Think Twice Before Buying An Investment Property

An investment property can be a great opportunity to earn rental income, especially since property values have been rising steadily since 2007 and are expected to continue to be a solid investment. However, if you’re thinking of diving in to the rental game, consider the following first:

You’ll Need a 20 Percent Down Payment

Unlike a primary residence purchase, mortgage insurance doesn’t cover an investment property. This means you’ll be required to put at least 20 percent down to secure traditional financing. Many lenders will offer their very best interest rates to buyers who come up with a full 25 percent down.

Lenders Will Require Excellent Credit

Mortgage professionals recommend a strong credit score of at least 740 before you consider taking on an investment property. Otherwise, you’re likely to pay points or get stuck with a higher interest rate. Of course, either option means more expense and an increased likelihood of getting underwater on the property in the future, especially if the home depreciates in value.

Your Savings Account Should Be Six Months Strong

While your credit score plays an integral role in securing a loan for an investment property, lenders also require proof that you can financially swing six months with a vacant rental, if necessary. That means, in addition to a 20 percent down payment, you’ll have to prove you have the requisite cash reserves to pay your mortgage for six months even with no rental income.

Purchasing an investment property is an incredible financial commitment, and it comes with more financial expectations than a traditional mortgage. Talk with a lending professional before purchasing your first rental, and consider all the requirements before diving in.

Image via Flickr/johnbourbeau