Whether you own your own home or not, you may have found yourself thinking about purchasing real estate as an investment. And it’s a good time to be thinking about it: interest rates are low, and according to the Atlanta Journal-Constitution, home values are slowly increasing in Atlanta and elsewhere. However, the steps toward taking out an investment property mortgage are a bit different than those involved in borrowing money to purchase your own home.
Down payment differences
One of the big differences between a mortgage for your own home and an investment property mortgage is the size of the down payment you’ll have to put down. Several programs exist that let you get a mortgage for a home without putting 20 percent down. For example, with Federal Housing Administration loans, your down payment can be less than 5 percent. First time buyer programs let you put down a smaller down payment in exchange for paying mortgage insurance.
In the investment world, there is no mortgage insurance. You’re expected to put down at least 20 percent, if not 25 percent, to even be considered. The money needs to come from your own pockets and can’t have been given to you by a friend or relative.
Interest rate differences
Another big difference is in the amount of interest you’ll pay. You can usually expect to see a higher interest rate on an investment property, as many lenders look at it as a riskier loan. Think about it this way: If you have two mortgages — one for your primary residence and one for an investment — and a circumstance arises where you have to choose, you’ll most likely pay the mortgage for the primary home first. When you put more down, the risk to the lender is reduced somewhat, and you might end up with a better rate.
Your credit still matters
Credit is still king when you’re applying for an investment property mortgage. In fact, it might matter even more when you’re in the market for a loan to buy an investment, since it’s considered a riskier venture . Before you start looking at possible investment properties, take the time to review your credit score. If it’s not above the mid-700s, now is the time to focus on bringing it up.
Getting prequalified is also a must when you’re looking at investment properties. You don’t want to risk making an offer on a house or apartment building only to have things fall through in the end. Going through the prequalification and preapproval processes will give you a fair idea of your chances and the potential size of the mortgage.
Depending on your credit, finances and the real estate market in your area, now might be the ideal time to purchase an investment property. Realize that the process will be a bit different than buying a home and that you’ll need more money up front before you start to explore the wide world of real estate investing.
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