Obtaining 90% loan-to-value (LTV) financing for an investment property can seem attractive due to the lower down payment requirement. However, there are important factors to consider with high ratio mortgage loans. Lenders will look closely at the borrower’s qualifications, the property’s cash flow, and loan terms to mitigate their risk. This type of lending requires proper due diligence by the borrower regarding repayment ability, risk tolerance, and long-term plans for the investment property.
Verify Income and Credit History to Qualify
Lenders granting 90% LTV financing will want to see strong income and credit history to confirm the borrower’s ability to make payments if property cash flow is interrupted. Providing tax returns, bank statements, and a high credit score improves the chances of qualifying. New real estate investors may find it difficult to qualify for high ratio lending without an established track record of investment success.
Ensure Sufficient Cash Flow to Cover Mortgage
The rental income generated by the investment property needs to sufficiently cover mortgage payments, maintenance, vacancies and other costs. Otherwise, the investor will need to contribute their own cash to cover shortfalls. With only 10% down, there is little margin for error so conservative cash flow projections are key.
Be Prepared for Potentially Less Favorable Loan Terms
To offset the greater risk of high ratio lending, mortgage terms may not be as favorable compared to lower LTV loans. This could mean higher interest rates, shorter amortization periods, stricter prepayment penalties and other conditions. The trade-off for less equity upfront is less attractive financing terms.
Have Contingency Plans for Rising Interest Rates
If obtaining a variable rate mortgage, be prepared for potential rate hikes which would increase the monthly carrying costs. Develop backup strategies in case rates rise faster than rental income, such as setting aside cash reserves or planning to refinance when possible.
Consider Implications of Falling Property Value
With higher leverage, the borrower’s equity position is more vulnerable if the property drops in value. Create contingency plans accounting for the greater loss exposure compared to lower LTV scenarios. Being forced to sell at a loss could be detrimental with only 10% down.
90% LTV financing allows real estate investors to purchase with less cash upfront but comes with greater qualification hurdles, potential risks, and financing drawbacks. Weigh these considerations carefully, run conservative projections and have contingency plans before pursuing high ratio investment property loans.