Best way to get a mortgage for investment properties over $5,000,000

Owning an investment property provides an excellent opportunity to make money from real estate. However, getting an investment property requires a lot of financing and is, thus, mostly funded through mortgages.

Getting a mortgage for an investment property is quite difficult already. But when it comes to investment properties over $5 million, it’s almost mission impossible. However, there are ways around it – there are effective ways to get mortgages for that luxurious property, whether you’re an individual or a group. This piece expires some of those ways.

What qualifies as an Investment Property?

A real estate property is considered an investment property if it was purchased to make a profit through rental income, potential resale, or both. Investment properties may be owned by an individual investor, investment firm, or corporation. These properties may be held for the long term or short-term. The latter involves flipping, which is the practice of buying real estate, remodeling or renovating it, and then quickly selling it for a profit. However, you can get a better profit from an investment property if you hold it t collect rent and then sell it for a profit when the equity appreciates.

There are different classes of investment properties. These include;

• Residential: Residential properties such as townhouses, single-family homes, condos, and other residential buildings allow investors to make money through rent. Investors buy these properties solely to rent out to individuals or families that would rather rent than buy a house. Residential investment properties are rarely in the $5 million margin
• Commercial: These properties also allow investors to generate income through rent. However, the tenants are not residents but businesses seeking office space. Commercial investment properties may include malls, large office spaces, etc. Commercial properties are more likely to fall into the $5 million bracket.
• Mixed-use: Some properties have some units dedicated to commercial activities and others to business activities. These are more common in downtown areas.

Should you buy a $5 million Investment Property?

Before buying a $5 million investment property, you must first understand the financial implications of such property. Being an investment property, there is always the potential that it will generate some income that you can use to offset mortgage payments, renovations, etc. However, things do not always go as planned, and if you don’t manage to make a profit from the property in the short term, you will still be left with paying the mortgage on it.

A five-million-dollar property is considered a luxury anywhere in America. In fact, the procedure for getting a mortgage for such a property is typically different (more on that later) than for “regularly” priced properties. A general rule among experts is that mortgage payments should not take more than 28% of your annual income. Some others are of the opinion that your property should only be about 3x your gross annual earnings and about 40% of your net worth. But these values are typically for first homes or other residential properties. Since an investment property will generate some income, you can afford to go above these metrics. But that begs the question, “how much do you have to make to afford a $5 million investment property?”

Looking at worst-case scenarios where you do not get a tenant in your property, or you cannot flip it in the short-term, you will solely be responsible for making the mortgage payments on your property. The average interest rate you will get on such an amount for such a property type is around 5% for a 30-year fixed mortgage. First, you will have to make a down payment of around 20% of the property price, which equals $1 million. Leaving you with a principal of $4 million. At the 5% interest, you’ll be making a monthly payment of $24,830, which is a lot.

In order to keep with the 28% rule, you would need to make at least $88,678 monthly, equating to about $1,064,142 annually. However, mortgage payments are not the only thing to worry about when buying a luxurious property. Depending on the purpose of the property, you may need to pay property taxes, homeowner’s association levies, etc. There is also the need to renovate the property consistently to keep it looking its best. Thus, you will need to make more than $1 million to easily afford such a property.

Beyond being able to pay the mortgage, there are other financial considerations that you need to make. The first involves your lifestyle and how other commitments may impact your ability to make mortgage payments. Often, buying such a property means you’re a high roller who loves to enjoy the finest things of life. Thus, when considering debts, credit card payments, upkeep, and all other expenses, you should still have adequate income to pay your mortgage and even put some n a savings account. The second consideration entails having a steady income stream or adequate cash reserves to cover eventualities.

As noted, an investment property is an income-generating one. Thus, you may not necessarily have to worry about making mortgage payments. Besides, most people who buy such properties are wealthy enough to pay cash or make higher down payments to enjoy better rates and lower monthly payments. But if none of this is the case, you must know how to get a $5 million mortgage.

Limits of Conventional Loans

A conventional loan is a type of mortgage offered by traditional financial institutions like banks or private lenders like Aurum and Sharpe. This type of loan is not backed by the government but conforms to Fannie Mae and Freddie Mac guidelines. For a conventional loan, borrowers must be financially qualified based on their credit history, income, and other factors.

