Investment property is treated differently from a typical owner-occupied unit. There are various financing options available with owner-occupied units with flexible down payment amounts and a full spectrum of terms. The number of options available will depend on your credit score.
With an investment property, your credit scores matter just as much as your down payment. There is less wiggle room for a minimum down payment amount, unlike in primary owner-occupied residences. Lenders require a 20% down payment because they need to see that you share a good portion of the risk. They also acknowledge that renters do not treat rental property as well as they do when it is owner-occupied.
Investment homes don't have the option of private mortgage insurance (PMI). This insurance protects the bank in the event you default on your mortgage. It is a mandatory additional fee for primary residences that have less than 20% equity. PMI is not an option in investment properties. Therefore, private mortgage insurance cannot bridge your shortfall in fulfilling the mandatory 20% equity that the lenders require.
Does the Type of Financing Affect How Much Is Required To Put Down at Closing?
In an investment property, you need to come to the closing table with 20% in equity for the loan amount, period. The type of financing isn’t a huge factor.
For owner-occupied units, buyers have the option to wrap the closing costs into the loan amount and have private mortgage insurance cover the shortfall in down payment and closing costs. As an investor, you will need to have a minimum of 20% down payment based on the purchase price.
How Does the Amount Put Down in the Down Payment Affect Later Payments on the Rental Property?
Some may recommend that it is best to get a fixed mortgage so that your payments are predictable. The length of the loan will depend on the purchase price, interest rate, and your monthly ability to pay the mortgage.
The more you put down at closing, the more principal you would have pre-paid, making your payment smaller. The shorter your fixed-rate term, the cheaper the house will be over the life of the loan since you will be paying down the balance in larger chunks with less interest accrued. But, keep in mind that with a shorter loan term like a 15-year fixed, your monthly payments will be heftier than on a 30-year fixed. There are 10-, 15-, 20-, and 25-year fixed loans also available.
Owning an investment home can be part of any savvy investor's wealth portfolio. Real estate may have liquidity drawbacks, but it has the ability to provide passive cash flow, tax benefits, is a great equity builder, adds diversification to your portfolio, and can act as a hedge against inflation.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Cash flow is not guaranteed. Programs that depend on tenants for their revenue may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants.
