How to get a mortgage for a rental property

If you are considering investing in a rental property, the first question you might ask yourself is how to finance it. For most people, the answer to financing a rental property is the same as financing their primary residence: you will get a mortgage. Even though you may need to invest more and interest rates remain historically high, an investment property with a mortgage can still create positive cash flow. Read on to find out what you need to consider when getting a mortgage for rental property.

Rental mortgages are equivalent to any second, third or fourth mortgage. Real estate investors can get up to 10 mortgages under Fannie Mae guidelines. Your second mortgage could be just the start.

The main difference between the mortgage on your primary residence and any additional mortgage is the down payment. For a rental property, you may have to pay 10-20% or so. Interest rates may also be higher than those for your principal residence or those offered to other home buyers.

Should I take out a rental property loan? If you crunch the numbers and see the possibility of positive cash flow with the current rental market, owning a rental property can be a powerful way to earn some cash now while increasing the value of your assets over time. time.

Borrowers have options when it comes to rental mortgages. You can usually only use government-backed loans, such as Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and United States Department of Agriculture (USDA) loans for your home. main. The notable exception is if you are buying a multi-unit property and plan to live in one of the units.

For rental properties, you can get conventional mortgages and jumbo loans. You may be able to use a home equity line of credit or home equity loan if you already own a home.

If you’re ready to apply for a mortgage for a rental property, here’s what you might consider:

Before applying, it is important to be realistic about your financial situation. Assess your personal finances and consider your assets, total debt, and debt-to-income ratio. These are numbers that lenders will look at. Typically, they look for a borrower with a debt-to-equity ratio below 30% before applying for a new mortgage.

The debt-to-income ratio is the ratio of total monthly debt repayments to total income. Lenders look at the ratio – expressed as a percentage – of a loan applicant’s gross monthly income that is used to pay off their debts. In some cases, the percentage also includes the total monthly expenses. For example, if you earn $10,000 a month and your debt is $2,000, your debt to income ratio is 20%.

In addition to assessing current income and expenses, you can add potential rental income based on market research to show lenders. This can factor into the total debt to income ratio and improve cash flow.

Once you understand your eligibility and financial situation, it’s time to research loan options and lenders. Don’t be afraid to apply to multiple lenders and be prequalified for the best terms. And don’t forget that you can negotiate when you have several offers.

When you are ready to apply for a mortgage, you will need to submit standard documents. These include:

• government-issued identification document
• Social Security number
• Tax returns
• Bank statements
• Proof of income such as payslips or W-2
• Rental property details
• Projected rental income
• Gift receipts (if applicable)

Plan to gather all necessary documents in advance to streamline the application process.

Finding the best rental mortgage lender cannot be overemphasized. Evaluate lenders based on their expertise, interest rates, customer service, and responsiveness. You can check online customer reviews and ratings from the Better Business Bureau (BBB) ​​and ask for references for customer experiences.

The step-by-step process for applying for a mortgage for a rental property includes:

• Fill out the application
• Submit documents
• Go through a credit check

Being prepared and organized can help ensure a smooth application process. Keep in mind that you can request pre-approval with basic information such as your name and social security number before seeking final mortgage approval from the lender with the most favorable terms.

Underwriting is the process by which a lender assumes financial risk for a fee. In the case of mortgage lenders, the risk generally relates to certain types of mortgage loans.

Lenders use underwriters to assess the total risk through the application, the creditworthiness of the applicant and other potential risks. Common factors that can impact the process of buying a rental property are your credit score, debt-to-equity ratio, total income, and the property’s cash flow potential.

When you are ready to close on a property, you will need to pay the closing costs, sign the closing documents and finalize the mortgage agreement. Before signing, carefully review all documents and consider having a lawyer review the contract and terms to understand any financial implications.

After the close, the real opportunities begin. You will need to develop a plan to manage the rental property, find tenants and ensure positive cash flow. Determine whether you will hire a property manager or manage the property yourself. Assess the property at or below comparable properties in the same area and plan how you will screen tenants to increase occupancy and protect the property.

As mortgage rates rise and fall, below market value properties are still available to investors willing to thoroughly research target markets. If you want to build your investment portfolio through rental properties, you’ll need to analyze the numbers, create realistic cash flow projections, and consider taking the next steps to start a rental property business.