There are plenty of viable options for investment property financing for nearly all real estate investors. Even when you are in debt, you could still be financing rental properties.
In some cases, for example, you may have loans for your car or home, but you could still get a rental property mortgage. Of course, this depends on your debt to income ratio, which we will get to in this article.
You might be concerned, however, about how to buy a house with no money or how you could be financing rental properties when in debt. We will be glad to tell you how it can be done, especially since getting started in real estate may even help you pay back your debts more quickly.
Before we delve further into the different ways you could be using to invest in real estate when in debt, let’s talk about whether or not you should even be buying rental property when you have debt.
Related: What Are Your Options for Financing Rental Properties?
Should You Be Buying Rental Property When You Are in Debt?
Certainly. In fact, buying a rental property can help you pay back the debt from other investments that you might have. This is because when you are buying a rental property, you can also be generating a passive income- your monthly rental income. Depending on the type of rental property, your rental income might be good enough to pay back debt and other loan payments while leaving you with some extra cash.
Moreover, investing in real estate makes for one of the best investment strategies as opposed to investing in stocks, for example. When you are investing in real estate, you are getting a top up from home appreciation. The home price index rose by 6.2% in 2017; that’s almost 4% after adjusting for inflation. This is the strongest year-over-year growth since 2014. Home prices in the US housing market continue to accelerate with the market growing steadily. Therefore, investing in real estate makes an excellent investment strategy to grow one’s income and, in the case of debt, to lower the amount of debt owed.
Now let’s discuss the process of acquiring a rental property mortgage and if your debt-to-income is indicative of your ability to further retrieve another mortgage to start financing rental properties.
The Process of Acquiring a Rental Property Mortgage
When you start thinking about financing rental properties, most likely you are looking into retrieving a rental property mortgage. Mortgage lenders will first want to sit with you and assess if you qualify for a loan. In the pre-qualification process, your lender demands that you provide financial information in order to comment on your financial solvency. The financial information includes information about your debt, income, and assets. The lender will then provide you with a rough estimate of how much you can borrow. Once you are pre-qualified, you further advance to get pre-approved. This is where the official mortgage application begins.
In the pre-approval stage, you supply your lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. To be able to qualify for a bank loan or a conventional loan, you must have a score of 620+ to qualify. Additionally, in the pre-approval stage, mortgage lenders will look into your debt-to-income ratio, credit report, and employment history. If you have a debt-to-income ratio higher than 43%, then you will most likely be unable to acquire a conventional loan and go about financing rental properties. If you get pre-approved, you can then start the mortgage application process.
Applying for a Mortgage While in Debt
You could still apply for a rental property mortgage even if you are in debt. As we explained in the process of acquiring a mortgage, your debt-to-income ratio could help you learn of your capability of financing rental properties while in debt. The debt-to-income ratio is simply all your monthly debt payments divided by your gross monthly income.
For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent.
With this rate, you could still get started in financing rental properties through a mortgage. Your debt-to-income ratio, however, will increase. Therefore, we recommend that you turn to a mortgage broker to help you calculate your debt-to-income ratio and find ways to make it low enough to be able to start financing rental properties and acquiring additional loans.
What if your debt-to-income ratio enables you to get a mortgage, but your credit score is not high enough? You could then use ways to increase your credit score to qualify for a mortgage and start financing rental properties. Your mortgage broker will look at your profile and help you find ways to increase your credit score as well.
Related: Financing a Rental Property: What’s the Best Way?
Other Means of Financing Rental Properties
If you still do not qualify for a conventional loan, you could get real estate investment loans through non-institutional lenders. Below are two ways you could go about financing rental properties without having to go to a bank.
Hard Money Lenders
Consider using hard money loans if you don’t qualify for a conventional loan. Hard money lenders are non-institutional banks that offer loans to investors to purchase a house, condo, or multifamily building. These loans are suitable for investors who do not qualify for a mortgage because they have a high debt-to-income ratio or a low credit score.
To qualify for a hard money loan, the lender will focus mostly on the value of the property rather than your financial background. This could certainly help you in financing rental properties while in debt, and therefore, makes a viable option to look into.
Seller Financing
Some real estate investors go about financing rental properties through seller financing. Seller financing is a real estate agreement where the seller handles the mortgage process instead of a financial institution. You will pay monthly installments to the property seller instead of a bank.
The seller will be willing to provide you with financing to purchase a property if you set a rigid financial plan to pay them back. You want to assure the seller that your investment property will produce positive cash flow. You must, additionally, assure the seller that you will pay the monthly installments set forth in the agreement. If you fail to comply, the seller can take the house back. Banks, in fact, do the same when you fail to pay off your mortgage loans.
What is advantageous about seller financing is that it typically involves little or no closing costs or appraisals. You could be saving more money using this method. Moreover, sellers are more flexible than a bank in the amount of down payment. While in debt, this can help you secure a rental property much more easily.
Related: Real Estate Investing for Beginners: Methods of Financing Rental Property
Bottom Line
Financing rental properties when in debt shouldn’t be an obstacle nor should it deter you from investing in real estate. In fact, when you invest in rental properties, you could use your rental income to pay off your debts. Not to neglect, investing in real estate makes for one of the best investment vehicles out there.
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