How does mortgage for income property differ?

Question

I was wondering if there were significant differences in obtaining a mortagage for income property (apartment) versus a personal dwelling.

I believe interest rates for income property mortgages are higher, and it makes a difference in the rules if the property is being foreclosed on. Are their other important differences?

Bryan Hancock · Answer

Mark...you need to get away from using gross multipliers and start to analyze deals properly.  Look through old forum posts on people analyzing apartment complex deals.  There are tons of tools on BP and there are even some financial models you can use in the new file share place.

Anything over 5 units becomes CRE money and the GSEs stop buying it.  Thus the rate will be higher.  The upside is that the larger buildings offer better yield as compared with SFRs.  CRE debt will have all sorts of things like lockouts, prepayment penalties, floating rates past some date (in many cases), etc. Getting funding for loans smaller than $500k will also be a challenge and you should likely expect to pay more for CRE financing for smaller buildings.  The terms will likely be less attractive too...like shorter amortization periods.

So yeah...there are many differences.  Do some searches on Darryl Dahlen's posts and study them to learn more about the differences.

Scott Miller · Answer

It's difficult to give you an accurate inventory of the differences between residential and investor financing because the topic is a moving target these days.

Some of these constants will remain and or amplify in their importance:

a.  You will need a higher score to get a higher LTV allowance with a investment financing then you would for residential.  
b.  You will secure a lower LTV allowance on your investment property then you would on your primary residence.  
c.  You will need to provide more documentation to get the same LTV you could with "lighter" doc requirements on your residence.  
d.  You will be expected to have more cash reserves for investment property financing then you would for residential financing.  
e.  You can expect to pay a higher interest rate on an investment property then you would a primary residence.  
f.  You will receive a higher allowance for gift funds, seller concessions, etc. on your primary residence vs. an investment property.

Those are the key differences; how and what they are change almost 2-3 days as of this writing.

Regards,

Scott Miller

Mark Hu · Answer

We were looking at a 8 unit complex, and I learned that the interest on these is at least 7%, versus 5% or less for 7 units or less residential income.
So I am curious, does the GM of sales of large (8+units) apartments reflect the higher interest rate? So far it seems to me 8+ unit apartments tend to have lower gross multiplier (selling price) to help out with the higher interest rates.