4 Financial Questions To Ask Yourself Before Buying An Investment Property
Nearly half of all investment property buyers in 2017 reported that the mortgage approval process was more difficult than anticipated. The challenges faced come largely from the fact that investors’ finances are scrutinized more intensely than first-time homebuyers’ finances. Lenders are generally more confident that homebuyers won’t risk losing their home by defaulting on their mortgage. But investors may not have the same emotional ties to their investment properties.
Most new investors rely on the leverage of a mortgage to purchase their investment properties, so these more stringent financial requirements pose a problem. To make your mortgage approval as smooth and straightforward as possible, ask yourself these four financial questions before buying your first investment property.
Do You Have Enough in Savings?
Buying an investment property requires a fair amount of money upfront. In addition to the down payment, you’ll need to cover the closing costs. You may also need to make repairs or renovations to prepare the property for the rental market. You’ll also be paying the mortgage costs until your first renters bring in some revenue.
Is Your Income Sufficient?
Lenders like the comfort of knowing that investors can cover their own debts and expenses plus the overhead of the investment property even when it’s not occupied by tenants. They analyze your debt-to-income ratio to see how your existing debt compares to your current income. So the higher your income, the better. But income doesn’t have to be a dealbreaker; you can still qualify for a mortgage with low income. There are creative options available to help buyers put together funding for an investment property, even on a low income.
Is Your Debt Under Control?
Lenders also look at debt-to-income ratios to make sure investors can reasonably afford to take on the additional debt of the investment property mortgage. If you have high interest rate debts (like credit cards and auto loans), focus on paying down those debts before investing in real estate. You may even want to consider consolidating your debts if they have become unmanageable.
Do You Have Good Credit?
Your credit score plays a large part in deciding whether you qualify for a loan. It also helps to determine the interest rate you pay on your mortgage. A low interest rate could easily save you thousands of dollars over the term of your loan. So check your credit report regularly, and dispute any errors on your report immediately.
If you answered “yes” to all four questions, you’re in a solid financial position to buy your first investment property! You’ll be able to afford the initial purchase and ongoing expenses of ownership. You won’t be taking on more debt than you can handle. And you’ll be able to get a favorable interest rate with your good credit to maximize your investment property income.
Guest blog post by Chrissy Jones.