Considering the purchase of a residential investment property?

When you’re planning to buy an investment property, you need sound financing information and flexible loan options. We’re here to help.

What are the benefits of buying an investment property?

Owning investment property may provide financial and personal benefits, including:

Rental opportunity. If you purchase an investment property close to local businesses, a popular commuting area, or vacation spot, this may be attractive to tenants and could create cash flow.

Ongoing income and cash flow. Your investment property may provide ongoing income to offset your expenses.

Potential tax benefits. Mortgage and home equity interest payments and property taxes may present the opportunity for tax advantages. Consult your tax advisor.

What should I consider before buying an investment property?

Whether you purchase a single family home, townhome, condominium, or a multi-family dwelling, when buying an investment property, here are some items to consider. Our experienced home mortgage consultants can provide more information.

Additional financial responsibilities

Different loan requirements

Eligible properties

If you purchase a home that needs renovation, finance and renovate with ease

• You may be able to purchase and renovate your home through the Wells Fargo Mortgage plus Home Equity Financing program. This option combines a Wells Fargo first mortgage together with home equity financing. There may be tax benefits and reduced closing costs with this option. Consult your tax advisor.
• Depending on the loan you choose, remodeling and repairs may require hiring a contractor.

Can I use the equity in my current home to buy an investment property?

If you have sufficient equity in your current home, it may be a useful resource for buying additional property. You may be able to purchase your investment property without an additional first mortgage by getting a home equity loan or line of credit .

Keep in mind that by using the equity in your current home, your home becomes the security for the new loan. Because investment properties carry a higher risk, you should consider this option carefully before making your decision.

If you decide to pursue this option, you may benefit from the following:

• Our home equity financing allows you to select the closing cost option that meets your needs.
• The interest on home-equity financing may be tax deductible. (Consult your tax advisor regarding the deductibility of interest.)

Wells Fargo provides home equity financing to meet your diverse real estate strategies, whether short-term or long-range.

How can I get started with homebuying?

Knowledge of the area where the property is located, as well as an understanding the financial considerations that go along with buying a home can increase your chances for a successful start. Here are some steps you can take to get started.

Create a financial plan

• Check your credit history and make a plan to get your credit in shape if necessary.
• Determine how much you can put toward a new home. The total amount you need is the sum of your down payment and closing costs .
• Use our monthly payment calculator to estimate payments for various mortgage amounts and interest rates. Your monthly payment will usually also include an amount for  property taxes and homeowners insurance. And, if your down payment is less than 20%, you’ll generally also need to get private mortgage insurance (PMI). 

Video — How much can you borrow?

Set a time frame

Determine when you’d like to buy your home and use your financial and credit information to establish a budget that can help you achieve your goal.

Consider using a real estate agent

While it’s easy to search for homes online today, you receive invaluable information and assistance by working with a licensed real estate agent.

Many real estate agents also hold a REALTOR ® designation. A REALTOR ® is a member of the National Association of REALTORS ® (NAR). The NAR trains its members in the most effective professional practices and requires them to abide by its strict Code of Ethics.

A licensed real estate agent may help you navigate the homebuying transaction more smoothly. Some of the benefits you’ll enjoy include:

• Professional assistance and representation
• Marketplace experience and access to up-to-date information
• Services provided at no direct cost to you because the agent is compensated from the seller-paid commission when you buy a home

Get started finding a real estate agent by asking friends and family for referrals, ask your home mortgage consultant, or do your research online.

What home financing basics should I understand?

If you obtain home financing, you’ll repay more than the amount you borrowed. How much you repay is determined by several factors, including your interest rate and loan amount. Here are some terms you should understand.

Discount points

Origination charge

• On a mortgage, this amount includes all charges (other than discount points) that all loan originators (lenders and brokers) involved will receive for originating the loan.
• The origination charge covers items including fees, document preparation, and underwriting costs, and other expenses.
• On refinances, if you qualify, you may be able to finance the origination charge as part of your loan amount.

Loan term

• Your loan term is the amount of time you have to pay off your mortgage balance.
• Shorter loan terms typically mean higher monthly mortgage payments, but often have lower interest rates.
• If you pay off your mortgage balance within a shorter term, you may pay less in total interest than with a longer-term mortgage.

