A reader is in the right financial position to invest in real estate but isn’t sure about the right loan to do it.
I’m lucky enough to work for a tech company that deals with virtual commerce, so I not only have a job, I’m getting paid overtime. I want to buy a house while interest rates are so low, fix it up, and flip it. There’s no shortage of advice online for doing that, but I can’t find anyone I really trust you to answer this question: What’s the best mortgage for me, given that I want to sell the place in a year or less?
– Zach in California
Laura Adams, author, and host of the Money Girl podcast responds …
Zach asks a good question because selecting the right mortgage for an investment property can help boost its profitability. Plus, lenders have more strict underwriting standards for a non-owner-occupied property compared to a standard home loan.
Here are six tips for getting a mortgage on a property that you intend to sell in the short-term
1. Review your credit
Lenders may also require higher minimum credit scores to qualify for a mortgage on an investment property. It’s another effort to mitigate the risk of making a loan to an owner who doesn’t plan to live in the property.
2. Prepare to pay a higher down payment
The typical minimum down payment for a mortgage on a single-family investment property is 25%. For multi-family properties, it could be a minimum of 30%. Because investment properties come with more risk to lenders, they require a higher down payment to offset it.
Working to improve your credit? This tool can help you identify potential errors and make disputes. Try it free for 14 days.
3. Expect higher interest rates
Interest rates on an investment property mortgage are generally higher than for a standard home loan. The rate depends on various factors, including the type of property, its purchase price, your down payment, and credit. You might pay approximately 1% to 3% more in interest than if you were planning to make the property your primary residence.
4. Have a cash reserve
In addition to proof of income, lenders expect borrowers who apply for investment property mortgages to have cash reserves. For instance, if you plan to make repairs and flip a property, they may require you to have cash on hand.
5. Watch out for loan prepayment penalties
In most states, prepayment penalties are legal within the first three years after you get a mortgage. They’re capped at 2% of your outstanding loan balance for years one and two. For year three, they’re capped at 1% of the balance.
For example, if Zach sold a house one year after getting a $200,000 mortgage to buy it, he could get charged up to $4,000 in prepayment penalties. That could take a massive bite out of his investment profit. To avoid this charge, ask your lender for loan options that don’t come with penalties.
6. Avoid paying points
Getting a lower interest rate on a mortgage could end up costing you more if it comes with points. They’re upfront fees that lenders frequently charge in exchange for lower interest rates. While paying points upfront can be an excellent way to reduce your monthly payment on a 30-year mortgage, it won’t help you save money for a loan you plan to pay off in a year.
When you plan on having an investment property mortgage for a short period, what really matters is the total cost of the loan, such as closing costs and monthly payments, you incur before selling the property. Paying as little as possible for an investment mortgage will help you pocket more profit on the deal.
Flipping houses as a side gig can be fun and profitable. Despite the economic troubles caused by the pandemic, the real estate market is strong in many markets.
To learn more about working successfully as your own boss, check out my new book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. There’s never been a better time to build a business and your financial future as a part- or full-time freelancer, independent contractor, or side-hustler in the on-demand economy.
Published by Debt.com, LLC