Buying an investment property requirements?

Question

Hi all,

I’m working on buying my 3rd property but first as an investment property instead of an owner occupied. I wanted to know in addition to my down payment/closing costs will I be required to show three months of mortgage reserves for both of my properties? The one is rented and cash flowing  (I have tax statements showing the income) the other I live in and only pay half the mortgage. So wondering if that makes a difference? Thanks!

Andrew Postell · Answer

@Matt Tallent if you are using Fannie/Freddie types of loans then I have included their guidelines below...HOWEVER, a lender can absolutely put rules OVER the Fannie/Freddie rules that make their own internal lending more "conservative".  We call these extra rules in the industry "overlays".  So if a lender says we require 12 months per property...that is allowed by Fannie/Freddie.  So try to ensure that you are working with a flexible lender with these loan types.  Here's the guidelines as they sit today (these do tend to change from time to time):

How Agencies Calculate Reserves

Calculation of Reserves for Multiple Financed Properties with Fannie Mae – Fannie Mae usually has a lower interest rate but higher reserves

If the borrower owns other financed properties additional reserves must be calculated and documented for financed properties other than the subject property and the borrower’s principal residence. The other financed properties reserves amount must be determined by applying a specific percentage to the aggregate of the outstanding unpaid principal balance (UPB) for mortgages and HELOCs on these other financed properties. The percentages are based on the number of financed properties:

• 2% of the aggregate UPB if the borrower has one to four financed properties,

• 4% of the aggregate UPB if the borrower has five to six financed properties, or

• 6% of the aggregate UPB if the borrower has seven to ten financed properties (DU only).

The aggregate UPB calculation does not include the mortgages and HELOCs that are on

• the subject property,

• the borrower’s principal residence

Required reserves for second home or Investment Property Mortgages with Freddie Mac – Freddie will usually require lower reserves but have a slightly higher rate

When each Borrower individually, and all Borrowers collectively, are obligated on one to six financed properties, including the subject property and the Borrower’s Primary Residence:

• Two months of the monthly payment amount on each additional second home and/or 1- to 4-unit Investment Property that is financed and on which the Borrower is obligated

When each Borrower individually, and all Borrowers collectively, are obligated on seven to 10 financed properties, including the subject property and the Borrower’s Primary Residence

• Eight months of the monthly payment amount on each additional second home and/or 1- to 4-unit Investment Property that is financed and on which the Borrower is obligated

Matt Tallent · Answer

Thanks and I’m doing standard 30year 15% down.

Anthony Dooley · Answer

@Matt Tallent Your lender will tell you what they need. They will look at the standard things like credit score, debt to income ratio, etc. I typically provide the last 2 years of tax returns and a personal financial statement because I don't have W2 income. It's no more complicated than you have done before, probably less complicated.

Nathan Killebrew · Answer

What type of financing are you looking to get?

(bank, hard, private, portfolio loan, etc...)

A lot of what you need depends on the financing route you take.