If you’re thinking about adding a passive income stream to your household income by purchasing investment or rental property, one of the first questions you might have is what down payment you’ll be required to put down. Many federally-backed home loan programs like FHA and VA loans require very little to no down payment, but can you use those loan programs for investment property; or must you have 20% to put down in order to buy a home you’ll rent out and use to generate income?
Can you buy investment or rental property with an FHA or VA loan?
Generally, no. Federally backed and insured loan programs like FHA and VA loans are not available for the purchase of investment or rental properties which won’t be your primary residence. There are a few exceptions to this general rule, including refinancing an existing FHA loan on a home which you have used as your primary residence, but now intend to move out of and use as a rental property. If you used an FHA loan to purchase the property initially, even if you move out and begin to rent out the property, you will likely still be able to refinance into another FHA or VA loan to take advantage of historic low interest rates. The good news about this exception is the FHA streamline refinances are usually some of the quickest and most straightforward refinance programs available.
Another exception to the FHA and VA “no investment property” rule is buy buying a duplex or multi-unit property where you will live in one (or more) of the units. As long as the property is owner-occupied, you will likely be able to qualify for an FHA loan for your income property. VA loans may be used to purchase properties with up to 4 units, meaning that you could take advantage of all your VA mortgage loan has to offer (including the NO down payment feature!), live in one unit and rent out the others to create additional income or to pay your mortgage each month.
What other down payment options are there?
If you already own a home with established equity, you may be able to use your home’s existing equity as a down payment on a second, investment property. You can leverage your home’s equity as a down payment through a cash-out refi of your existing mortgage loan, or through a home equity loan or line of credit.
Many lenders will extend loans for investment properties with less than a 20% down payment but will require the addition of private mortgage insurance or PMI on the loan. PMI for investment mortgages is generally more costly each month than on an owner-occupied home, so if you are putting down less than 20% and taking on PMI as part of your purchase you’ll want to remember to factor PMI into your cash flow projections.