When looking to buy a rental property, getting a loan is usually the first step. Often, though, people misunderstand the requirements involved. Information overload is sometimes to blame for this.
Getting a loan for a rental property involves knowledge of the right steps, explains Paramount Management, and for a first-time investor, this can seem rather daunting.
In this article, we are going to share with you the requirements and details associated with getting a rental property loan. After reading this piece, you’ll find the process a lot simpler and easier to execute.
Here are the requirements for getting a loan for a rental property.
A Good Credit Score
This is the first thing your lender will take into consideration once you make your intentions of buying an investment known to them. Mortgage lenders use a credit score to assess the potential risk of lending to a person.
Basically, the higher your credit score, the lower your credit risk. It may qualify you for a better interest rate, which can potentially mean thousands of dollars in savings. A lower credit score, on the other hand, means just the opposite.
As such, it’s your best interest to maintain or improve your credit score before seeking an investment loan.
So, what credit score should you aim for when you want to get a rental property loan? Generally, aim anything north of 620 is good. Although some lenders may accept 20 points less, a score of 660 and above is considered safe.
If you have a lower credit score, the following are some things you can do to improve it.
- Always make a point of clearing debts on time.
- Only apply for and open new credit accounts when necessary.
- Keep balances low on your credit cards.
- Form a habit of periodically checking your credit report for errors and incomplete claims.
A Low Debt-to-Income (DTI) Ratio
A low debt-to-income ratio demonstrates a positive balance between your debt and income and suggests the ability to pay back debt without issues. A high ratio, on the other hand, means that you are overextended and don’t have enough income to pay back your loans.
A good debt-to-income ratio is typically 36 percent or lower. If you have a lower figure than this, here are some few things you can do to lower it.
- Pay your debts before they are even due.
- Increase your income by, say, negotiating a higher salary with your employer.
- Lower your loan interest rates by using a balance transfer.
- Consider refinancing your loan with another lender.
Save a Sizeable Down Payment
Just like having a good credit score and lower debt-to-income ratio, lenders may also require a down payment to help lower their risk. They figure that if you have your own money invested, then you’ll be less likely to default on your mortgage.
Your lender will evaluate your financial standing, your loan options, and any other significant information to decide the best down payment you should make. It’s important to save for your down payment before you start the loan process so you are able to cover any associated costs with the loan, such as your down payment or closing costs.
Besides that, your bank will also evaluate your cash reserve to verify that you are able to make your mortgage payments.
Research the Various Mortgage Types
There are many mortgage types available to rental property buyers. Each has its own set of pros and cons, and you’ll therefore need to do your own research to know which one suits you best. Your lender can help you identify the best choice for you.
The different options include:
- Conventional loans: These are issued by private mortgage insurance companies, and are backed by Fannie Mae and Freddie Mac.
- Veterans Administration loans: These are only available to eligible US veterans. They are processed, underwritten, and serviced by lenders such as banks and mortgage firms.
- Federal Housing Administration loans: This is a government-backed mortgage. Unlike others, these usually come with flexible lending requirements.
To view other mortgage products that may best fit your needs, visit our Mortgage Products page.
Search for a Mortgage Lender
Details on loan terms and approval differ from lender to lender. And therefore, it’s important to research the various options before deciding on one. For instance, some lenders include expected potential rental income in debt-to-income ratio while others don’t.
When choosing a lender, it’s important to find one you can trust and looks out for your best interest. Big institutions like banks often can’t give the attention needed that other lenders may be able to, and provide the type of relationship you’re looking for.
Don’t be afraid to search for a lender that suits your specific needs.
Getting pre-approved shows agents and sellers that you are a committed buyer. In addition, it shows you an idea of just how much you qualify for to find the right investment property.
You’ll need to fill some paperwork to get pre-approved, and provide some details such as tax returns, work history, etc. Your lender will walk you through exactly which documents you need and help you through the process.
Obtain Approval for your Mortgage
If your lender is satisfied with the details you have provided, you’ll get approved. At this point, all you’ll be left with is just to purchase the rental property.
There you have it! Everything you need to do to get a loan for a rental property. Just make sure to buy the right property in the right location. It can make all the difference.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 07/14/2020.