Real estate investors are hit the hardest by “multiple finance property” guidelines, which the majority of lenders enforce. When an individual owns four or more indebted residential real estate properties beyond the primary home — that’s what’s known as a multiple finance property situation.
If you have fewer than four financed properties, then you won’t be considered as much of a lending risk as an individual who has more. But if you do (or plan to), it’s important to know what the process will entail.
When You Have Multiple Finance Properties
As with any mortgage loan these days, the lender is going to be most eager to review your personal income tax returns for the past 24 months, particularly the Schedule E section of each year’s returns.
The Schedule E identifies each rental property, as well as other key factors lenders look at when determining income for qualifying purposes. The section includes material facts such as gross rents received per property, carrying costs, upkeep expenses – and lenders will examine with a fine-tooth comb the net income after expenses.
*Mortgage Tip: The net income of each rental property will be used to help you qualify, so the higher the net, the better the outcome of closing that loan.
- Find a lender that can actually do a loan for a borrower with four or more finance properties. (Some lenders allow upwards of 10 financed houses.)
- Know this: Your loan will be pricey. Lenders charge a risk-based premium for investment property passed onto the consumer via a higher rate and/or discount points. This is an unavoidable requirement by Fannie Mae and Freddie Mac.
- This will be a document-heavy loan process, be prepared to provide lease agreements for each and every occupied mortgaged property.
- Your credit score will need to be at least 700, including no foreclosures in the past seven years. (And you can monitor your credit scores and an overview of your credit reports for free using Credit.com’s Credit Report Card.)
- More emphasis will be placed on your debt ratio in the lending decision.
- You’ll need 20% equity or more in the subject property when purchasing. When refinancing, property can be 80% indebted unless eligible for a HARP 2 refinance.
Added Costs for Multiple Properties
When you have four or more houses (single families, condos, PUDs and one to four multi-units all apply here) each carrying mortgage debt, any subsequent new home loans will be higher-risk. In a default situation, the investor is more likely to walk away from an investment property than they are on a primary residence home. The risk increases per property because of added possible future credit risks.
The best way to reduce the costs associated with several investment properties is to ask a lender if there is an additional pricing premium specifically for multiple finance properties, beyond the investment property cost. Some lenders do charge an extra premium specifically for this reason, while others do not. Each lender will charge a premium for the fact that property is non-owner occupied. The key is to work with a mortgage lender who has expertise and specific experience in qualifying real estate investors who own multiple mortgaged properties.
Finally, when you’re looking for a lender to handle this kind of mortgage, keep this in mind: Middle players, like direct lenders, typically don’t charge extra for more homes, whereas smaller lenders have to, and bigger banks can get away with doing so.