In a depressed housing market, purchasing a rental property can be a smart move to make. You can buy property at lower prices and then rent them out to people who have been left out of the market because of the tightened credit restrictions. However, getting a loan to buy your rental property is slightly different from financing a residential property. Banks will take a look at these loans and give you the buyer, a more critical eye. Knowing more about what you have to do can help you when you are trying to finance your rental property. Read on to learn about rental property vs. regular home loans!
Rates
Because mortgage lenders see rental properties at a greater risk of default than the primary residence, they will charge higher interest rates too. If you are in financial trouble, you will have to pay your mortgage and payments for your primary property first then next on your investment property. Your interest rate will depend on your credit score, and you can negotiate a lower interest rate when you agree to pay points on the loan.
Down Payment
Your lender will need you to have a down payment of at least 20 percent of what is given as the purchase price before they will consider giving you a loan. A 25 percent down payment will be even better. A larger down payment can help you qualify for a better interest rate for the loan.
Qualifying
Lenders look closely at borrowers who want to seek mortgages on rental property. If you have a debt payment for another house, are you planning on taking on additional debt? You would need to have your finances in order. You will be required to have a good credit rating of above 740. But it doesn’t mean that you cannot get a loan with a lower credit rating. You just have to go through more obstacles to please the lender and you might not get a favorable interest rate. You have to show your ability to make the mortgage payments, even if the market goes down and you are not able to rent your property for many months.
Reserves
To prove that you are able to carry a rental property, your lender will need you to have a reserve fund that consists of six months or more of mortgage payments as well as maintenance for the rental property. The lender doesn’t want you to depend only on the rent to make the mortgage payments. If your renter falls behind on rent or the home remains empty for months, your lender has to know you are still able to make payments.
Grow Your Real Estate Business with InstaLend
InstaLend allows you access to capital at affordable rates. We provide you with new construction loans, single family rental loans, and more. Our streamlined processes make it easy for you to get the loans with minimal paperwork. Here at InstaLend, our professional team has the knowledge to help you along. Feel free to contact us for more information.