How to Finance My Second Property

[Brandt Welch]

Hello BP community!

I recently purchased my first home about 8 months ago and I'm looking to buy another in the area to rent out. I had a conversation with a lender this morning and he mentioned that the underwriter for my loan app would consider this an investment property and not a secondary residence, thus forcing a higher down payment (20-25%) and higher interest rate. Another option he mentioned is that I could decided that I want to move in to the new property and instead rent out the home that I purchased last year. I'm young (26), unmarried, and without children so this option is not completely infeasible, but still seems like an awfully inconvenient solution since I just moved in less than a year ago. My question is: how do investors typically go about getting financing for that second property? Is applying for a mortgage as an investment property the way to go or are there other options anyone can suggest?

Thanks in advance!

[Mike Singer]

Lenders price loan based on risk and an investment property is a much higher risk than a second home. A second home is typically in a vacation area more than 2 hours from your current home. There isn't really another option than the one proposed to you unfortunately. Even if you go with that option it needs to make sense on paper (Be a bigger home, closer to work, etc... something that makes the old property inferior to the new).

[Brandt Welch]

Quote from @Mike Singer:

Lenders price loan based on risk and an investment property is a much higher risk than a second home. A second home is typically in a vacation area more than 2 hours from your current home. There isn't really another option than the one proposed to you unfortunately. Even if you go with that option it needs to make sense on paper (Be a bigger home, closer to work, etc... something that makes the old property inferior to the new).

 Yea that makes sense! I One caveat that I forgot to mention was that the monthly payment I'm targeting for the second property is such that I could still afford it  and my current home even without any rental income that the second property might generate. I thought this might play a factor in how the underwriter views things, but it doesn't seem like it does.

[Reid Chauvin]

Hi @Brandt Welch - for what it's worth, the minimum down payment on a 1-unit investment property is 15%. It's 10% down for a '2nd home'. The interest rates have been pretty comparable for those two occupancy types. If you are not willing to employ the 'house hack' method, (i.e., buy a new primary residence w/ low down payment and rent out your current residence), and you have no intention of occupying this next property at all, then purchasing as an investment property is the way to go. 

[Mike Singer]

Unfortunately that wouldn't make a difference. They can tell what the plan is with the property based on location. You're not going to vacation 15 minutes from your primary home. Your best bet is to live in the new property, but you're going to have to have an explanation of why you want to move into it. There's alot of occupancy fraud where people say they're going to live in the home and then it shows up as a rental listing a week after closing. You dont want to deal with that. 

There was another post with a similar situation last week. They called the same thing out a few days before closing and it threw a wrench in the whole deal. 

[Jay Hurst]

Quote from @Brandt Welch:

Quote from @Mike Singer:

Lenders price loan based on risk and an investment property is a much higher risk than a second home. A second home is typically in a vacation area more than 2 hours from your current home. There isn't really another option than the one proposed to you unfortunately. Even if you go with that option it needs to make sense on paper (Be a bigger home, closer to work, etc... something that makes the old property inferior to the new).

 Yea that makes sense! I One caveat that I forgot to mention was that the monthly payment I'm targeting for the second property is such that I could still afford it  and my current home even without any rental income that the second property might generate. I thought this might play a factor in how the underwriter views things, but it doesn't seem like it does.

@Brandt Welch    A misconception by borrowers is the the underwriter has the power to say yes or no on a conventional (and that matter the vast % of ALL loans).  There is an automated system that spits out yes or no, and the underwriters job is to make sure the documentation and the loan meets Fannie Mae, Freddie Mac or the non conventional program  requirements. 

[Zach Wain]

If you are able to move into the home, you can do this over and over each year. You only have to occupy the home for 1 year. Each time you get primary home interest rates and low downpayment options like 5% down. That is by far the best and cheapest way to add RE. Otherwise, you can still buy with 20% or even 15% on a rental home or second home, the rates are the same for conventional loans. Main difference is PMI and min downapyment for a conventional 2nd home is 10%, rental is 15%. Both will have high rates/fees until you get to 25% down

[Ramandeep Sidhu]

One option is to take out a conventional mortgage, which is the traditional type of mortgage for investment properties. This type of mortgage typically requires a down payment of 20-25% and a higher interest rate. Another option is to consider an FHA loan. FHA loans may have lower down payment requirements, but they come with higher mortgage insurance premiums. If you have built up equity in your primary residence, you can use a home equity loan to finance the down payment on your investment property. Another option is to consider a portfolio loan, which is offered by local banks and not sold on the secondary market. Portfolio loans may have more flexible underwriting guidelines and lower interest rates. Finally, you can consider a hard money loan, which is based on the property's value and not the borrower's creditworthiness.

[Jonathan Taylor]

@Brandt Welch you can move out of your primary house and convert to a rental after one year of occupancy. You can use 75% the market rents of the departing residence to help qualify if your DTI is too high. Since you have been in the house 8 months, this strategy would require you to wait a few months. With the rates the way they are, that may be a solid option considering a DSCR loan would be higher than a conventional investment property rate, albeit not by much, but require similar down payment requirements (20-25%).