Here, it is important to know that if you are planning to buy a home for personal use, it will be easier and cheaper to get a loan than for an investment property. The lenders know that in any case the borrowers will try to save their home and that will be their priority but it is not the same with the investment property. Hence, for a lender lending for an investment property is more risky than lending for owner’s resident.
So, when it is not the same as personal property, let’s have a look at few points which can be useful for anyone who is new to investment property financing.
Maintaining Your Credit ScoreYou financial behaviour with the bank is kept in a data base and they always keep a credit score ready which is a summary of your previous credit related activities. The score actually indicates why and how someone is eligible for a loan and why he is not eligible for it. The credit score has a direct relation with the interest rate you are going to pay. The higher the credit score is, the higher the interest rate will be. Usually the interest rate below 740 results in a high interest rate. The score above 740 is considered to be good score.
You can plan well to maintain a good credit score long before you want to obtain a loan for your first investment property. To make your credit score favourable you can always keep the below points in mind.
Check Your Credit Score RegularlyKeep checking your credit score regularly; this will keep you motivated to make it better.
Never Miss Any EMI Or Other PaymentsAlways make the payments on time and never ever delay in it. Once you make a mistake or delay, it is going to affect your credit score for a long time. Keep auto payment activated or keep the reminders set to make all the financial payments on time. Always handle any kind of issues on time and as soon as possible. Also try to avoid over utilization of your credit and maintain a balance in your credit card which is lower than 30 percent of your credit limit. The credit score is available online for free and there are agencies which can help you with your credit report for free.
Interest Rate Will Be HighIt is important to know that you cannot expect the interest rate same as the home mortgage. The interest rate will be always higher in the investment purpose loan. It will be always 1 to 3 percent more than the loan given on the owner occupied properties. So, for example if the interest rate is 4 percent for your homeowner loan, it will be definitely 5 to 7 percent interest in case of investment purpose loans. As mentioned above, since these types of loans are risky, the interest rates are higher and you have to just accept it.
LTV Will Be LowThe newcomers also have to accept that they have to pay at least 20 percent down payment. This is the requirement by most of the banks and in few cases it can be little different but this is the number one should keep in mind and must have this 20 percent along with the amount for the next couple of months ready while obtaining the loan.
LTV is going to be 20 % or more. If the borrower has a poor credit score, the bank would want more than this amount as down payment. The 20 percent can be considered the best case. Hence a newbie needs to be mentally and financially prepared for this situation.
Prefer A Fixed Interest Rate MortgageYou have an option to go for either a fixed rate mortgage or an adjustable one. When you have a fixed rate mortgage your rate of interest will be locked and hence will remain same for the complete period of the loan.
In the adjustable rate of interest case, the rate of interest will change. Usually the banks keep the interest rate low in the beginning to attract the borrowers but later they increase it. Hence not getting impressed by the lower interest rate in the beginning, one should know that it may get increased anytime in the future. Hence, it is suggested to go for fixed interest rate and if you are going for ARM (adjustable rate mortgage), make sure to understand all the terms well to know that how it will increase in the future.
Paperwork Related PreparationThe lender will ask for the proof of your income and financial status. You need to be ready with the bank statements of at least two months. In case of being self employed one needs to get a certificate from CPA which shows the self employment from two years. You investment proves, retirement accounts related information, driving licence, Social Security card, any divorce or separation related papers, bankruptcy related papers etc will be required when you will apply for loan.
Buy Your First Property As Owner OccupiedYou can also try to get a homeowner loan for which the down payment and ROI will be less. Later, you can give a part of it on rent or can get shifted in a smaller house as well after sometime. This way your first loan will not be much costly. However, it is suggested to check all the rules and regulations before you make this decision as the lender may restrict you to live in the house for certain time period. Hence check if this works in your particular case or not. You can also use your present house as a source of income.
Now, you know how you can be prepared for your first investment property loan. Hope it helps!