Remember that interest rates only tell part of the story. The total cost of a mortgage is reflected by the interest rate, discount points, and origination charges. This total cost is known as the annual percentage rate (APR), which is typically higher than the interest rate. The APR lets you compare mortgages of the same dollar amount by considering their total annual cost.

Monthly mortgage payment

Your monthly mortgage payment is typically made up of four parts:

• Principal. The part of your monthly payment that reduces the outstanding balance of your mortgage.
• Interest. The part of your monthly payment that goes toward the cost of borrowing the money.
• Taxes. The part of your monthly payment that goes toward property taxes charged by your local government. We typically collect a portion of these taxes in every mortgage payment and hold the funds in an escrow account for tax payments made on your behalf as they become due.
• Insurance. The part of your monthly payment that pays for homeowners or hazard insurance, which provides protection against losses from property damage due to wind, fire, or other risks. Like taxes, insurance costs are usually collected and paid from an escrow account.

Depending upon your property location, property type, and loan amount, you may have other monthly or annual expenses such as mortgage insurance, flood insurance, or homeowner association fees.

Video — The components of a mortgage payment

Watch this video to understand what makes up a typical mortgage payment – principal, interest, taxes, and insurance – and how they can change over the life of the loan.

Check today’s rates to see our current interest rates.

How can I estimate how much I might be able to borrow?

There are different ways to estimate a price range that’s appropriate for you. The words prequalification and preapproval may refer to two different services provided by mortgage lenders. While both are useful options for learning your potential purchase price range, it’s important to understand how they differ.

Prequalification

We offer two prequalification options:

• Prequalification letter .  If you’re considering buying a home, this gives you a general estimate of the loan amount you may qualify for based only on preliminary information you provide (without us obtaining a credit report).
• Prequalification with credit letter .  If you expect to buy a home but might not be ready to start making bids, this letter carries a little more weight. It provides a general estimate of the loan amount you may qualify for based both on preliminary information you provide and an initial review of a credit report.

Preapproval

Our Priority Buyer ® preapproval letter empowers you to bid on a home with confidence and lets sellers and real estate agents know you mean business. It’s more formal than a prequalification because it:

• Confirms you’ve submitted an application, are credit-checked and have completed the first loan decisioning phase.
• States the approximate mortgage loan amount and purchase price range for which you qualify, subject to certain conditions or documentation.
• Means we may offer a loan commitment once all information on your application is verified, underwriting requirements and conditions are satisfied and acceptable property-related reports are provided.

Video — Prequalification versus preapproval

Have questions or need help? Our home mortgage consultants are available to help you. Contact us today.

Benefits of a preapproval 

Having a Priority Buyer ® preapproval letter can provide several benefits. It identifies you as a serious buyer, adds to your negotiating strength when making an offer, lets you shop confidently, and may allow for a faster closing.

It can also help you identify and address possible qualification needs early in the homebuying process. Plus, if you’re a first-time homebuyer with no record of previous mortgage payments, a preapproval may help you feel much more confident pursuing your first home purchase.

Have questions or need help? Our home mortgage consultants are available to help you throughout the home financing process. Contact us today.

How will you evaluate my home financing application?

When you apply for home financing, we generally use these four main criteria to assess your application.

Income

Do you have a reliable, continuing source of income to make monthly payments?

• Income can come from primary, second, and part-time jobs, as well as overtime, bonuses, and commissions.
• You may use other sources of income if you want them considered for payment, provided they can be verified as stable, reliable, and likely to continue for at least three years. Some examples include retirement or veteran’s benefits, disability payments, alimony, child support, and rental or investment income.

Current debts and credit history

Do you pay your bills, loans, credit cards and other debts on time?

• We examine your payment habits before deciding to loan you money.
• We also review your credit history and credit score.

It’s a good idea to check your credit history and correct any problems before applying. Wells Fargo also offers a series of online credit education videos.

Assets and available funds

Do you have enough funds for a down payment (if you’re buying a home) and closing costs.

