Mortgages: Residence vs Income Property

[DeletedUser394]

I've been entertaining the idea of purchasing my first property soon enough.

When applying for a mortgage, does a bank take into account whether you're using it for a personal residence or as an investment property?

In other words, would they be more lenient knowing a tenant would be contributing a large portion of the mortgage (assuming it's not vacant, and taking into account that it may be vacant from time to time).

Or does this question never come up at any point in the application process?

The problem is my personal income. I keep it artificially low (legally) to avoid taxes and what not, so that's why I'm wondering if they make a distinction between a rental and a residence. I'd be putting at least 20% down.

Just a thought I had, curious to hear some responses.

Thanks.

 

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[Visionquest]

Just a few thoughts. If this a rental property you will not be homestead. This will have tax implications. Also make sure the area where the property is allows for rentals. It is becoming a trend in the suburban neighborhoods where I live to sign association contracts saying that the property cannot be rented. It is good to be honest with the bank about what you are going to do with the property. You have to sign about 100 pages of documentation and they will ask you if this will be your personal residence. they will not be any more or less lenient on you based on the amount of money you put in. Mortgage brokers have specific housing lending laws they follow. these have become increasingly more stringent since the mortgage crisis. My advice is to try and get a relationship with a Banker. Someone who is on your team who is going to invest in you and hit it out of the park then you can go back later and get more the next time. Hope this helps

 

[Visionquest]

One other thing. If this rental property is purchased through your company the asset is depreciable agains income but only to the extent of the basis you have in it. So the more money you have in the better the tax implications.

 

[lleone]

The banks do differentiate between whether it's going to be your own or an investment property. Investment properties loans usually require more of a downpayment and a bit higher interest rate. They will look at your income, but the more you put down, usually the more agreeable they become. One option you have is to purchase a multi-family and live in one of the units. They will look at that loan closer to an owner occupied.

If you're looking at doing a rehab or fix and flip type property, you can usually get a hard money loan without too much trouble. The issue is that the interest rates will be higher, so it's not a long term financing solution.

I would not purchase through your company due to the tax limitations mentioned by visionquest, but also from a liability point of view. I'm not an attorney, but I would purchase each of your investment properties under separate LLCs (Limited Liability Corps) for liability reasons.

 

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[ericj]

Banks do consider an investment property a riskier loan than that of an owner occupied home loan. Higher down payments, lower DTI ratio's of purchaser, and strict credit worthiness in general are all considered with a great influence on the decision of an approval of a loan. Much more so since the bubble/mortgage bust a few years ago.
I have a friend who buys and owns many investment properties, but he buys them all with cash. He would find the crazy foreclosure deals for cheap, then repair the property and make it a rental. For example, he bought a house recently for 30k, spent 10k fixing it up, and now rents it for $700+ a month. It will take him 5 years to return his investment in rent (if all goes well, that is!), and he is expecting the market to return as well. So he hopes he could sell the property for double his investment soon.
It might be easier to buy cash (with investors/hard loans/etc) than deal with banks as they are much stricter now.