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Are you thinking about taking advantage of the soft real estate market—and rising inventory—to buy an investment property in NYC, but need a little help to make your dream become a reality?
Even if you own or have owned an apartment in NYC, owning an investment property here is quite a bit different. And similarly, getting a mortgage on an investment property is different from getting one for a house that is your primary residence. But that should not be a deterrent, especially in the current market.
“Assuming the property can command enough rent, interest rates are still low to make financing an investment property an attractive proposition,” says Robbie Gendels, a senior loan officer in the New York City office of National Cooperative Bank, which unlike many other banks, offers investment loans on co-ops, condos, and single-family homes.
Here’s what you need to know about getting a mortgage on an investment property in NYC.
1. It will be an adjustable-rate mortgage
The federal government doesn’t back mortgages for investment properties, which means you’ll need to shop around for lenders who’ll loan the money on their own books. These so-called portfolio loans are rarely offered at fixed rates, Gendels says, so you’ll likely be offered a 5/1, 7/1, or 10/1 adjustable rate mortgage (ARM). That means rates remain fixed for either five, seven, or 10 years, respectively, and then adjust annually up to a certain percentage cap. Typically, there is a margin set (for example, 3 percent over LIBOR rates with a cap of 5 percent over the initial interest rate).
2. Interest rates will be slightly higher than a residential mortgage
“Most banks will charge around a quarter point more on loans for investment purchases than for a mortgage on a primary residence,” Gendels says. “But rates are still appealingly low.”
Currently, for instance, National Cooperative Bank is offering a rate of around 4.375 percent for a 5/1 ARM, 4.50 percent for a 7/1 ARM, and 4.625 percent for a 10/1 ARM on an investment purchase in New York. Annual adjustments after the initial five- or seven-year period are based on LIBOR plus a margin (for example, 3 percent) and can’t exceed an additional 5 percent above the original interest rate.
3. It’s harder to qualify as a borrower—and your down payment will be bigger
You’ll need a minimum FICO credit score of 720 (versus 680-700 if the property is your primary residence). The maximum loan-to-value ratio is 75 percent—meaning if the property you have your eye on costs $1 million, you’ll need to come up with at least $250,000. (For primary residences, some banks lend up to 90 percent with mortgage insurance.)
4. But it’s easier to meet the owner-occupancy test
If you’re buying a condo, the building will need to be at least 30 percent owner-occupied. This is actually a lower threshold than the 51 percent needed to obtain a federally-guaranteed mortgage.
5. You’ll need a healthy reserve fund
Most lenders will want to see that you have six month’s worth of principal, interest, taxes, and insurance stashed away in savings.
6. Big-time investors need not apply
If you already own a lot of investment units, financing your next purchase is probably not an option. At National Cooperative Bank, Gendels says, there’s a 10-unit cap on investment financing.
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