How much do you need for a down payment on an investment property?

When it comes to generating income, there's no lack of options. Some people invest in rare coins or precious stones. These types of things tend to increase in value as time goes by. Others invest in property, which can generate returns in several ways. Of course, any real estate investment comes with financial questions to be considered before you jump in. For most investors, the main question they ask is, how much do you need for a down payment on an investment property?

The answer to this question depends on several variables, including details about the property and the institution from which you plan to borrow.

What Is an Investment Property?

An investment property is any property you purchase to generate income, either through renting or by appreciation and resale. There are active and passive investments when it comes to real estate. Active investments are those in which you not only take on the loan but also take on other expenses. For example, in residential real estate, the landlord pays the mortgage and invests time and money in dealing with problems as they arise. Passive or hands-off investments require only the required startup capital. Generally, you become part of a group of investors and don't manage the property.

How Do You Get Approved for an Investment Property Loan?

There are lots of ways to get this type of loan. Effectively, it would help if you showed potential lenders that you have a history of good credit and sound money management skills. A credit score above 600 is required for securing a loan, and 660 is generally considered a safe score. In addition, your debt-to-income ratio should be 43% or lower.

What Is the Down Payment on an Investment Property?

As far as down payments go, you're generally looking at 15% or more of the loan amount. So, if your loan totaled $10,000, you'd pay $1,500 immediately. Down payments are determined by factors such as the loan program and property type, debt-to-income ratio, and credit score. For example, while Fannie Mae requires only a 3% down payment for a single-family home, they typically require 20% on an investment property.

Credit scores and down payments are balanced against risk by lenders. For example, a conventional loan on a one-unit investment property with a credit score of 700 could qualify you for a 15% down payment. However, a 25% down payment will probably be required for an investment property with two to four units. It may be possible to secure a lower rate, such as a 10% down payment, but it's rare. You'll have to meet the lender's criteria and assume more risk.

Investing your money is an important aspect of developing wealth. At Right Start Mortgage, we know how to identify the best loan options for you. Contact us today to get started on your home-buying process.