What Borrowers Must Know About Financing Multiple Investment Properties
Are you financing multiple investment properties? Make sure you know how many you can finance and how to organize the properties so you get the financing you need for a strong financial future.
Financing Multiple Properties with Support from Freddie Mac
Freddie Mac Allows for Six Financed Properties
In the past, the rules set by Freddie Mac stated that investors could only borrow on a total of four investment properties. However, these rules have been adjusted, and as of March 2017, the maximum allowed properties is six, but only if the property in question is either a second home or an investment property. (There is, however, no maximum if the properties are considered primary residences.) This increase in the maximum allowable properties for funding was great news for property investors, as they could increase their portfolio without using other forms of financing, which can be more expensive.
Freddie Mac’s Qualification for Investment Properties
Even with the raise in limits from four to six investment properties, there remains a bit of confusion as far as what actually counts towards the six properties. Some lenders may consider any property where you hold the title towards the number. For example, if a property was financed by a spouse or a business, it may be counted towards the six allowable investment properties.
However, Freddie Mac has clarified this confusion by providing specific guidelines for what properties are and are not counted towards the limit of six.
To qualify, you must not be obligated on more than six financed properties, including the property for which you are seeking financing. There are, however, many examples of financed properties that do not need to be counted towards the total. Commercial real estate, for example, is one of the properties that will not be counted, and properties with five or more units are also not subject to the number. If you own undeveloped land, you can leave it off the count, and if you own a timeshare, it will not need to be included.
Manufactured homes are also able to be left off in most situations. However, if the property is titled as “real property” or the manufactured house is placed on land that is titled as real property, it will need to be included in your total.
If property is titled to your business, it can also be left off of the total, provided that you are not obligated in an individual capacity towards the property. If you are obligated, on a personal capacity, it may need to be included towards the total of six.
Property titled to a trust can also be excluded. However, you will again need to not be obligated personally towards the property in any fashion.
Financing Options for Property #7?
As you steadily gain investment properties, you may eventually reach the barrier where Freddie Mac will no longer support the loan. However, there are still options available so you can continue to purchase investment properties with funding that fits your specific needs.
The process, however, may be a bit more complicated after you reach Freddie Mac’s limit of six. Funding multiple investment properties is still possible, but you’ll need to provide more documentation and the requirements (such as credit scores and downpayments) may be more strict.
To qualify, lenders will probably need to see proof of six months worth of reserve that will provide a buffer against vacancies. You may need to provide a 25% downpayment for the property if it is a single-family home, and if the downpayment requirements could be 30% or higher if the property contains two to four properties.
Tips for Financing Multiple Investment Properties
Whether you are seeking your first investment property or want to finance your tenth, having a strategy and being prepared when you visit the lender will make the process more simple and less of a hassle, increasing your chances of fast approval.
Bring a Downpayment
As we alluded to earlier, you should be prepared to deliver a sizable downpayment for your investment properties. As far as lenders are concerned, investment properties create higher risk than primary houses, so they may require that you bring as much as 20% or even 30% in order to secure financing.
While it can be challenging to save this larger amount if you want to purchase an expensive investment property, it will save you from paying interest (which can be higher than normal) on a significant portion of the property.
Enhance Your Credit Score
One of the first things you should try to do when funding multiple investment properties is to make sure you are a strong, capable borrower, which usually means having a good credit score. Depending on the situation, you may need a credit score as high as 740 to get the loan you need, especially if you have a large number of investment properties. If you have a lower credit score, you many have to pay more in interest, which can significantly reduce the financial returns from your investment.
Making timely payments and managing your debt-to-income ratio is one of the best ways to increase and maintain your credit score. By keeping a consistent history of payments and not stretching your overall debt load, you increase your chances of being approved for funding on multiple investment properties.
Consider HomePath for Your Investment Property
HomePath, which was created by Fannie Mae to connect homebuyers with foreclosed homes, is also an option for investors. HomePath takes possession of foreclosed property and makes them available to homebuyers. However, if the organization cannot find someone to purchase the home as a primary residence, they will make it available to investors. Purchasing a foreclosure has certain risks, but it may be an option to help you get an affordable property. Keep an eye on the HomePath site for properties available in your area and you may be able to add to your investment-property portfolio without spending a significant amount of money.
Providing Reliable Funding for an Investment-Property Purchase
If you are interested in purchasing an investment property, let the experienced team at San Diego Purchase Loans be your guide. We’ll help you understand the details of each mortgage option so you can make a fully-informed decision.