Mortgage on investment property

[Sohil Vashi]

Hi everyone

I am interested in purchasing a townhouse as a long term rental. This will be my first investment property and I am confused about how a mortgage works on an investment property. All of the homes we have lived in as a primary residence have been new construction and the appraisal does not make a difference in the loan amount.

My question:

Suppose I see a house for sale for $100,000 and I am able to purchase the house for $85,000. The appraisal based on similar homes in the area would come in at $120,000. Would the down payment required be 20% of the appraised value or of the purchase price?

The home needs work and if the down payment is based on appraisal, I would use my cash for the rehab.

Thanks in advance!

[Chris Mason]

Lenders will use the lesser of appraised value or contract purchase price to determine value. If your contract price is $85k, the lender is going to consider it an $85k home even if it appraises for $500k, unless you are buying from immediate family and intend to owner occupy.