Q: A triple-decker on our street is for sale. My husband and I would like to try and buy it as an investment. My husband is handy and can do a lot of repairs and maintenance himself, it is close to our house so we can keep an eye on it and the tenants. Is it going to be hard getting a mortgage to buy it?
A: With interest rates still low, buying rental housing can be a good investment, especially if you can do a lot of the upkeep and manage it yourself. Lending conditions, in general however, have tightened so getting a mortgage to buy the property may be difficult depending on your situation.
To improve your chances of getting a mortgage, you will need to put down a sizeable down payment. Mortgage insurance does not cover rental property, which means you are going to have to put down at least 20 percent to obtain traditional financing. If you can put down more, all the better. The more you can put down, the better interest rate and terms you will receive. If you do not have enough in the bank for a down payment, taking out a home equity loan on your personal property might be an option.
Check your credit score. Do this before you go to a bank. Above 740, you should be golden and have the opportunity to borrow on the best terms and interest rate. Below 740 is going to be iffy, and you will likely have to pay a higher interest rate or pay points to buy the rate down. Have at least six months worth of reserves in the bank to cover expenses and lost rent during vacancies. Borrow locally. Stay away from large national lending institutions, especially if any of the above criteria – down payment, credit score and reserves – are lower than recommended. Local banks know the market and have more interest in investing locally than a big regional or national bank. They also have more flexibility in their lending practices. Going to a mortgage broker is also a good idea since they have access to a wide array of lenders and lending options. Just be sure you go to a reputable broker. Ask to see their credentials, and get some references and recommendations.
Another possibility might be to ask for owner financing. You are going to have to sell the owner on the idea so come up with a strategy – down payment, interest rate, terms – and an exit strategy.
Linda Goodspeed is a longtime real estate writer and author of “In and Out of Darkness.” Email her at email@example.com.
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