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Minimum Credit Scores

Credit Qualification Requirements for Buying Residential Investment Properties

January 29, 2016 By Justin McHood

Purchasing an investment home can be a great way to make money for many people. The key in making money, however, is securing affordable financing that does not make it hard to either rent the property out or to sell it in the near future after fixing it up. Because this home is not your primary residence, lenders are a little tougher with the restrictions they provide. They look at investment properties as a much higher risk for themselves as you are more likely to default on an investment home mortgage than you would on the mortgage for your primary residence.

Fannie Mae Mortgage Credit Guidelines for Investment Homes

Many people prefer to use conventional financing for their investment home. It makes sense since the interest rates are typically low and the fees are greatly regulated, making it easy to afford the loan. Unfortunately, it is more difficult to qualify for an investment property conventional mortgage. The minimum credit scores that are put in place are higher than you would find for subprime mortgages and you also have to have a certain amount of reserves in place in order to make up for the riskiness of providing financing for a home that you will not live in or use.

If you plan on putting down more than 25% of the purchase price of the investment property, you have a little more leeway on the minimum credit score. The way that Fannie Mae determines the minimum credit score for investment properties is to evaluate not only the amount of the down payment you are using, but also the amount of reserves you have on hand. The greater amount of reserves you have on hand, the less risky your loan profile becomes. Fannie Mae’s guidelines are as follows for LTV’s less than 75%:

  • Debt ratio less than or equal to 36% and at least 6 months of reserves – Minimum score 640
  • Debt ratio between 36% and 45% and at least 6 months of reserves – Minimum score 660
  • Debt ratio between 36% and 45% and at least 12 months of reserves – Minimum score 640

Fannie Mae’s guidelines for LTV’s greater than 75%:

  • Debt ratio less than or equal to 36% and at least 6 months of reserves – Minimum score 680
  • Debt ratio between 36% and 45% and at least 6 months of reserves – Minimum score 700
  • Debt ratio between 36% and 45% and at least 12 months of reserves – Minimum score 680

These guidelines are based on what Fannie Mae allows, but every lender can have their own requirements as they are the ones providing the funds. Some banks are willing to take the risks that Fannie Mae allows, while others will require higher credit scores and/or more reserves in order to make up for the risk that investment properties bring.

Subprime Mortgages for Investment Properties

If you are unable to qualify for a conventional loan for an investment property, another option you have is a subprime loan. Even those these loans are known to have higher fees and/or interest rates, they provide you with the ability to purchase the investment home and make money, especially if you are going to sell the home for a profit down the road. If you plan on keeping the home and renting it out, careful consideration will have to be taken regarding the amount of rent you can charge on the home in order to make a profit. If you are taking the loan for the short term, however, and plan on selling it, you can take the higher fees and interest because you will not have to pay the interest charges for very long.

Subprime loans are less focused on credit score and are more focused on the entire financial picture you provide. Basically, if your score is below the above thresholds, you will have to turn to subprime lending. Some subprime lenders will accept scores as low as 540 (or lower) depending on the other circumstances you provide. If your debt ratio is low, you are a lower risk than someone with a low credit score and a high debt ratio, which is a sign of financial irresponsibility. Every lender has their own threshold on what they will accept though. If you find a lender that is willing to accept a low credit score, expect to need excessive reserves on hand or to put down a large down payment to make up for the riskiness of the loan.

Another factor subprime lenders will look into is your credit history, namely the housing history. If your past is blemished with many late payments on your housing, whether mortgage or rent, obtaining an investment property will not be very likely. If your housing history is clean, however, but your revolving credit has late payments, that can often be overlooked as long as it was not during the last 12 months or if there were only one or two late payments during that time.

FHA and VA loans are not an option for investment properties, unfortunately. Even though they provide lucrative finance terms and the ability to make low down payments, FHA and VA strictly providing funding for primary residences as it is their duty to provide adequate housing for those that would otherwise be unable to afford it.

If you are considering the purchase of an investment property, it is important to weigh all of your options. The government oversees the regulation of subprime loans with the Ability to Repay regulations, keeping interest rates and fees in line on subprime loans. If you are able to qualify for conventional lending, that will typically be your best option unless you have to pay private mortgage insurance for having a loan-to-value ratio over 80%. Because conventional loans are capped at an 85% LTV for investment properties, the amount of the private mortgage insurance will be lower and the amount of time it must be paid will be minimal, making it an option that you should weigh when determining which loan will allow you to be the most profitable in your purchase of an investment property.

Filed Under: Credit Scores

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