In the traditional sense, conventional loans are known as conforming loans. This is because they adhere to limits set by the federal housing finance agency (FHFA). These limits change yearly based on average home prices and vary by state. In 2022, the conforming loan limit in most states is $647,200. However, in high-cost areas such as Alaska, Hawaii, Guam, and the US virgin islands, the limit is set at $970,800.

In some US regions where properties are much more expensive than average, there are also greater loan limitations, up to 50% above the maximum. For instance, the Upper East Side of Manhattan in New York City has a cap of $970,800 for 2022. Meanwhile, there are gradations between the highest and lowest caps. For example, Boston, Massachusetts, has its conventional loan limit in 2022 as $770,500. Similar gradations can also be seen in many areas of New York, California, Michigan, etc. It should also be noted that this limit also varies by the number of units. The limits are often higher for multi-family occupancy properties.

These limits imply that you cannot collect a loan more than the limit amount if you want to get a property in any of these areas. So, in the case of buying a $5 million property, you will have to make a down payment of about $4.4 million to be able to access the loan. However, you do not have to limit yourself to the conforming loan limits. There are other options to get higher loan amounts for expensive investment properties.

Financing a $5 million Investment property with a jumbo loan

Jumbo loans, commonly referred to as jumbo mortgages, are loans that exceed the Federal Housing Finance Agency’s (FHFA) limits. Unlike conventional mortgages, jumbo loans cannot be bought, guaranteed, or collateralized by Fannie Mae or Freddie Mac. These mortgages have unique underwriting standards and tax repercussions and are intended to fund luxury residences and residences in highly competitive property markets. Jumbo loans can be used for everything from residential purchases to investment properties.

Jumbo loans also have their own limits. Mostly, these loans range from $650,000 to $3 million. However, this limit varies by lender, and some lenders can let you borrow up to 10, 15, or 20 million dollars. The prevailing characteristic of jumbo loans is the step qualifying requirements. Jumbo loans are high-risk loans; thus, lenders require that you meet very strict creditworthiness criteria before they can offer on to you.

Although jumbo loans do not conform to FHFA limits, they fall under the Consumer Financial Protection Bureau’s (CFPB) classification of “qualified mortgages.” This implies that you must meet strict criteria and present extensive documents to prove your financial history. To qualify for a jumbo loan, you must meet the following criteria;

• A credit score of 700 and above. Some lenders may require that you have at least a 740 credit score. A higher credit score implies a lower interest rate.
• A maximum DTI of 35%. While some lenders may allow higher DTIs for lower-end jumbo loans, most lenders will require the best possible DTI if you want to collect a jumbo loan of $5 million.
• Down payment of at least 20%. The down payment criteria will be higher with most lenders, up to 30%. However, the minimum down payment you can make to get a jumbo loan.

What are the mortgage rates on jumbo loans?

Jumbo loans typically have higher interest rates than conventional mortgages. Although, in recent years, the interest gap between jumbo and conventional loans has gotten progressively smaller. Today, the average percentage rate on most jumbo loans is comparable to that on most conventional loans. Some jumbo loans even have lesser interest rates and APRs than conventional loans.

The interesting thing with jumbo loan interest rates is that jumbo loans for residential properties are not treated much differently from those for investment properties. At the current average 30-year fixed mortgage interest rate of about 6%, you can expect the jumbo loan rate to be between 6.25-7%. But these rates will typically apply to those with very good credit histories. The interest rate on a jumbo loan may reach around 7.5% for those without excellent credit histories.

Options for those who do not qualify for jumbo loans

If you do not qualify for a jumbo loan based on a recent bad credit or a lack of necessary documentation relevant for a jumbo loan application, you can apply for a non-QM loan. Although non-QM loans are typically designed to address conforming amounts, some lenders make provisions for non-qualifying jumbo loans so that borrowers can access luxury amounts easily.

A non-qualified mortgage (non-QM) aims to assist homebuyers who cannot satisfy the stringent requirements of a qualifying mortgage. You might need to explore non-qualified mortgages, for instance, if you are self-employed or don’t have all the required paperwork to be approved for a typical mortgage. Some lenders allow you to take out a non-QM mortgage of up to $5 million to finance an investment property.

