If you are in the market for a new home, but currently own an investment property, you might wonder how it will affect your ability to qualify for a mortgage. Lenders will not hold owning another property against you. However, if you are still paying a mortgage loan on the investment property, the lender will take extra precautions to ensure you can afford the new mortgage. That means a lender may require a higher down payment, cash reserves and better credit than non-investment homeowners.
To qualify for a new mortgage when you already own an investment property, you need to be prepared to meet stricter requirements. This may include a high credit score and a larger down payment.
Classifying a Home
A residential property falls into one of four categories: owner-occupied homes, a second home, a vacation home and a non-owner occupied home. Investment properties and second homes are considered a risk for lenders and can carry a higher interest rate. When purchasing a home you plan to live in, you typically get a lowest interest rate. The down payment requirements on a primary home are also lower than on an investment home. If there is enough equity in your investment property, you might consider taking out a home equity line of credit to help with the down payment on your new mortgage.
Higher Credit Scores
To qualify for a mortgage with a conventional loan, the minimum credit score is typically 680 or higher. If you are using an FHA loan to purchase the home, you can gain approval with a score as low as 500, although 580 or higher is preferred. If your investment property does not have a mortgage, or you own it outright, it will not affect the credit requirements. However, if you are still paying a mortgage on the investment property, a higher credit score is required to buy a home. You will need a score of at least 720 to qualify.
More Income Needed
Along with meeting the credit criteria, you will need to prove you can make the new mortgage payment along with any other debt. If you have a mortgage payment on the investment property, it will increase your debt to income ratio. Your DTI ratio is the percentage of your gross monthly income that is applied toward debt. Lenders use the DTI ratio to assess a borrower's risk.
A high DTI will put you in the higher risk category. As of the time of publication, the maximum DTI for a conventional loan was 28/36. For an FHA loan, the maximum allowed DTI is 31/43. You can only include rental income from the investment property if you received rent for two years and reported the income on your past two tax returns. Some mortgage companies only allow 75 percent of the income you receive from a rental toward your income calculations.
Most lenders require borrowers to have a reserve fund with enough money to cover mortgage payments for several months if you plan to occupy the home. If you have a mortgage on your investment property, you will need enough funds to cover each mortgage payment along with taxes and insurance for three to four months, depending on the lender. You will also need a similar amount of funds for your new mortgage. When determining mortgage eligibility, the lender is mostly concerned with your liquid assets, such as funds in your bank accounts.
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