How does the mortgage process differ when buying a revenue property vs an owner occupied purchase?
As the main borrower will not be residing in the property, getting a mortgage on an investment property is deemed higher risk in a lenders eye. They will be scrutinizing the mortgage application more closely in order to ensure the main borrower can support the investment property in the event the renter defaults on payment. The aspects of the application that the lenders will be looking for additional strength in are:
– Net worth
(your assets minus your liabilities gives you a positive or negative net worth)
o The lenders like to see a positive net worth with access to some liquid assets
– Credit Score
o The lenders like to see low credit utilization and good credit habits. There are higher credit score requirements for a investment property purchase.
– Additional supporting documentation may be requested
o The lender may request additional documentation to confirm income and access to liquid assets.
– Purchasing in a company name
o If you are purchasing an investment property in a company name, the lender may request documents regarding the company.
These are not hard and fast rules, but we want to ensure you are prepared for what to expect from the mortgage process when it comes to purchasing an investment property.
What are the possible sources for down-payment for an investment property purchase?
-Own resources- saved up in a bank account, RRSP’s, investments, sale of existing property etc.
-Borrowed from an unsecured source- from an unsecured line of credit or personal demand loan
-Borrowed from a secured source- Home Equity Line of Credit or proceeds of a refinance etc.
-Vendor-Take-Back- the seller carries a 2nd mortgage for you until you;
a. Pay it off
b. Can refinance your first mortgage to eliminate the 2nd mortgage carried by the vendor
-Gifted from an immediate family member
As of April 19th,2011, a 20% minimum down-payment is required to purchase an investment property. There are some exceptions to this rule, but they are associated with higher interest rates and maybe even an upfront fee.
How does the lender the lender verify rental income?
Some lenders will allow market rents if a lease agreement is not available. Some lenders make a lease agreement mandatory if rental income is being used for qualifying. The requirements differ among lenders. Some lenders even ask for your Tax Returns to confirm you have been declaring and paying taxes on your rental income. This is usually the case for borrowers who own multiple rentals already.
Are the income documentation requirements different for an investment property purchase?
If you are self-employed, the lender may request additional documentation pertaining to your business i.e. business financial statements. Otherwise, income requirements are the same as owner-occupied.
Are interest rates higher for rental properties?
Some lenders add a rate premium if the property is a rental, some do not.
As always, if you have any questions or would like mortgage information, please do not hesitate to contact us at 866-932-8412 or Info@MortgageGirl.ca