Home Buying in San Jose>Question Details

Nguyen, Home Buyer in San Jose, CA

What are the criteria for investment property loan?

Asked by Nguyen, San Jose, CA Sat Apr 25, 2009

First house's mortgage 2500/mo, credit card fully paid off monthly, no other debt, excellent credit scores. Now we're (my wife and I) looking to buy a rental property. We will have a decent downpayment (150k). Gross income for last 2 years are significantly different (got a promotion) 70k last year, 120k this year.

How likely and how much would we be able to borrow? Thanks.

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The highest LTV (loan to value) loans you will find for investment property will probably be 25% down. That puts you at $600K (or less if you don't have money for closing costs). There are plenty of multi-family income properties for sale throughout the Valley around that price range (typically duplexes). The loan qualification process will include the rental income the property produces but generally lenders will count 75% or less of the actual rent towards your qualifying because of vacancy, maintenance, and property tax costs. The rest counts against your income. Your credit score will need to be over 720 in almost all cases.

You're in good shape but you shouldn't expect the new investment to be generating positive cash flow. At the down payment level you are at you probably won't break even. You will have tax benefits from depreciation and any losses or expenditures you have for the new building. Those factors may put you on the positive side on April 15th. But not by much if at all.

There is a lot more to it and you don't want to buy something that might sit at the same value for the next ten years. You have to be ready to be a landlord. Property management companies sometimes charge up to 10% of monthly rents for their services. You can be your own property manager for something small like this but you will want to join the California Apartment Association so you can have access to lease forms, disclosures, and credit report services.

Accumulating rental property over 10-20 years will result in owning buildings that produce positive cash flow with built up equity. It just doesn't happen overnight.
0 votes Thank Flag Link Sat Apr 25, 2009
I agree with what Andrea stated. The best thing is always to work with your mortgage agent first. Each scenario is different, and the mortgage broker has to look at what is the best way to meet the client best interest. Please make sure that you are working with an agent who has you interest as the number one priority. Best of luck.

Mike
1 vote Thank Flag Link Sat Apr 25, 2009
If you're serious about becoming a real estate investor you should be concerned about what you can afford to buy, but you should be more concerned about how you are going to consistently find opportunities and make deals that make sense.

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0 votes Thank Flag Link Mon Apr 27, 2009
You really need to sit down with a lender. There is no way to know exactly what you will qualify for without running your credit reports and verifying your income and assets. You will need approx. 30% down on an investment property so the $150k will get you about a $500k purchase. Best down payment scenario would be that your $150k should be in savings, not planning to be borrowed from your current home. You will also pay a higher interest rate on investment loan, if not principal residence. If you need a referral for a mortgage broker, email me. Otherwise, you may consider going to your existing financial institution where you already have your checking/savings.
0 votes Thank Flag Link Sat Apr 25, 2009
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