Become a landlord with as little as 15% down
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
A reader emailed a request asking for an update on investment property financing. OK I say.
You can buy rentals with as little as 15 percent down on Fannie Mae conforming loan amounts up to $417,000 on one-unit, $533,850 for two units, $645,300 for three units and $801,950 for four units. Anything less than 20 percent down does require mortgage insurance.
If you want to pull cash-out on an existing rental (to purchase more rentals for example), you can go 75 percent loan-to-value cash-out on a single unit or 70 percent on two to four units.
The next level is called Freddie Mac agency high balance. You can purchase a single unit investment property with 20 percent down for loan amounts from $417,001 to $625,500 or 30 percent down for any units. Loan amounts for two units are $533,851 to $800,775, three units $645,301 to $967,950 and four units $801,951 to $1,202,925.
For cash-out on a high balance loan, you are limited to 65 percent loan-to-value.
Interest rates are lower on agency conforming loan limits than agency high balance. And, the more money you put down, the better the pricing you will receive.
For example, 25 percent down reduces your points by 1.25 percent as you have more skin in the game, offering less risk of default to the lender.
One-unit pricing is cheaper than two or more units. These are examples of loan level pricing adjustments or LLPA’s. If you are really interested (or really bored), you can Google Fannie Mae loan-level price adjustments to learn more.
Some portfolio products offer interesting pricing dynamics. For example, one lender offers investor loans with 25 percent down, up to a $650,000 with no LLPA’s.
Take the example of a single unit loan amount of $625,500 at 4.75 percent, no-cost 30-year fixed for a payment of $3,263. Or, take the no-cost 5/1 ARM at 3.75 percent with a payment of $2,897. That’s $366 cheaper, albeit for a five-year with 25 percent down compared to a 30-year fixed with 30 percent down. You are saving nearly $22,000 in the first five years. Talk about cash-flow and less money down!
Unaffordable Orange County will have huge tenant demand for years to come. Sky high rental rates are here to stay, and that helps you make the mortgage payment.
Buy rentals. Buy now. Buy later. Cash-flow and leverage are the names of the game.
Jeff Lazerson - Mortgage Columnist since 2011