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Even if you are a seasoned real estate investor, it's a good idea to understand why income property loans are different than owner-occupied single family loans.
To keep it simple, it all comes down to risk. Lenders and those who invest in mortgages consider loans on income properties to carry more risk than loans made on homes that will be occupied by the borrower. Historical data suggests that in times of trouble, property owners become delinquent on their income properties before they do on the homes they live in.
As a property owner, it’s not always easy to understand why all loans of this type of property are lumped together in the same "risk bucket" since some income properties are less risky than others. Some are in very desirable locations, have more equity and stronger tenants. But, it's best to be prepared for what the general marketplace has to offer for these types of loans.
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Here are three things to note when shopping for a new loan to purchase or refinance an income property:
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Pricing – since these loans carry more risk, the terms are not as good as those available on owner-occupied single family homes. You can expect the rate and total fees on income property loans to be a little higher. As always, for lenders and investors, it's about risk and return. Don't expect to be offered the same terms on your income property that you received on the home you own and live in, even if you have perfect credit, employment history, strong qualifying income and a large amount of savings.
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Qualifying – lenders have higher qualifying standards for these types of loans. There is less flexibility when it comes to credit scores, debt-to-income ratios and savings or reserves when qualifying for income property loans. The combination of a lower credit score and a higher requested loan-to-value can decrease the chances of a loan approval, or if approved, impact the pricing, making the rate and total costs higher. On the other hand, the combination of a really good credit score and a lower requested loan-to-value can make for an easy loan approval and great pricing.
- Guidelines – loan to values are lower, there are more restrictions on cash-out and the number of properties financed. Since more equity is required, lower loan-to-values are offered. There are also restrictions on getting cash out when refinancing an income property. Getting cash out was almost universally non-existent after the "meltdown", but it is once again allowed, with just a few limitations. Lenders also limit the total amount of financed properties allowed by the borrower. For some lenders the total number of financed properties allowed is four, for others it's ten.
In summary, lenders offering these loans will make adjustments to the pricing, qualifying requirements and program guidelines in order to compensate for the added risk associated with lending on income property.
There are very good options for financing income properties right now. Agency programs (Fannie Mae and Freddie Mac) are still available for 1-4 unit income properties. Interest rates are low and the general credit market is improving.
We hope this article is helpful. Please contact us with any questions or comments.
Posted by: Brian Bush
Brian and his team have been funding income property loans for over 23 years.
Since 1991, they have funded over 1,000 loans totaling more than 1 Billion Dollars.
You can reach Brian at 800-607-1941 x220 or bbush@slglends.com .
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