Financing for the small landlord
AngieNewtown wrote:
My husband and I…are thinking of buying next summer…and are seriously thinking of the owner-occupied 2 or 3 family approach, as Ehwhy suggests…
Can you comment on the financing picture for owner-occupied dwellings like this? Will 25 percent down still be required, or somewhat less (do I remember 10 percent from your post a few days back)?
Also, we still have our rental property back in our old home state. It's on an aggressive repayment schedule (7 years left on a 15 year loan) and is essentially breaking even. Can you speak to how this might affect our financing requirements? A while back folks were talking about needing 6 months PITI in reserve for both the old investment property *and* the new property as well--are those guidelines still in place?
Hi Angie,
About down payment:
Fannie Mae or Freddie Mac guidelines are looking for 20 percent down for 2- or 3-family home loans. The vast majority of lenders will want that, so they can resell on the secondary market.
A portfolio lender can offer more options for someone like Angie. Smaller lenders have the option of holding their loans, instead of selling them to investors on the secondary market. This makes them able to lend with as little as 5 percent down.
FHA will finance with as little as 3.5 percent, but be aware that the mortgage insurance with FHA just increased.
About reserves:
For a 3-family house, FHA requires 3 months of PITI in reserve. Most conforming lenders will want to see 6 months' rent loss insurance on the other property as well, but that shouldn’t be very expensive at all. Portfolio lenders, like Middlesex Savings Bank, require as little as 2-3 months reserves.
About qualifying:
In conforming loans, the investment property will be looked at closely with regards to monthly cash flow. The lender may want leases and will likely want to see tax returns with rental claimed on Schedule E. A lot of properties that are break-even do not look that way to a lender because Schedule E allows for depreciation and deduction of other expenses. The depreciation may be added back, but other expenses are not. The other method of calculating cash flow would be to deduct 25 percent of the gross rent for maintenance and vacancy. You’re golden if 75 percent of the rent covers PITI.
Portfolio lenders have the latitude to look at the income of the other house, deduct the actual expenses of operating that property, and add 75 percent of the net income to your income in order to qualify.
FHA will use 85 percent of rent added to income. FHA also requires that 85 percent of total rents must cover the PITI. There are all sorts of restrictions regarding landlord experience requirements for new landlords, including conversion of a primary residence into a rental property when purchasing a new home.
Angie, your loan is going to be complicated. You may need an up-to-date Schedule E before a lender will have a clear picture of your income from the other property. Qualifying will also depend on your employment and credit and all the usual lender rules.
Eric recommends that you should either put 20 percent down, if you can, or go for a low down payment through FHA. He doesn’t see the middle ground (10 percent down) as being a good option.
Thank you to Loren Shapiro from Asset Mortgage Group and Eric Heinrich from Mortgage Master, Inc and Anne Barry, Assistant Vice-President of Residential Lending at Middlesex Savings Bank.
OK, readers, more questions?
Do you have advice for Angie and her husband?
