How is Financing a Rental Property Purchase Different Than a Primary Residence?
Financing a rental can be much different from financing a primary residence. Home buyers who understand and anticipate the difference between these two purchases can prepare in advance to buy the home of their choice.
Difference Between a Rental Property and a Primary Residence
A primary residence is a home that the buyer lives in for the majority of the year. In a newly purchased home, the primary residence must be occupied by the homeowner for at least 60 days after the close of escrow.
A rental property is a property that is not lived in by the homeowner, but is instead rented to a tenant. Typically, there will be a rental agreement between the property owner and the tenant. This rental agreement can be used to prove that the house is being rented, which may become necessary at tax time. Rental properties are susceptible to tax breaks, so even though securing financing for a rental property can be a challenge, the tax breaks can make the investment worthwhile.
Financing a Primary Residence
A primary residence can be financed with a relatively small down payment and low interest rate. Typically, the smallest down payment that a mortgage lender will accept is 3.5%, if the borrower is purchasing a home with an FHA loan. Home buyers purchasing their primary residence can also take advantage of lower credit requirements, if purchasing with an FHA loan. In fact, buyers can qualify for an FHA loan with credit scores as low as 500. However, buyers with low credit scores lower than 580 must produce a 10% payment when purchasing through FHA.
Financing a Rental Property
When it's time to secure a mortgage for a rental property, home buyers with high credit scores and a sizable down payment are more likely to qualify, and more likely to enjoy a low interest rate. In fact, rental home buyers should have a credit score of at least 740 or they can expect to pay more in interest. In addition, a rental home buyer should expect to have a down payment of at least 20%, and will do better if they can produce a down payment of 25%.
It's All About Risk
Clearly, the mortgage qualifications for a primary residence are much more relaxed than for a rental property. Why is this? Because primary residences are relatively low risk. Homeowners need somewhere to live. If times get hard, buyers are less likely to default on a mortgage for a primary residence than they are to default on a rental property.
Contact Your Lender
For more information about mortgage requirements for different types of properties, contact a reputable lender. A good lender can answer your questions and help you decide what type of loan is right for you.
If you are a real estate investor or property owner and want to learn more about how we can help you buy investment properties and our property management program please go to our website at http://www.delvalproperty.com/.
Mike Lautensack is the owner of Del Val Realty & Property Management ("Del Val”). Del Val is a FULL SERVICE Philadelphia Property Management company with over 15 years' experience and manage over 3,000 single family homes, HOA units and multifamily properties in and around Philadelphia, PA. We advise property owners how to build wealth and financial security through hassle-free ownership of rental real estate with our NO "Hassle" FULL Service Management Program. This proven management system allows owners to enjoy the financial benefits of cash flow, tax savings, and wealth creation. All this while it GUARANTEES you will never have to deal with maintenance or tenant issues. Please see our website for more information at http://www.delvalproperty.com/