Tips for Securing Mortgage for a Rental Property

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Home prices are currently high and many people are hearing the news that it’s a great time to buy rental property. So, more and more investors are interested in the rental property business. But, to begin in the rental property business, how does one get a mortgage to buy their first rental property? Years ago, rental investment property could be bought with little or even nothing down. This is no longer the case. However, mortgages for rental properties still exist and some are even quite investor friendly. It is important that borrowers know the facts so that they can make themselves eligible to acquire a mortgage for a rental property.

Let’s run through helpful tips that can assist borrowers in acquiring a mortgage for rental properties.

Money Down

To secure the mortgage for a rental property, at least 20% down payment is required. I recommend having at least 25% or more in liquid assets for the down payment and closing costs. Also, generally, the more you put in down payment, the easier it will be for you to qualify for the loan. An investor will also usually get a better interest rate with higher down payment.

Always Have More Cash

Six months of cash reserves can be required by lenders giving loans for rental properties. Meaning that to buy a rental property, you must have six months of reserve mortgage payments. If a borrower doesn’t have enough cash, that borrower might not be able to qualify for the mortgage.

Strong Borrower

There are many factors that can affect the terms of a mortgage on a rental property, but it is extremely important that you check your credit score before applying for a loan.

If your credit score is below 740, lenders might require an investor to pay additional money to keep the interest rate at the market’s lowest. If you want to avoid paying additional money, the only other option is to have yourself charged with a higher interest rate. Either way, you’ll be losing your valuable dollars that could be saved if you have a credit score of 740 or above.

Loan Limits

Currently, most lenders provide a maximum of ten loans to each investor at one time. It is important to find the lender that’s willing to go to the ten-loan limit and can help you strategize to use the loans to your advantage.

An important thing to remember about loan limits is that the more the loans, the higher you’ll have to pay in down payments. The amount of down payments varies depending on how many loans you have. For example, for one to four loans 20% down payment is required while for five to ten you’ll have to make a down payment of 25%.

In addition, for more loans you’ll also require a better credit rating. For example, for one to four loans a minimum credit score of 630 is required while for five to ten loans, you’ll need a credit score of 720.

Say No to Big Banks

If you’re short on cash or don’t have enough money to pay in down payment or there are other factors that make you a weak borrower, consider a local bank for financing instead of going to large financial institutions.

The benefit you get from a neighborhood bank is that they provide more flexible options and have more knowledge about the local market.

Another viable option is to work with mortgage brokers as they offer loan products. However, be sure to research thoroughly to ensure that you find an experienced broker that can really help you.

Conventional mortgage or Non-QM Loan

There are different options available to obtain mortgage for a  rental property. Most investors consider options that suit their credit score and financial situation. The two types of loan that you can use for rental property are conventional mortgages and Non-QM Loan. Non-QM Loans are also knowns as Portfolio loans.

Conventional Mortgage

Conventional mortgage is available to you through a private lender (mortgage institutions, credit unions, banks). For a conventional loan, your credit history will be assessed to check whether you qualify for the loan or not. This means that you must have a good credit rating, at least 20-25% money in down payment and/or cash reserves in the bank.

Debt Coverage Ratio Through Non-QM Investors

One program offered through a portfolio or Non-QM investor is the mortgage for an investment property that is covered by DCR (Debt Coverage Ratio). Basically, what DCR means is that if the rent covers the principal, interest, taxes, and insurance, then the loan will be funded. Borrowers need to put 20% down, have a minimum 620 FICO, and show that they have 6 months experience as investors. Other than that, as long the rent covers the PITI (principal, interest, taxes, insurance), it’s a go!

 

In a nutshell, if you have a good personal credit history, you’re generally in a good position to acquire a mortgage for a rental property.

If you have been denied a loan for a rental property, or have any questions about real estate or mortgage please contact the author, Matt Herbolich, MBA, JD, LLM by phone or text at 786.390.9499, or by email at mherbolich@usa-mortgage.com. Mr. Herbolich works when you work, so feel free to contact him anytime.

Matthew Herbolich
Matthew Herbolich
Mr. Herbolich is a Senior Loan Officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS 227262. He is an expert not only in lending but multiple facets of real estate, particularly the title industry. Matt Herbolich trains his fellow loan officers on title industry topics, real estate investing, and countless mortgage guidelines. Have any questions? Call at 888-900-1020 or send email to: mherbolich@usa-mortgage.com

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