One of the biggest obstacles to investors who want to buy rental properties is coming up with the down payment to buy rentals. If you want to buy rentals that are below market value, many times they need repairs and an investor will need even more cash. FHA offers a 203k rehab loan, but to you must occupy a house for at least one year when you get a FHA loan. The Fannie Mae Homestyle Renovation Loan available for investors, even though most lenders won’t offer the loan. The Fannie Mae investor rehab loan allows an investor to finance 80 percent of the purchase price and the repair cost.
How much money do investors have to put down on rental properties?
When you are first buying rental properties you should be able to find a lender that will allow you to put 20 percent down. Once you have a few rental properties you will start to run into lenders that will require 25 percent down. If you can find a portfolio lender who lends their own money and does not sell loans to other banks, you should be able to continue to put 20 percent down on your rentals. I have 13 rental properties and I am buying my 14th next a week and my portfolio lender still allows me to put 20 percent down.
My portfolio lender does not finance any of my repairs, but I have heard of some that will. Portfolio lenders will all have different terms and guidelines on their loan programs and many will offer different programs to different investors based on their qualifications. If you can’t find a great portfolio lender who will finance repairs there is another option. A Fannie Mae investor rehab loan can greatly reduce the amount of money need to buy an investment property.
How does a Fannie Mae rehab loan work?
Fannie Mae offers a rehab loan for investors, but most banks I have talked to have no idea how it works or will not offer it. There are a couple of lenders I know of that offer the program and it can save investors a ton of cash. Here are the basics:
- Finance up to 80 percent of the purchase price and repair amount
- The repair amount cannot be more than 50% of the after repaired value
- The closing costs are usually $1,200 to $2,000 more than a regular investor loan
- Interest rates are higher than a regular investor loan (1 to 3 percent)
- A licensed contractor must complete the repairs after closing
- An inspector will review the work as it progresses and approve draws to pay the contractor
- Repairs must be completed within six months of purchase date
How much cash can you save by using a renovation loan?
Here is an example of the costs and how much money you can save with a Fannie Mae rehab loan.
Fannie Mae rehab Regular conventional loan
Purchase price: $100,000 $100,000
Repair costs: $30,000 $30,000
Down payment: $26,000 $20,000
Loan amount: $104,000 $80,000
Loan costs: $4,000 $2,200
Inspection fees: $500 0
Total cash: $30,500 $52,200
As you can see the total cash out-of-pocket is much less with the rehab loan, because you can finance part of the repairs. The interest rate will be higher on the rehab loan as will the loan amount making your payment much higher. If you are buying a rental property make sure you can still cash flow with the higher payment.
What are the restrictions on a Fannie Mae rehab loan?
When you get a loan based on Fannie Mae guidelines there are many restrictions, especially for investors. I go into the restrictions in much more detail on my article how to finance more than four properties. Most banks will use Fannie Mae guidelines when they give loans to investors. Fannie Mae will allow investors to have more than four mortgages, but you have to put 25 percent down after you have four mortgages in your name. With the rehab loan from Fannie Mae you cannot have more than four loans in your name.
The loan can be a great way for investors looking to buy their first house or first couple of rental properties to pay less out-of-pocket cash. However, it does not work for investors who have four mortgages in their name.
How can you find a lender that offers these loans?
Not every lender will know what this program is or offer it. The best way to find a lender that does is search Google for Fannie Mae Homestyle Renovation Loan and your state. You should see a couple of results pop up for lenders that offer the program in your state.
Most investors struggle with finding enough money to buy rental properties. The Homestyle Renovation Loan is one option that can reduce the amount of cash you need. It has many restrictions and will be more expensive than a conventional loan so make sure it is worth the extra costs. For more ideas on how to buy investment properties with less money down, check out this article.