Real estate makes an excellent investment because you can leverage funds from other sources to make your purchase. However, you won’t find any mortgage lender who will fund your investment if you don’t put money down first.
Your down payment is a sign of good faith that you’ll make your payments and bring in a profit. Therefore, it’s typical for a lender to ask for 20 percent. Some commercial lenders may even require 25 percent.This number tends to frighten real estate investors who are concerned about coming up with 20 percent. The average home price in Houston is around $300,000. That means you’ll need $60,000 in cash to meet the 20 percent requirement, which is a significant sacrifice on your part.
But just because it’s common to pay a 20 percent down payment doesn’t mean it’s always the case. There may be some situations in which it isn’t required, although you may not want to take that route. Read on to learn more about the 20 percent “rule.”
20-25 Percent Is Preferred
Banks will automatically ask for 20-25 percent down. It’s the nature of conventional mortgages because it’s in their best interest. It doesn’t mean they’re hard and fast on that rule, but they will ask for it.
Even though it’s difficult to come up with this much cash, putting down 20-25 percent is best for you too. A larger down payment means a lower financial investment in the long term. You’ll have lower monthly payments, a lower interest rate, and you won’t have to pay private mortgage insurance (PMI).
If you put down less than 20 percent, you will be required to have a PMI policy, no matter who your lender is. It protects the bank from losing essential equity in your property should you default. It will range from $50 to $200 for residential properties, and its money you’ll never get back.
Yoana Leusin of Mashvisor ran some simple calculations to show just how much more an investor will spend if they put down 5 percent rather than 20 percent. If they have the same interest rate, the investor who pays 5 percent will have a higher monthly payment.
“That real estate investor will pay to the bank a huge amount of money, which could have been avoided and used in order to make money in real estate. If you have the possibility to do so, put a bigger down payment,” she advises.
But It’s Not Required
In reality, the 20 percent down payment requirement is a myth. It’s the standard request for conventional loans, but more and more lenders are accepting less in a good economy.
“As the housing market improves, mortgage lenders have made a multitude of low- and no-down payment mortgage programs available to U.S. buyers,” says Dan Green, contributor for The Mortgage Reports. “The programs aren’t just for first-time buyers, either. Repeat home buyers are getting access to the same zero-down products as everyone else.”
He mentions a variety of loans including Freddie Mac, Fannie Mae, FHA, VA, and USDA loans. Of course, many of these programs are not recommended for an investment property. Mortgage lenders typically see a rental property as a commercial investment, and your application may not be approved.
You may be able to convince a lender to give you a conventional loan with a lower percent down. If you can present a great business plan with a clear revenue stream, they may be open to taking 10-15 percent instead of the full 20.
High Credit Helps
If your lender is going to agree to a smaller down payment, they need to see that you have a history of paying your debts. You’ll get further with your application if your credit looks good.It also qualifies you for better interest rates so you can make more money on your income property. When the bank thinks you’re a good bet, the odds of you getting a better deal increase.
“Below (a score of) 740, it can start to cost you additional money for the same interest rate,” says Todd Huettner, president and founder of a financial institution in Denver. “Below 740, you will have to pay a fee to have the interest rate stay the same. That can range from one-quarter of a point to 2 points to keep the same rate.”
Avoid Large Banks
Large banks tend to be tighter with their money than credit unions or smaller mortgage lenders. “They’re going to have a little more flexibility,” Huettner says, referring to neighborhood banks who want to put more money into the local economy.
He recommends doing your due diligence to make sure that the bank can sustain a large loan. A bank that’s been around for some time shouldn’t have a problem but be wary about a bank that just opened.
Additionally, research the different kinds of mortgages that are available to you and choose a bank that offers the mortgage you need.
Overall, the most efficient investment you can make will be one with a 20 percent down payment. You’ll pay less in the long run and begin a strong relationship with your mortgage lender. It’s the best scenario for investors.
But that doesn’t mean you have to have the full 20 percent. Sometimes, you just can’t come up with that much cash. There are ways to invest with as little as a thousand dollars, and you might find this is the best option for getting started. Use your best judgment here to maximize your earning potential.
Contact Green Residential Today!
Navigating the financial side of a good real estate investment takes a lot of work. While we can’t convince your mortgage lender to take a down payment of less than 20 percent, we can make other parts of your real estate investment much more bearable.
Our team of realtors are among the most experienced and knowledgeable in the Houston metro area. We understand the market and will help you get the best deals. We also offer a flat rate fee that can reduce your financial obligation during closing.
If you’re in the rental property market, we’ll be there to manage your properties for you. We’ll screen tenants, write lease agreements, collect rent, handle evictions, maintain the property, and so much more. For more information about how we can make your life easier, contact us today!