Getting rental property financing is an important but often misunderstood step of investing in real estate. The reason why is simply information overload. There are many requirements and details associated with getting a loan for rental property that make it difficult to know where to begin. Luckily, however, the process becomes a lot simpler once it is clarified. In this blog, we’ll do exactly that. Here are the 3 requirements for getting a loan for rental property as well as the 5 steps you’re required to take to land one.
1. Good Credit Score
The first thing a bank will consider before lending a loan is your credit score. For mortgage lenders, the three-digit credit score is an assessment of potential risk. The lower your credit score, the higher of a risk you are to lenders. A low credit score can also lead to higher interest rates and a shorter amortization schedule. Therefore, you must make it a priority to have and maintain a good credit score for a loan for rental property.
But what exactly is a good credit score for a rental property loan? The minimum credit score for rental properties is 620. While some mortgage lenders may accept a credit score of 600, a 660 is considered safe. With a 20% down payment, a credit score of 740 and above is considered optimal. To lower the down payment, a real estate investor would need a score of 760.
Here are some great ways to improve your credit score and ultimately qualify for a mortgage:
- Pay bills on time months before applying for a loan for rental property
- Work on your credit utilization score
- Check your credit report periodically for errors and incomplete claims to have them removed
2. Low Debt-to-Income Ratio
A high credit score is best for rental property financing. A low debt-to-income ratio, on the other hand, is another must-have. Debt-to-income ratio (DTI) is the percentage of your income that is used for debt payments, such as student loans, credit card loans, and car loans. Overall, a good DTI for conventional loans is 36% or less.
Like a credit score, improving your DTI will take time and commitment. It is best to focus on improving both areas before taking on a mortgage loan for rental property. You should also consider contacting financial experts for additional help. If your debt-to-income ratio is above 36%, here is what you can do to reduce it:
- Avoid accumulating any more debt
- Pay off existing debt as much as you can
- Do not make any large credit card purchases right before applying for a mortgage
3. Down Payment and Cash Reserve
While a rental property mortgage allows you to borrow money, you also need to pay considerable sums for the loan. The most obvious cost is the down payment for rental property. The typical down payment ranges from 20-25% of the property price, largely depending on the property type and number of previous mortgages. Nonetheless, there are many options available that provide little-to-no down payment for rental property.
Related: Want to Know How to Buy Rental Property with No Money Down?
A down payment isn’t the only money you need to save up for a mortgage for rental property. A real estate investor also needs a 6-months’ cash reserve of mortgage payments. The reserve must include payments for both the rental property you wish to purchase and any properties you currently own.
How to Get a Loan for Rental Property
1. Evaluate Mortgage Types
After getting your loan requirements for rental property in check, you can start searching for a loan for rental property. A good place to start is by researching various mortgage types. Here are some of the most common ones used by real estate investors:
- Conventional loans (from non-government lenders, such as a bank)
- Federal Housing Administration (FHA) loans
- Veterans Administration (VA) loans
Related: 8 Best Investment Loans for Real Estate in 2020
The pros and cons of each type of loan differ. FHA and VA loans, for instance, provide low down payments and can be borrowed with a low credit score and low investment property mortgage rates. However, they also require the property to act as a primary residence, while conventional loans do not. Still, through house hacking, FHA and VA loans become viable investment property mortgages.
As mentioned previously, many other types of mortgage loans exist. There is no objective ‘best loan for rental property’. All in all, you need to find what type of mortgage is the best for your real estate investment, finances, and goals.
2. Look for Mortgage Lenders
The next step is finding a mortgage lender. Research is significant when searching for mortgage lenders. That’s because the details of loan approval and terms can differ from lender to lender. Some lenders, for instance, include future rental income in DTI percentages, while others do not. You may also secure a mortgage with a lower credit score or down payment with certain lenders. Make sure you check with local banks for real estate investment financing options. Also, look for lenders with the proper experience with a loan for rental property.
3. Get Pre-Approved
Before obtaining loan approval, you should get pre-approved. While a pre-approval does not guarantee that you will receive a loan for rental property, it shows sellers and agents that you are a serious buyer. It also gives you an idea of the amount you will be qualifying for and of your potential rental property mortgage rates. Therefore, you can begin to establish a price range when finding investment properties. To get pre-approved, you’ll need to fill out paperwork. Your mortgage lender will also ask for your credit report and history, bank statement, work history, and tax returns.
4. Find a Rental Property with Mashvisor
With the stamp of pre-approval, you can begin to find rental properties. This step can be a lengthy process on its own. With Mashvisor, however, it never is. Mashvisor’s investment property search engine allows you to find profitable rental properties for sale all over the US housing market. With Mashvisor’s investment property or Airbnb calculator, you can analyze projected rental property cash flow, rental income, cash on cash return, and cap rate for both traditional and Airbnb properties. Through Mashvisor’s analytics, you can find the rental property that will provide the biggest bang for your buck. This is not only beneficial to you, the future successful real estate investor, but also to your mortgage lenders, who will be more likely to approve your loan as a result.
Related: What Is Mashvisor? What Can It Do for Real Estate Investors?
5. Obtain Approval for Your Loan for Rental Property
With your financial credentials, pre-approval, and top-performing investment property, you’ll be well on your way to loan approval. Before that, review the terms of the loan rates for investment properties, monthly mortgage payments, and other details. Once everything is agreed upon by both parties, a purchase agreement, or a binding offer, will be signed. All that’s left to do is purchase your money-making machine of a rental!
The Bottom Line
With the guidelines outlined in this blog post, you’ll be able to secure the best loan for rental property. For more on finding investment properties for sale, CLICK HERE to start your FREE trial with Mashvisor!