Conventional Loan for Rental Property- Money Down- 20 vs 25% Down

12 Replies

I've spoke to several lenders at this point and it seems that most will give you 30 years terms but every lender I've spoken with (3 different ones) are all requiring 25% down vs 20% down. Has anyone else seen this? Should I keep looking or is this just based on the economic climate we're in right now?

Hi @Spencer Herrick ,

For investments/ commercial loans, it is typical to see what you are seeing. If you wish to lessen the down payment, then you will want to make this a primary home loan [which may or may not work for you]. A hard money lender is also a great option, though your interest rate may be higher as the risk it higher. 

The reason why banks require a large downpayment is if the economy crashes they have the X% downpayment as a cushion. For more risky investments, they often require a larger downpayment. Lenders also take into consideration people's finances and experience in the field. Legal disclaimer: please seek professional advice from a licensed lender and attorney.

Best regards,

Joe Marini

Spencer, 

I have found the same regarding rental property loans and hard money loans. Every lender is asking 20% down unless it's a primary residence. Consider the 3.5% down FHA financing option if you can use it as your primary residence. Just remember that 3.5% primary residence FHA loans have price limits for Single family, duplex, triplex, and fourplex properties in which 75% of the income from the rental units need to cover 100% of the mortgage.

Hope this helps,

Tim

Hi Spencer, how many units are you looking to buy? An investment non owner occupied SFH home is 15% down and a multi is 25% down. This is standard for all lenders. What kind of property/rental are you looking to buy?

@Spencer Herrick  

I hear the same quite often, that lenders are requiring 20 or 25% for conventional investment purchases, despite the fact that the minimum is 15%.

Some of the reason relates to how ridiculous the points will be if the lender locks your rate at 85% LTV. Meaning, compliance rules sometimes prevent us from offering as high of a rate as we need to, which creates a scenario where the borrower has to take the highest rate we can offer and then pay points. At least in my world, 15% LTV on an investment purchase means there will be a hefty points cost. And because I know that's likely not going to make sense for the borrower (i.e., pay a few grand so that you don't have to put a little more than a few grand down), I tend to tell them they need to bring 20%, and that the rates improve quite a bit at 25%.

Additionally, I suspect that the 20 or 25% requirement is an “overlay” for some lenders, meaning a situation where they have a higher standard than the investor. Overlays are often pushed down from the lender’s servicer. Meaning, they sell their loans, and Cenlar or whoever they sell to says they won’t buy the servicing if the loan isn’t a little safer (for example: the servicer requires 2 years of returns for self-employed income, despite the fact that the underwriting system says only 1 year is needed). For this reason and others, I would shop for a lender that does not sell off their servicing. They’re uncommon, especially with investment purchases.

For 1 unit conventional investment property, you can get 15% down, but you will take a hit on interest rate, and you will need mortgage insurance (unless you pay upfront). Should not have to pay points. If a lender tells you that he can't do 15%, it an overlay.