Investing in real estate is still one of the most successful investments you can make— if you know what you’re doing and you’re willing to put in the work that goes with it. This is a good investment to make if you’re financially stable, you’re guaranteed an ROI (a return on investment), and you have time to manage the property/have the finances to hire a property manager.
Even though price increases have slowed down over the past few weeks and investment property prices have remained relatively stable compared to previous years, the mortgage rates are much different for these types of properties than if you were buying a home to live in.
Differences Between Primary Residences and Investment Properties
Lenders define a primary residence as the property where you’ll live and spend most of your time. Odds are that if you’re trying to invest in another property, you’re already living in your primary residence, and the property you’re investing in isn’t going to turn into your new home.
Rental properties, vacation rentals, and other types of properties that you will not be living in— but will be earning income from— are considered investment properties, while vacation homes that are for your use only are considered second homes by lenders. Because lenders make a distinction between primary residences and investment properties/second homes, obtaining a mortgage is different for each type.
Obtaining Mortgages for Different Classifications of Properties
Obtaining a mortgage for your first home can be pretty difficult, yet it is the easiest of the various types of properties. Mortgage rates are the lowest for primary residences, simply because lenders know that homeowners— especially first-time homeowners— are going to make sure that they pay their mortgage to avoid becoming delinquent and possibly homeless. You’ll usually need to be able to put down a 3% down payment and have a credit score of at least 620.
Lenders view second homes as a risk simply because it’s not your primary residence. If you’re not able to pay the mortgage on a second home, losing the second home won’t necessarily make you homeless. Because of this, you must have a down payment of 20% or more and a credit score of 700 or higher.
Investment properties have the strictest qualifications for mortgages of all the property classifications. Again, lenders know that this will not be your primary home, so there’s less incentive to pay a mortgage every month. Again, you’ll need to put down at least 20% and have a credit score above 700 for the best rates.
Mortgage Rate Impact on Property Investors
Property investors— specifically first-time property investors— need to understand that mortgage rates for their investment property will be higher than the rates for their primary residence. For example, a $200,000 loan for a primary residence may have an interest rate of 3.25% and a monthly mortgage payment of $870, while the same loan for an investment property may have an interest rate of $3.75% (or much higher) and a monthly mortgage payment of $926. Again, this is why you should make sure that you’re financially stable enough to invest in a residential property and that you’ll get a return on your investment.
Is it Possible to Get a Lower Mortgage Rate on Investment Properties?
The good news is that it is possible to get a good mortgage rate on your investment property through lending companies that specialize in helping real estate investors. Other tips that can help you get the best possible mortgage rates include:
- Have assets that can be converted into cash quickly
- Keep your credit score above 700
- Make a down payment that is more than 20%
- Pay down your debt as much as possible
Keep in mind that it’s never a good idea to state that your investment property (or your second home) will be your primary residence on your mortgage application. It seems like a handy and harmless tip to ensure that you’ll get a lower mortgage rate— especially if you know that you’re going to pay it each month— but this is considered mortgage fraud, which comes with huge penalties— even prison time. Lenders have the sophisticated digital technology to determine if a home is truly going to be your primary residence.
The bottom line is that property investors should understand that mortgage rates are going to be higher for investment properties. The only legal way around a high mortgage rate is to make sure your credit score and finances are in good standing, and to look to lenders that specialize in helping property investors.