Inside Look: Income Property Loans
Purchasing your first rental property is a big step in your real estate investor journey. Aside from choosing a potentially profitable property, you need to figure out how to finance your rental.
Before sharing how to apply for an investment loan, let’s look at how a primary home mortgage differs from a rental property mortgage.
The Difference Between a Mortgage for a Primary Home and a Rental
On the surface, a mortgage for a rental may look similar to a mortgage for a primary home since the application process is the same. However, there are different rules and guidelines lenders follow when you apply for a mortgage on a rental property.
Larger Down Payments
For a primary home, you can make as little as a 3% down payment in some cases, while the minimum down payment required for investment properties can range from 15% to 20%.
Since lenders are taking on higher risk, your mortgage rate on your rental property will likely be a little higher. Usually, the rate will be between 0.375 to 0.5 of a percentage point higher for an investment property compared to a primary home loan.
In some instances, you may have to settle for a shorter term compared to the typical 30-year term offered for primary home mortgages.
How to Apply for a Rental Property Mortgage
The application process for a rental property involves the same steps as a primary home loan. Lenders will qualify the buyer, appraise the property, research the title and underwrite the loan.
When financing a rental property, lenders will require a minimum credit score of 620. If you want to get the best rates your scores should be in the high 740s or better. DTI ratio should be no higher than 35% to 45%.
The lender may ask for financial statements for the past 3 years as well as projections for the next 12 months, similar to the requirements for a commercial borrower. Additionally, you’ll also need to submit current personal financial statements and tax returns of principal owners.
Ready to Invest in a Rental Property?
Being a landlord has its perks, but it’s important that you have all the information necessary for success. Get in touch with our loan advisors for personalized guidance and to get pre-approved on your loan today.