Tips For Getting a Mortgage For an Investment Property

A great question asked in today’s market is whether an investment property is beneficial or not?

The answer, of course, is determined by your income, debt and many other factors.  The best way to start is by seeing if you are qualified to get a mortgage for an investment property. How? By simply following these tips.

Qualifying for a loan on an investment property is not always a stroll in the park. It can be a very difficult process since bankers consider investor loans to be “risky,” as they always say. Getting a mortgage for an investment property can be annoying. You have to start by having a good credit score. What is a good credit score? The most commonly used credit scoring model ranges from 300 to 850. While each lender sets its own standards to what constitutes a “good” score, a score of 740 and higher is considered favorable and usually gets an investor the best interest rates.

Related: 5 Common Real Estate Challenges and Their Solutions

Money Down: first step to getting a mortgage for an investment property

Most banks will ask for at least 20% money down on an investment property loan. So be the smart guy and always have a down payment of 25% or more. The more, the merrier! This will make it easier for you to get qualified for the loan. You must always have more money in the bank since most banks ask for at least 6 months reserves for mortgage payments. Loan costs may be more expensive depending on what type of investment property you are buying.

Related: Buying Your First Rental Property: What Property Is Right for You?

As mentioned before, getting a mortgage for a home is a tedious process and getting a mortgage for an investment property is even more complicated.  Anyone looking to buy a rental property should keep in mind the following:

1. Investor lenders:

Always go for dependable local lenders (mainly a direct lender). You should always take time to develop a relationship with your lender.

2. Loan limits:

Keep in mind that the more loans you have, the higher the down payments need to be. Depending on the number of loans you have, the down payment amount will range. For example, one to four loans typically requires 20 percent down while five to ten loans require 25 percent down.

Fannie Mae, which provides information in originating loans for sale, allows each investor to carry 10 loans at once. So if you find the right lender, make sure that they will go up to the 10-loan limit.

3. Always have CASH, CASH, CASH:

Lenders will always ask you to have 6 months of cash reserves. Meaning that if you want to own a property, the lender will want you to have 6-months of mortgage payments. So always have enough cash ready to rumble.

What kind of loan should you get?

There are different ways to finance an investment property. Most investors go with the financing option that is easiest to obtain, depending on their financial situation and credit score.

A conventional mortgage

A conventional mortgage is a type of loan that is available through a private lender (banks, credit unions, mortgage companies). With a conventional loan, your ability to be qualified is determined through your personal credit history.

Related: How Real Estate Investors Spend The Most and Make the Most Money

Hard money loan 

The is a type of short-term loan. They are basically hard money loans, meaning that the loan is secured by the property. Meaning, the value of the property is worth more than the loan, to avoid the lender losing any money, should the loan not be paid back. When borrowers have bad credit scores, they turn to hard money lenders to help them out.

Related: Financing a Rental Property: What’s the Best Way? 

The bottom line is, when it comes to getting a mortgage for an investment property, getting qualified can be stressful. Be sure to understand the requirements ahead of time and consult a professional in order to get the best possible plan.

Investors can use Mashvisor’s investment property calculator to enter their different financing options and get their returns automatically calcualted for them.

To summarize how to best get qualified for an investment property mortgage:

  • Always have your money down payment ready
  • High credit scores
  • Know your loan limits
  • Have a dependable direct lender
  • And always take time to research on mortgage financing!
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