Flipping Homes: Three Things To Remember About Your Home Loan
There are many individuals who are now going into home flipping as a hobby. Whether you're trying to renovate a home for a fast sale or trying to invest in your very first rental property, there are some things about the home loan process that you'll find different from when you bought your first residential home. Here are a few things that you're going to have to remember.
Your Insurance and Property Tax Requirements Will Be Different
You should expect to pay more in both insurance and property tax than you paid with your first home. This is because an investment property doesn't qualify for homestead exemptions (property tax) or homeowner's policies (insurance). Instead, you'll need to pay the full amount of property tax and for a real property insurance policy. Banks generally require that these be paid monthly in order for the mortgage to be considered on time, and may even collect these amounts from you in escrow in order to ensure it. Thus, your monthly costs may be much higher than you expect.
You Will Need a Larger Down Payment
When you bought your first home, it's possible that you put as little as 3.5% down -- with a first-time mortgage. If you're a veteran, you may have put as little as 0% down. This is a far cry from traditional 20% mortgages. But for an investment property the lowest you can usually get is 10%, and even that is through specific foreclosure-only mortgage loans. For the most part, you'll need to put 20% to 30% down -- plan accordingly.
Your Income Will Need to be Greater
Banks will need to see that you can support both your current property and the property that you are purchasing. But it isn't just that -- they also need to know that you'll be able to afford repairs and maintenance as needed, so you'll have to have a buffer. In general, you should always make sure that your income is up and that your expenses are as low as possible before you go for an investment loan. Different banks have different lending criteria, but nearly all of them are going to factor in the complete cost of maintaining this housing, without considering your potential for profit.
Of course, in an ideal world most home flipping would be done with cash only purchases. But the reality is that most people need home loans -- and home loans make it easy to parlay just a few dollars in cash into a significant investment. You just need to remember that the process of getting a home loan for an investment property is substantially different than getting one for an occupied property.