Multi-family investments: How to qualify for a loan
If you’re serious about a multi-family investment, you need to consider how to finance your future plans.
Qualifying for a loan with a multi-family investment property isn’t always the same as qualifying for a single-family property. There are some differences to be aware of.
The down payment
To begin with, the down payment will probably depend on how many units make up the property. Generally, a down payment is higher for a multi-family property.
If you’re able to get a conventional loan, you probably won’t be looking at putting 3% down.
That’s because, in terms of a multi-family investment property, the down payment cost is considerably higher.
You live at the property:
2-unit residence= 15% minimum down payment
3-4 unit residence= 20% minimum down payment
You don’t live at the property:
25% minimum down payment
The minimum down payment you’re required to pay may be much smaller, though, if you’re able to secure an FHA loan. One of the drawbacks, of course, is FHA mortgage insurance.
If you’re a veteran or active duty military, you may qualify for a VA loan. It could mean no down payment to worry about, but again, not everyone qualifies for this type of loan.
Your credit history plays a part in the mortgage you’re able to secure. When you’re trying to qualify for a loan, lenders want to see your credit score.
Different loans, and sometimes even different lenders require specific credit scores and debt ratios.
That debt ratio is also called a DTI. It’s the amount of monthly debt you have compared to your gross monthly income.
A lower debt-to-income ratio gives you a better chance of qualifying for a loan. The exact amount depends on which type of loan you’re trying to get.
For some, the max is 50%, but it does vary.
You may be able to qualify for a loan based on the rent payments you expect to collect from your investment property. You’ll need a lease agreement in place to make this work.
The lease agreement needs to state how much you’ll get paid. It also needs to show how long you’ll be collecting rent from a specific tenant.
Keep in mind, your anticipated rent is capped because you can’t use the total rental income you’re expecting to collect.
Instead, you have to account for the vacancy factor in case a tenant gives notice, which is about 25% less.
Some loans require you to have reserves in place in case something significantly impacts your income in the future.
The amount varies, but could mean you need to have one, three or even six months of mortgage payments in reserves.
In order to qualify for a loan, it’s important to understand your finances and exactly how much you’re willing and able to handle in terms of a multi-family investment.