHA loan if you meet some criteria: You have a family size increase: In this case you have to show the lender that you need to upgrade your space due to increasing the number of dependents in your house. (This one is hard to prove for the underwriter) Relocation: if you move over 90 miles from the location (usually for new employment) of the current property that has the FHA loan. 3 years after the last FHA loan purchased: This one holds but the assumptions is that in 3 years you do need more space. So if you meet any of this criteria then you can buy a new property with a new FHA loan and keep the house you recently bought with the original FHA without refinancing. You can do whatever you want with it (aka renting it) You cannot split approved % (like 1/3 of the amount) because that would give you more than one FHA loan without you meeting any of the criteria (especially because you would not move there). To me the best way to find a lender is to go local. Interview as many lenders as you can an work with the lender you feel more comfortable and that is knowledgeable about the rules. Most likely you will have to get a conventional loan and put 20%- 25% down because the property will be consider an "investment" property. Therefore, I don't think you can get a low down payment because you wont be living in the property. (I asked this to me lender) Yet, it is possible for you to get a conventional loan for 5% down payment if the underwriter thinks or assumes the house in Colorado would be a "retreat" (or second home) for you; but this is hard to pull because you will be getting it with the intention to rent. (If someone else could confirm this I would appreciate it) Warning: I am not a lender. I did all this research when I was trying to finance my properties. This is the information that the lenders gave me and BP Have a good one!

Yesenia C. · Answer

@Stephen Underhill and @Diego A. Thanks! Sorry, I worded my question poorly. I am not looking into a 2nd FHA loan. Let's say I was approved for $100K, but my home only cost $60k. Do you think a bank would easily approve a conventional loan for $40k? I was wondering what other types of loans are out there and how much of a down payment would I need? Thanks Michael Wentzel for answering my question. In my reasearch I also found out about HomePath. Do you guys think that would be a good option?

Rob Fegan · Answer

From www.homepath.com: "HomePath offers owner occupants (homebuyers who will live in the home as their primary residence) an exclusive "first look" at newly listed foreclosed properties. During the First LookTM marketing period, you can make an offer and purchase a HomePath home without competition from investors. Look for the First Look logo to see which properties are still in the First Look marketing period." I run into First Look properties often and must wait out the initial period prior to being able to offer as a non-owner occupied.

Michael Wentzel · Answer

@Yesenia C. I'm relatively new to Real Estate investing and I'm not familiar with HomePath. Did you do a general search for "HomePath" on Bigger Pockets and see if there are any forums or blogs concerning the program? Mike

Stephen Underhill · Answer

im fairly certain that the terms for FHA dictate you may only have one loan at any given time, and must pay off/refi out of it before you are allowed another. I.E. somebody may get qualified for 200k, but cant use it on 5 $40k properties over 5 years.