Have your eye on a New York City investment property, but need a little help to make your landlording dream a reality?
“Assuming the property can command enough rent, interest rates are still low enough — despite recent increases — 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. “Just be aware that getting a mortgage on an investment unit is a little bit different than getting one for a home that is your primary residence.”
Here’s what you need to know about getting a mortgage on an investment property:
1. It will probably 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, says Gendels, so you’ll likely be offered a 5/1 or 7/1 adjustable rate mortgage (ARM). That means rates remain fixed for either five or seven years, respectively, and then adjust annually up to a certain percentage cap. Typically, there is a margin set (for example, 3% over LIBOR rates with a cap of 5% over the initial interest rate).
2. Interest rates will be slightly higher than a residential mortgage
“Most banks will charge around a half a point more on loans for investment purchases than for a mortgage on a primary residence,” says Gendels. “But rates are still appealingly low.”
Currently, for instance, National Cooperative Bank is offering a rate of around 3.75% for a 5/1 ARM and 4.0% for a 7/1 ARM on an investment purchase. Annual adjustments after the initial five- or seven-year period are based on LIBOR plus a margin (for example, 3%) and can’t exceed an additional 5% above the original interest rate.
3. It’s harder to qualify as a borrower--and your downpayment will be bigger
You’ll need a minimum FICO credit score of 720 (versus 680-700 if the property were your primary residence). The maximum loan-to-value ratio is 75%— 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% with mortgage insurance.)
4. But it’s easier to meet the owner-occupancy test
If you’re buying a co-op or condo, the building will need to be at least 30% owner-occupied. This is actually a lower threshold than the 51% 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 months 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, says Gendels, there’s a 10-unit cap on investment financing.