Investment Loan - Purchase or Refinance

There are two distinctly different types of financing available for investment properties. For residential income properties from 1 to 4 units, we can use the same loan programs as are used to finance owner occupied homes. This even includes VA and FHA as long as one of the units is occupied by the borrower.

The buyer is the qualifier on the purchase or refinance of 1 to 4 residential units. For qualifying purposes, the gross scheduled income of the property is reduced by 25% and this amount is used to offset the principal, interest, taxes and insurance. After this calculation, if there if a plus, it is added to the borrowers income. If there is a minus, it is treated like it is another monthly payment obligation for the borrower. If 2 to 4 units are purchased using FHA financing, then, as previously stated, the owner must occupy and they get credit for 90% of the gross scheduled income from the remaining units.

Financing for non-owner occupied properties is priced differently from owner occupied. As a rule of thumb, you can assume that the interest rate you would receive for an owner occupied property will cost 1.5 to 2 points more for a non-owner occupied property. You can avoid paying more points by accepting a little higher interest rate. Each ¼ of a percent higher interest rate should save you 1 point in cost.

The fundamental difference in the financing for 5 or more residential units and commercial properties is that the property must qualify on its own. The lenders reasoning is, if they have to take the property back, they want to make sure it will support itself. The borrower must also qualify with regard to assets, credit, etc., but the emphasis is on the property. The loan programs described above are only for 1 to 4 residential units. Although there are many sources for financing commercial and multi-unit residential properties, the financing is typically more expensive and not always as readily available. For this reason, these kinds of properties can be difficult to sell or refinance in tight money times. It may be wiser to buy two 4 unit buildings than to buy one 8 unit. Documentation for this kind of financing is much more extensive than for the smaller units.

When we receive inquiries about financing these larger apartments or commercial buildings, we check our sources plus we call the local banks. If one or more of the local banks has a better interest rate and/or better terms than we can offer, we send our clients directly to the appropriate source.