Buying an investment property when you already own a home can help or hurt you, depending on your financial situation. You can borrow money from your primary residence to use as a down payment to buy a rental and for expenses once you own it. Alternatively, you can apply for a non-owner occupied mortgage to purchase the investment property, but owning a home already can work against you if you don't have enough income to support both properties, even when taking your prospective rent into consideration.
Equity is the difference between the market value of your home and the total amount of mortgages against it. If you have equity, you can apply with a lender to borrow some of it (usually up to 80 percent of the value) in order to place a down payment on an investment property or to pay for it outright. When looking for a home equity loan, keep in mind that terms, such as interest rate and amortization, are different than for a first loan. Find out the details before you apply.
When calculating the return on your investment and cash flow from a rental, you will need to subtract your equity loan payment. Also, you may have to use the remainder of your equity to make the payments while the rental is vacant. If you can no longer afford to operate your investment property, you risk losing it to foreclosure (if you have a mortgage on the rental). In addition, you also can lose your primary residence if you were using the rental income to make your equity loan payments. Therefore, there are serious implications when buying an investment property using your primary house.
Non-Owner Occupied Loan
An alternative to using an equity loan to fund your investment property is to save enough money for a down payment and apply for a non-owner occupied mortgage. These loans have higher interest rates than the ones for primary residences because rental homes are seen as a greater risk. When assessing your loan application, most lenders use about 75 percent of the anticipated rent to help you qualify for the rental mortgage in order to count vacancy rates, repairs and other costs associated with owning investment properties. Therefore, your current mortgage plus any amount of your investment loan not covered by rent will be used against your income to qualify. In addition, some lenders may require you to have a signed lease on the rental property before you can close the loan.
Qualifying for a mortgage for your investment house may be more difficult than for the loan on your primary residence. You may need a down payment of 20 to 25 percent, depending on the type of loan that you want. In general, lenders will review your credit rating and history of bankruptcies, late payments and charge offs. In addition, to protect you and the lender from default, you may be required to have about six months of expenses for your rental in the bank.
- NOLO: When Home Equity Loans or Lines of Credit Can Lead to Trouble
- HSH.com: Home Equity Loan: Fund the Down Payment on Investment Property
- HSH.com: How to Buy and Finance Investment Property
- FHA Info: Income Guidelines
- Minnesota Investment Real Estate; Where Should I buy Investment Property?; Scott Ficek
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