Financing Out-of-State Investment Properties

You can finance a rental in another state with the same loan types you would use at home, but the lender has to be allowed to lend where the property is, and the closing follows that state's rules and costs. The lender may need a license in the property's state, a local bank or credit union may not lend outside its area, and DSCR lenders that work in many states qualify you on the rental's income. Budget for the state's transfer and mortgage taxes, which can add thousands of dollars, and expect to sign by mail or online unless you travel to the closing.

For the underwriting basics that apply wherever the property is, start with our tips for getting approved for an investment property mortgage.

Which lenders can lend in the rental's state?

Where you live does not limit the loan; the property's state does.

• Mortgage companies and brokers (nonbanks). For home loans made for personal or household use, loan officers at these companies need a license in each state where they work; loan officers employed by banks and credit unions register with the Nationwide Mortgage Licensing System and Registry (NMLS) instead. A loan on a rental you will not live in is a business-purpose loan, and state mortgage licensing laws may not reach it; North Carolina's, for example, defines a residential mortgage loan as one made primarily for personal, family, or household use. Ask the lender what license, if any, covers your loan in the rental's state, and check the company and loan officer on NMLS Consumer Access (nmlsconsumeraccess.org), the free public registry.
• Community banks and credit unions. A credit union can only lend to members, and its field of membership sets who can join; for a community credit union, that is tied to a defined local area, so one in the rental's town may not accept you. Your own bank or credit union may not lend in another state. Ask each one whether it lends in the rental's county before you apply.
• National DSCR lenders. These lenders qualify the loan on the property's rent rather than your income, so they do not need a local relationship with you. See how DSCR loans work.
• Conventional loans. Fannie Mae and Freddie Mac underwriting rules do not change with the property's state, so a lender that sells loans to them and lends in the rental's state can offer one. The loan amount still has to fit the county's conforming loan limit. The down payment, reserve, and 10-property rules are in conventional loans for investment properties.

To compare offers once you have lenders that can lend there, see comparing lenders for investment property loans.

Appraisal and insurance from a distance

The lender, not you, orders the appraisal, and it goes to an appraiser in the property's market. Two things to plan for:

• Few comparable sales. In a small town or rural county, the appraiser may have to reach farther for recent sales, and a low value means a larger down payment or a renegotiated price. Write enough time into your purchase contract's appraisal and financing deadlines to handle a second look.
• Rent schedule. For a loan that counts rent, the appraiser also reports market rent. Ask your local agent or property manager for current leases on similar units so you can check the appraiser's figure.

For insurance, get quotes from an agent licensed in the rental's state as soon as you are under contract. If the building is in a Special Flood Hazard Area, a high-risk zone on FEMA's flood maps, federally regulated lenders must require flood insurance on the loan. Check FEMA's flood map for the address before you make an offer, since flood coverage changes the rent you need.

How closing works when you are not there

You have three ways to sign:

1. Travel to the closing. You sign in person at the title company or attorney's office.
2. Mail-away closing. The title company or attorney sends the documents to you, you sign them in front of a notary where you live, and you ship them back. Build in shipping time on both ends, and wire your funds early.
3. Remote online notarization (RON). You sign electronically on a live video call with a notary. Fannie Mae accepts RON only if the property's state allows it or recognizes RON done under another state's law, and the county recorder will accept the document for recording. Ask the lender and title company early whether your loan and county qualify.

Some states require an attorney. In South Carolina, the state supreme court treats title searches, closing, and recording as the practice of law that a licensed South Carolina attorney must supervise. Ask your agent or lender who closes loans in the rental's state, and confirm that person can handle a remote signing.

State transfer and mortgage taxes

States and counties may tax the deed, the mortgage, or both, and the rates differ. Two examples:

Florida charges documentary stamp tax of 70 cents per $100 on deeds (60 cents plus a 45-cent surtax in Miami-Dade, where the surtax does not apply to a single-family home), 35 cents per $100 on the mortgage, and a nonrecurring intangible tax of 0.2 percent of the loan. On a $300,000 purchase with a $225,000 loan:

• Deed stamps: $300,000 / 100 x $0.70 = $2,100
• Mortgage stamps: $225,000 / 100 x $0.35 = $787.50
• Intangible tax: $225,000 x 0.002 = $450

The lender is the taxpayer for the intangible tax but may pass it to you. Your purchase contract says who pays the deed stamps.

New York charges a mortgage recording tax with several parts, per $100 of loan: a 50-cent basic tax, a 25-cent special additional tax, and a 25-cent additional tax (30 cents in counties in the Metropolitan Commuter Transportation District), unless the county has suspended the additional tax. On a residential property with 6 or fewer units, the lender pays the special additional tax and cannot pass it to you. New York City, Yonkers, and some counties add their own mortgage taxes; the state's Form MT-15 lists the current local rates.

Ask the title company for an estimate of every state and local tax on your deal before you set your offer price.

A realistic timeline

Plan around the steps that take longest from a distance:

1. Before the offer: confirm two or three lenders that lend in the state, get preapproved, and line up a local agent, inspector, insurance agent, and property manager.
2. First days under contract: apply, lock the rate for long enough to cover the closing date, order the inspection, and request insurance quotes.
3. Appraisal and title: the slowest steps are usually out of your hands. Ask the lender for the appraisal order date and the title company for the title commitment.
4. Final week: schedule the notary, RON session, or attorney; review the closing figures; and wire funds after confirming the wiring instructions by phone with the title company at a number you looked up yourself.

If you cannot be reached quickly, sign a power of attorney only after the lender and title company approve its form in advance.