Non-QM loans are not backed by the government or secured by Fannie Mae or Freddie Mac. Thus, these loans are high-risk to the lenders. Non-QM jumbo loans are double the risk of regular jumbo loans since you do not need good credit or present all the necessary paperwork to qualify. Thus, non-QM lenders typically set higher interest rates on these loans. Typically, you can expect the interest rate on a non-QM jumbo loan to be at least 0.5-1% higher than that on a regular jumbo loan.

A non-QM loan makes mortgages available to people of all classes. If you can demonstrate that you have the financial capacity to make regular payments on a $5 million investment property mortgage but do not have a subpar credit score, high DTI, and poor income documentation, you can apply for a non-QM jumbo loan. However, such loans are difficult to find and often require you to make higher down payments and interest rates.

Financing a $5 million Commercial Investment Property

If you want to finance a $5 million commercial property like a mall or large-scale office space, you can look for an SBA 504 loan. SBA loans are long-term, low-interest loans provided by the small business association. These loans are offered to small businesses looking for disaster relief or to expand their operations. SBA loans can be used to purchase land, buildings, equipment, and even inventory. Borrowers can get up to $5 million on SBA loans, with more favorable terms than conventional loans.

SBA loans are made specifically for qualifying businesses that cannot get reasonable financing without the help of the SBA. Individual investors CANNOT obtain an SBA loan since it is made specifically for businesses. To qualify for an SBA loan, your business must;

• Be worth $15 million or less.
• Operate as a for-profit entity.
• meet SBA size requirements that pertain to small businesses. Size requirements vary by industry.
• Have an average net income of $5 million or less after income taxes for the preceding two years before applying for the 504 program.
• Meet job creation requirements or, alternatively, community development or public policy goals.
• Not be involved in purchasing and holding real estate. Real estate purchased with the loan must be utilized for business needs.
• Not be engaged in any form of lending.
• Not have defaulted on a federal loan previously.
• Repay the loan through income generated from the business activity undertaken with the loan
• Provide the SBA with personal histories for all principals in your company.
• Have a feasible business plan
• Occupy at least 51% of the building if it is an existing structure and 61% of the building if it is new construction.

Currently, interest rates on SBA 504 loans are around 3.8% for a 10-year fixed term. Borrowers may also get SBA 504 loans for 20 or 25-year terms.

SBA loans provide ample opportunity for business owners to buy an investment property. However, it is limited by the owner-occupancy requirements and scope of property use. Regardless, given its term and relatively low rate, it is a viable loan for financing a $5 million property.

Who are the best lenders to get a $5 million mortgage

You must shop for the best lenders if you’re considering getting a $5 million investment property mortgage. The best lenders will offer you excellent service delivery, good interest rates on your purchase, competitive closing costs, and excellent property appraisal. Consider the following lenders for your loans;

• Aurum & Sharpe: offer non-QM loans for investment properties at highly competitive rates.
• Wells Fargo: Offers jumbo, non-QM, and SBA loans for investment properties
• Rocket Mortgage: offers jumbo loans
• Aliant credit union: offers jumbo loans, available nation-wide
• Bank of America: offers jumbo loans and SBA loans for investment properties.

Bottom Line

Purchasing a $5 million investment property is no mean feat. If you want to get a mortgage for such property, you must know where to look and the type of mortgage to look for. Currently, your best option as a business or individual is a jumbo loan, which has stringent requirements and relatively higher interest rates. If you do not meet the requirements for a jumbo loan, you can attempt a non-QM jumbo loan which comes with higher interest rates. You may qualify for an SBA 504 loan to purchase your $5 million property as a business.

Regardless of which loan you use, ensure that you properly weigh the financial implications of the loan, do your checks and balance and seek the best rate. A $5 million investment property has to be a profitable investment. Aurum and Sharpe offer a range of mortgage options for investment properties. These include non-QM loans, and cash-out refinance for these properties. Contact us today at 9177404325 to book an appointment, or use the online form to get in touch.

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