In the mortgage industry, an investment property is a home a borrower purchases but does not intend to occupy. Whether a single-family home, a duplex, a 4-flat, or a condo, a home is classified as an investment property when the owner does not reside there.
Because investment properties are just that—investments carry even more risks for lenders than second homes. When you own an investment property, you may have difficulty finding tenants or face unexpected repairs that drive up costs and cause you to miss your loan payments. Increasing the risks for interrupted income from the property also increases the potential cost for your lender.
Given these additional risks, an investment property requires an even bigger down payment to purchase, and it carries a higher interest rate when compared to a primary residence or second home:
A down payment of 15% is required for an investment property when it is a single-family home, including a condo or townhome. In other words, you can borrow up to 85% of the property value.
A down payment of 25% is required for 3- or 4-unit investment properties. You can borrow up to 75% of the property value.
You can’t use gifted funds or a gift of equity or grants as part of your down payment for an investment property. You must prove that you have the cash-to-close for your lender to approve the loan.
You can, however, use your expected rental income from an investment property to help you qualify for the mortgage - depending on the circumstances. One of the primary benefits of an investment property is that you can offset your mortgage costs based on the income you expect to bring in from renting the home.
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