Financing is one of the biggest elements when it comes to investing in a rental property loans. Lenders see rental properties as a risk investment as opposed to primary residences, thus the requirements seems to be on strict terms and the interest rates are usually higher.
All You Need To know About Rental Property Loans
Rate Differs
Lenders want to be compensated for what they perceive as a greater risk, thus the interest rates are typically higher than for a mortgage on a primary residence. For private lenders or hard money lender that issues short-term private loans for distressed properties meant to be fixed and resold, rates may be much higher, like say 7.5%-14%.
Note: Interest rates for rental properties can be fixed or variable, and except in ‘fix and flip’ instances, then it’s usually 15 to 30 years.
20% Down Payment Will Be Required
Even though there is no set rule, normally you will have to put down at least 20% maybe 25% of the purchase price when securing financing for a rental property.
Your Credit Score is Needed
To get a rental property loan, your credit score and history is usually an important factor, and just like with primary residence mortgages, the better your credit score, the better the rate.
On the FICO credit score scale, the most popular with lenders, your credit score is considered “good” which means you are a relatively safe betif it’s between 670 and 739. Traditional banks most likely have the strictest credit requirements. Some private online lenders, have a minimum score of 640 for a rental property loan and others look at credit history and liquidity, though with no particular minimum.
Complicated Finances
Purchasing a rental property can be tricky if you have to show you can afford to repay what you borrow on your investment while having also a mortgage on your own home. The two factors considered by banks are debt-to-income ratio and cash reserves.
Debt-to-Income Ratio
The debt-to-income ratio is the amount of your monthly income that goes to paying debt. Most traditional lenders will want to keep this ratio below 45%. This ratio can be especially challenging for the first purchase of a rental property as you do not have the additional rental income flowing in from the property yet. Thus you may have to be able to afford two mortgages using only your current income. Some lenders may be willing to add a percentage of the rental property’s projected rental income to your current income to make you eligible for approval, thus ensure you check.
Cash Reserves
Lenders often require that you have a certain amount of cash in the bank. This may vary according to the lender, but can be the equivalent of 6 months or more mortgage payments. This includes the mortgage payments on your own home and the new rental property loan.
Lenders Differ
Rental property loans are offered by big banks and community banks, private and hard-money with less rigid requirements. These lenders may compete with the traditional lenders and/or offer shorter-term ‘fix and flip’ loans at higher rates. Some of these lenders target the experienced real estate investor with bigger portfolios of properties. If it is you are a first time buyer of a rental property, another financing option may be to get a home equity loan on your own home.
Rental Property Loans (Is It Worth It?)
There’s a reason rental properties are seen as riskier investments, this is because poor property management, vacancies, and unforeseen repairs can hurt your intake and your ability to pay your loan. Be it as it may, the income produced outweighs your costs, and once your rental property is stable, you may be able to refinance with better terms, which is why after all you are considering a real estate investment.