• You may use funds from various accounts including savings accounts, certificates of deposit (CDs), investments, and retirement funds.
• If you’re buying a home, in some cases, you may be able to use gift funds toward closing costs and all or part of your down payment.
• Generally, you’ll also need to show that you have additional funds in your accounts to cover several months of mortgage, tax, and insurance payments.

The property

What is the market value of the property you want to finance?

We will order a property appraisal to make sure the value of your property meets our underwriting requirements.

Responsible lending guidelines

We approve applications where we believe the borrower has the ability to repay the loan or line of credit according to its terms. We use two ratio-based guidelines to evaluate your ability to repay.

Debt-to-income ratio

Debt-to-income ratio is the percentage of your monthly income that is spent on monthly debt payments.

• We compare your expected monthly mortgage payment (principal, interest, taxes, and insurance) plus other monthly debt obligations to your gross (pre-tax) monthly income.
• Mortgage program guidelines vary, but a good rule of thumb is to keep your total debt level at or below 36% of your gross monthly income.

Housing-expense-to-income ratio

Housing-to-income ratio is the percentage of your monthly income that is spent on monthly housing payments.

• We also compare just your expected monthly mortgage payment (including taxes and insurance) to your gross monthly income.
• Mortgage program guidelines vary, but a good rule of thumb is to keep your housing expense level at or below 28%.

Even if you fall within the 28%/36% guidelines, make sure you’re comfortable making your monthly mortgage, insurance, and tax payments, in addition to all of your other monthly payments. Remember that homes have other costs — such as utilities, maintenance, and repairs — that may not exist if you rent.

How can I find a home that meets my needs?

In today’s world of instant access, you have a wealth of options available to you through internet searches and mobile apps. You can find detailed information, pictures, as well as video tours of homes available for sale.

In addition, you can receive valuable information and assistance by working with a real estate agent to locate properties for sale that meet your needs. Real estate agents make it their business to know about communities and the homes within them.

As you begin your search, keep these items in mind:

Location, features, and amenities

• Location is as important as appearance or size. Do you need to be in a particular school district, close to a job, public transportation, or day-care facility?
• Consider which features and amenities you want in your new home using our home wish list (PDF)*. Separate “wants” from “needs” and prioritize your list.

Types of homes

• A single-family home is one of the most popular options.
• Condominiums, town homes, and co-ops all offer different lifestyle and ownership features. You’ll need to budget for monthly fees for garbage and snow removal, landscaping, and similar services charged by these communities.

Consider newly built homes in addition to existing homes. Our Construction Lending Center provides financing tips and buying considerations.

Sometimes finding your ideal home involves compromise. You may want to consider “a diamond in the rough” — a place you can transform with a bit of ingenuity or some renovations. Ask a home mortgage consultant about our Purchase & Renovate SM loan that allows you to buy a home and make renovations and repairs in one transaction.

If you aren’t already working with a real estate agent, your home mortgage consultant can provide you with information to contact real estate agents in your area. Your real estate agent and home mortgage consultant will work together to help make homebuying a rewarding experience.

What can I expect during the homebuying process?

Your real estate agent can help you through each stage of the homebuying process.

Get preapproved

As you go through the process it’s a good idea to have a preapproval for maximum leverage.

Our Priority Buyer ® preapproval letter identifies you as a serious buyer, adds to your negotiating strength when making an offer, lets you shop confidently, and may allow for a faster closing.

Make an offer

Work with your real estate agent to determine the appropriate amount for your initial offer based on comparable home sales, market value, condition of the home, and your closing date.

Put your offer in writing 

Handle all negotiations in writing to make sure both parties understand the terms of the agreement. If you do negotiate verbally, follow up in writing.

Submit a deposit 

This good faith deposit demonstrates your commitment to the transaction.

Finalize your purchase contract

The contract is a legally binding contract between the buyer and seller describing all the terms of the transaction. Depending on your state, an attorney, real estate agent, or title company may help negotiate and draft the contract.

Other tools and resources

While our Learning and Planning Center helps you understand all the stages of the home financing process, we also provide additional tools and resources.

Explore your loan options