Becoming a landlord, especially in our country’s current economy, could possibly be a wise investment. But one of the main elements of rental properties is finance if you’re considering buying a rental property.
Rental assets are viewed by investors as more risky than primary residences. Therefore, the approval criteria are more restrictive, and interest rates are typically higher.
Below are a few things to consider when applying for rental loans:
Getting a Loan for a Rental: Property Types
Usually, an investment property would fall into one of the following categories: apartment, single-family home, multi-family unit, and house.
In general, when you seek rental property loans, you would need to stick with one to four-unit homes. You will need to choose a commercial residential loan or an apartment loan as an option if you wish to purchase an investment property with over four units.
It’s worth remembering that you would be able to take out a main mortgage on the house if you buy a multi-family home and intend to remain in one unit yourself. You could be eligible to use an FHA loan or VA loan for owner-occupied homes to fund your purchase. It may also be worth exploring a traditional mortgage. Either of these three alternatives could lead to a lower interest rate and improved mortgage terms.
Rental Property Loan Lenders are Strict
Lenders may ask you to go through hurdles before they accept your mortgage application because of the elevated risk associated with investment property loans. You would, for instance, need:
- A more significant down payment of 20 percent or more
- More reserves for cash (often six months per existing mortgage plus the new mortgage)
- Adequate income to cover current loans and a new mortgage
To discover more about rental loans, follow the highlighted link.
Rental Loans Require a Good Credit Score
Your credit score and background will typically be an important consideration in obtaining a loan for a rental property. The higher the score, the better the offer, much like with primary residence mortgages.
Your score is rated “good” on the FICO credit score scale, which is the most commonly used scale by lenders. Meaning if your score is between 670 and 739, you’re a pretty safe bet. Conventional banks usually have the strictest conditions for credit.
If you have to explain that you can afford to repay what you borrow on your house while still getting a mortgage on your own house, owning a rental property can be tricky. The debt-to-income ratio and cash reserves are two considerations regarded by banks.
The ratio of your debt to income is the percentage of your monthly income that goes into interest payments. The majority of conventional lenders tend to keep this percentage below 45%.
For cash reserves, lenders would need you to have in the bank a certain amount of cash. It may vary by lender, but can be the equivalent to interest payments for 6 months or more.
Rental Loans 101
When it comes to rental loans, you must have all of your “ducks in a row”. Otherwise, it’ll be a bit of a challenge to get one.
Hopefully, this information helped you learn more about rental property loans. If so, feel free to read more of our blog posts.