Applying For a Mortgage to Rent or Flip a Home

Financing Investment Properties Getting a mortgage to buy a home you intend to live in is one thing. However, if you want to buy a home to rent or sell quickly afterward, you may have additional financial and mortgage requirements to meet.

Whether you want to buy an investment property to maintain for years, or a house to flip it as quickly as possible, you must be financially prepared to apply for funding and shoulder the responsibilities of those properties.

If you have questions, ask your lender or financial advisor what actions make sense for your specific situation.

Down Payments

Typically, lending money to a homebuyer to purchase an investment property is a greater risk than it is to loan money for a primary residence in the eyes of most lenders. With investment properties, the lender realizes that the buyer may not have the same emotional attachement to an investment property than their own home. As a result, many buyers of such properties will often be required to make a down payment of at least 20 percent.

Mortgages with a loan-to-value percentage of greater than 80 percent usually require private mortgage insurance, which does not typically apply to investment properties. If you cannot make the 20 percent down payment, you may have to plan to get a second mortgage.

Qualifying for a Mortgage Loan

The number of banks queuing up to give you money depends somewhat on what you plan to do with the property once you have purchased it.

Some experts recommend that you consider local lenders who have a better understanding of the neighborhood where you plan to buy and may see more benefit in lending to you. Conversely, you can also look online. In fact, buying and flipping homes is at a six-year high, due to a competitive mortgage financing environment with more online lending options.

With any lender, you must show the lender that you have the financial resources to handle the payment. Underwriting guidelines are typically stringent for investment properties, and you must be prepared to meet them with a good credit report, detailed proof of income and plenty of cash reserves in most cases. While lenders often only require you to have 3-6 months of mortgage payments in reserve, they may require that amount in reserve for each property you own.

Planning for Mortgage Payments

Buying investment properties can be as challenging as it can be rewarding. Make sure to do your homework before spending your hard-earned money!

Before you actually start the mortgage loan application process, formulate a plan for how to make the mortgage payments. After you purchase the investment property, there will likely be some period of vacancy while preparing the home for tenants, or to improve the property so it can be flipped.

Although it is tempting to prepare for a best-case scenario, it is often recommended to be make sure there is money enough in reserve to make payments for at least 6 to 9 months after purchase.

If you want to make most of the improvements yourself prior to selling or renting, perform enough research to know if you have the skill, money and time required to get the property ready. Improvements also cost money, possibly tens of thousands of dollars.

Be wary of borrowing against your primary residence to obtain funding for improvements. A loan secured by your home, no matter how small, is risky as this is your primary residence.

Selling a Flip

There are many factors that affect the amount of time it takes to sell a home. However, there are averages you can use for planning. Studies show that homes spend around 49 days on the market before they are sold, with an additional 41 days to close the sale. The two numbers put together total about 90 days, and that does not include any time spent making improvements. Your home may take more or less time to sell, depending on the local market, the time of year and the amount of work you put into making the home easier to sell. Some buyers plan to make 3 to 4 mortgage payments before transferring ownership to a buyer.

You may also face limitations on the type of buyers you can consider. For example, the Federal Housing Administration restricts buyers from receiving FHA loans on homes that were purchased less than 90 days prior to the date of sale. If you plan to court buyers who want to buy using an FHA loan, you may need to wait at least 90 days.

The FHA also places additional requirements on FHA buyers who want to buy flipped homes with an increase in value (e.g. 100 percent or more). Check with your mortgage lender for additional information regarding these important rules and restrictions on lending to recently flipped homes.

Tax Considerations

Maintaining an investment or rental property comes with certain tax benefits and liabilities. For the time that you own the property, you can typically deduct certain expenses from your tax liability.

These may include:

  • mortgage interest
  • discount points paid on the mortgage
  • property maintenance, cleaning and repairs
  • property improvements
  • management fees
  • travel to and from the property
  • insurance
  • utilities

In exchange, you must report the rent tenants pay to you as income, as well as any other of your expenses paid by the tenants. It is vital to keep a very careful record of all your expenses for a rental property. Consider hiring a professional accountant who specializes in taxes to help you maximize your tax deductions and minimize the likelihood of an audit. 

When you sell the property, you may be required to pay capital gains taxes. The capital gains tax rate depends on your total income for the year. However, capital gains taxes are broken up into short-term and long-term investments. Any property owned for less than a year prior to selling may be considered a short-term investment, and subject to a higher rate of taxation. However, you can often deduct from this number the amount you pay in improvements to the property, as well as most fees paid in the process of selling the property.

Breaking into the investment property market may be a highly rewarding experience. To do so, you may need to be an excellent applicant, with plenty of money in reserves and a great plan to get the property ready to rent or sell. With this information, you are better prepared to start your dream of establishing appealing homes for tenants or buyers.

#hw
Dylan Snyder is a seasoned real estate professional serving the Jupiter real estate market, Palm Beach real estate market, Palm Beach Gardens real estate market, North Palm Beach real estate market, and the surrouding Palm Beach County area. Along with being a top producer in Jupiter real estate, Dylan's professionalism and expertise in luxury and waterfront real estate sets him and his team of real estate experts apart from the competition. For more information on Jupiter and Palm Beach real estate for sale, contact Dylan at (561) 951-9301.

Leave a Comment