Investing in rental properties requires learning about the methods real estate investors use to finance their properties. In this article, we will shed light on using loan for rental property. Loans are one of the most sought after methods to finance a rental property; however, not everyone can be eligible to be granted a loan. To learn more about how you can get a loan for rental property, keep reading. Also, Mashvisor offers a variety of articles regarding real estate topics that can help you obtain all the necessary real estate investment information on how to make money in real estate.
First of all, we are going to talk about one of the most common types of loans: the traditional loans.
Related: Financing a Rental Property: What’s the Best Way?
Loan for Rental Property: Traditional Loans
Traditional bank loans usually follow the Fannie Mae & Freddie Mac guidelines. According to those guidelines, a down payment can reach 30% of the loan’s value. Therefore, make sure that your credit score and income look good for the traditional bank loan, because this data will determine if you’re eligible to be granted a loan for your real estate rental property.
This type of loan can be granted from the national banks like Bank of America and US Bank. A traditional loan is good for you as an individual real estate investor who is looking for banks that are familiar with the local housing market and banks that know you personally.
It is worth mentioning though that small banks are stricter when it comes to granting loans. This is due to their cautionary procedures to ensure that the borrower can pay off the loan. Therefore, they will want to know the borrower personally by arranging face-to-face visits to get to know you. Also, the small community banks prefer that the borrowers’ real estate deals are in their area.
So, what are the basic requirements to obtain a loan for rental property? And are you eligible to borrow money to start your real estate investment business? Let’s find out.
Loan for Rental Property: Basic Requirements for Obtaining a Loan
- Credit Score: A credit score is the numeral value that shows the creditworthiness of a person. Banks take credit score into consideration to determine whether the individual is capable of repaying the debt. Therefore, it is a huge factor when applying for a loan to finance your rental property.
Related: What is a Good Credit Score? Everything Real Estate Investors Should Know
While some banks can accept credit scores that are below 600, it is better to have a 620+ credit score. It is also worth mentioning that investor-only lenders require a 680+ credit score.
- Debt to Income Ratio: The debt to income ratio is a comparison of an individual’s monthly debt payment and his/her total income. The bank will decide if the ratio is acceptable by taking into consideration the loan’s value. However, it is usually between 35% and 50%. The longer the loan period is, the easier it is to get more loans on more real estate properties.
- Down Payment: It is usually between 20% and 25%.
- Tax Returns: It is important for banks to make sure that real estate investors get good regular incomes, which shows in the tax returns. In case your income is not good enough, it will be very hard to get a loan.
- Liquid Assets: Having liquid assets in reserves is essential as a safety net, just in case you go through difficult months money-wise. Banks might require between 6 and 12 months of cash reserves.
- Work Stability: It is also comforting for banks when they see that real estate investors can maintain a job for a long time. People who stay in the same career for a long time are more likely to get a loan because this guarantees a stable and consistent source of income. Thus, it shows that the real estate investor can repay the loan.
So, if you can tick off all these requirements, then it’s good news for you. It means that you are an eligible loan borrower, and banks can trust you to lend you money.
Loan for Rental Property: Loan Required Information and Documents
The following are normally the documents and information any money lender requests real estate investors to provide in order to proceed with their loan application:
- Personal information (full name, phone number, date of birth, social security number, marital status, etc.).
- Credit report (an authorization for the lender to run the credit report).
- Tax Returns for your primary residence (for the past two years).
- If you’re renting a house, you need to provide the lease agreement and proof of the first month’s rent.
- If you’re a renter, you have to provide proof of your rent payments.
- Employment and income history (for at least two years).
- Discharge papers if you’ve had a bankruptcy in the past seven years.
The additional requirements depend on the lender. Some lenders require more documents and information in their applications, and as a real estate investor you have to be up to constantly receiving more requests from the bank/money lender.
Loan for Rental Property: Loan Application
It does not matter the type of loan you’re using, the process you will go through to apply for a loan for rental property is almost the same. If you work with a loan officer, it will only take from 20 to 30 minutes to get the pre-approval. Depending on the bank/lender, the loan pre-approval can last from 30 to 90 days. So, during that period, if you fail to buy a real estate property, you might need to do the application again in order for the lender to approve it.
When you find the property you want to purchase, you can submit all the requested documents to get the final approval for the loan. After that, you will usually need to wait for the property appraisal in order to submit any additional documents the loan lender requests.
The loan usually takes 30 days to be closed.
Loan for Rental Property: Additional Notes
- Your debt to income ratio should be low: If you were already granted a loan for your personal home, it will be harder to qualify for a loan on an investment property. This is due to your higher debt to income ratio.
- According to Fannie Mae, your rental income should show up on your tax returns before you’re even considered eligible for a loan.
- If you already have rental properties, but they have not been rented for a year or so, it will be really hard to qualify for a loan on more rental properties.
- Try not to buy the most expensive properties out there to rent them out because the more expensive the house, the harder it is to get qualified for more rental loans due to the high debt to income ratio.
- Make sure the house you intend to buy does not need much repairs as conventional lenders are strict when it comes to giving loans for buying houses in bad conditions.
For more information about this topic, please visit Mashvisor.
Related: Real Estate Investing 101: How to Buy Your First Rental Property.
Bottom Line
There are multiple methods to finance rental properties; loan for rental property is a pretty common method among real estate investors who do not have enough financial resources. It is essential to learn about loans before you decide to apply for one. Make sure that you’re comfortable with all the responsibility and requirements of obtaining a loan before you seriously take that step.
Hopefully, this article answers all the questions that have been going in your head about loan for rental property. For further details, dig into the articles on Mashvisor for better understanding of this topic and other related ones.