5% down on investment properties?

Question

I read that there are new mortgage lending programs that allow first-time homebuyers to put as little as 3-5% down with a conventional, conforming loan. For high-cost areas like Orange County, CA, the limit for a 4-unit is $1.2M. However, it's my understanding that a conventional conforming loan you do not need to live in one of the units (where FHA does have an owner-occupied requirement). I'm not opposed to living in one of the units if I buy locally, but I wanted to clarify whether that's the case. Is it possible to get financing for an investment property with as little as 5% down without living in it?

If it matters, I have excellent credit, 6 months reserves, proof of long-term employment, low DTI.

I know that I need to meet with a direct lender in my area. Any suggestions or recommendations as to where I can find one are appreciated!

Thanks in advance for your advice!

If it matters, I have excellent credit, 6 months reserves, proof of long-term employment, low DTI.

I know that I need to meet with a direct lender in my area. Any suggestions or recommendations as to where I can find one are appreciated!

Thanks in advance for your advice!

Joel Owens · Answer

Amanda I can appreciate you trying to stretch a dollar and be creative but this has all been thought of before.

A lender bases risk on skin in the game for an investment property. If you only have 5% into an investment and tenants wreck the place it's easy for an investor to walk away. When it's 20 or 25% down and a big chunk of money lenders know buyers will fight a lot more to get their money back out of  a property. That is why for non-owner occupied they want to take a lower LTV position on the first mortgage.

When you live in a property lenders know people will fight more to keep the place so that is where higher loan LTV percentages come in with less down.

Generally at closing for an owner occupied property you will sign an affidavit you plan on living in the property. Do not be an investor saying they will live there to get 5% down and they are not. That is mortgage fraud and can get you in the slammer quick.

Why not just go FHA and get a gift from your family if you are lower on funds??

Get with a mortgage broker who can guide you and let you know A,B,C won't work or it will. You have to make sure your mortgage plan strategy is doable and legal and the property price is realistic for the area you want to own in.

Chris Mason · Answer

85% LTV for SFR investment properties is doable (not 80%-75%), but rates are never all that great (you can however "get your foot in the door" at 85% LTV and refinance after it appreciates a bit). 75% LTV is kind of what lenders want for investment properties.

There's also all sorts of OPM and otherwise creative scenarios, like getting friend/family to lend you the money and secure it by another property you own (with some caveats), but in general yeah if you aren't going to live in it, and don't want to commit fraud, and are just getting started, put in your head 85% for SFR, 75% for MFR.

Lloyd McNeely · Answer

Hi Amanda,

Do the sellers have enough equity to sell to you with 5% down and carry back and then you refi after 6 months or a year?

Another question for a lender might be "can the seller carry back in a 2nd position 15% and you come in with 5% plus costs and do a conventional 1st?". Of course that's if the sellers might be open to that.

Is it a private sale or MLS/Agent sale?

The other thing to keep in mind is the PMI on FHA loans until you refi.

Chris Mason · Answer

Oh, so you were a wholesale AE, you say?

Bet you don't miss that, do ya? :P

Bill Hamilton · Answer

@Chris Mason I am sure you are right about where the fraud generally comes from. I was a wholesale AE for a number of years and it was rarely the borrower that trying to do an end run. Usually it took an LO or broker to know enough to try and accomplish that.

Chris Mason · Answer

I was assuming that a mortgage broker was trying to party like it's 2005-2007, not that OP was trying to be sneaky. Most fraud scenarios, believe it or not, are not instigated by the consumer.

Amanda Larson · Answer

@Joel Owens Thank you. I would never say I'm going to occupy a property unless I plan on occupying it. The reason I was asking about financing options is because I'm considering my options. I wanted to know if there were any 5% down financing options available for non owner-occupied investment properties because I truly did not know. It makes perfect sense that lenders require more upfront for investment properties. And thank you both for clarifying. :)

Amanda Larson · Answer

Thanks for explaining that further to me @Chris Mason

Chris Mason · Answer

Hi @Amanda Larson,

We use the lesser of appraised value or contract price.

You can massage that a little bit. For example, what if the contract says $83k and includes a $3k seller credit to help with closing costs? That means the contract price is $83k even thought your "net" offer was really only for $80k.

So our 75% LTV loan would be for $62,250, not $60,000.

Obviously $62k v $60k doesn't matter, really, but scale it up to typical O.C. MFR purchase prices (I was stationed in your area for several years :) ) and suddenly it does matter, because now you're talking about keeping ten thousand dollars in your pocket, and that right there is the budget for the better part of a full kitchen rehab that'll let you charge significantly higher rent!

Amanda Larson · Answer

Thanks, everyone! I'm interested in MFR and I'm fine with living in it, but that obviously only works if I buy locally. However, putting

Another question - @Chris Mason let's say 75% for MFR. What if a motivated seller accepts $85,000 for a property that's appraised at $100,000. that's probably not going to happen with a financed deal, I'm guessing. Maybe all cash, quick close, but anyway. For arguments sake, would the LTV be based off the appraised value ($100,000) or the purchase price of $80,000?

:)

5% down on investment properties?

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