Downpayment and Loan Percentages Vary? - Please help

[Philip C.]

Hi there,

I'm searching for my first out-of-state buy-and-hold investment property and after speaking to several lenders and realtors, I'm hearing different things that I hope to get some clarification on:

1. To qualify for a conventional loan, the down payment for a SFH or duplex is a minimum 25%-35%, because 20% is only for folks who intend to live in the home.

2. For an investor to get the best interest rate and terms, the home must already have tenants in place, because then 70%-75% of the rental income can go toward the loan approval, meaning less money out-of-pocket every month.

So here's where I need clarification: (For #1) Which is it? 25% or 35%? The BP webinars Brandon gives, he always inputs 20%. Why?

(For #2) Does this mean I should limit my search to only homes with tenants in place?

Sorry if these questions seem basic; it just helps to have someone tell me exactly what I need.

Thank you! - Philip

[Andrew Postell]

@Philip C. thanks for posting this.  Here are your answers:

1. The down payment minimum for both Fannie and Freddie are 25% for non-owner occupied duplexes.  If you live in the duplex you could receive 15% or even 3% in some scenarios with conventional lending.

2. Fannie and Freddie allow rental income to be used IMMEDIATELY to qualify you for the loan.  Even if the home is empty.  This is for a purchase transaction only though. If you buy the property, renovate it, and then need to refinance into a Fannie/Freddie loan then an executed lease would be needed to use rental income to qualify.  This is according to Fannie/Freddie...where it gets confusing is that banks are allowed to have OVERLAYS.  

Overlays are the extra rules that banks put on top of Fannie/Freddie loans to limit their risk.  So if you hear a bank say "you need a minimum credit score of X"...that is an overlay.  Fannie/Freddie don't have minimum credit scores.  Same with rental income too...or downpayments.  The lender may have overlays for either of those items.  I would suggest interviewing any lender with the following questions to see if they are friendly to investors:

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
3. What is my minimum down payment required? (not so important but if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
4. Can I change title to my LLC?
5. Do you sell your mortgages?
6. What is your loan minimum?
7. Can you explain to me what your reserve requirements are?

If the lender can answer these questions then you are on the right track to using an investor friendly lender.

Thanks!