Thinking About Buying a Rental Property? Here’s What You Need to Know About Loans

If you are thinking of buying a rental property, odds are you are looking to finance the purchase with a loan. Unless you have a ton of cash set aside, this is the standard route when buying investment properties. Using this option reduces your risks by limiting your investment to the money spent on the down payment for the property and the loan closing costs. To start the process and get pre-approved apply here.

Thinking About Buying a Rental Property? Here's What You Need to Know About Loans

However, to get a loan, you have to qualify for it and investment property loans are not the easiest to get approved for. They have tougher terms than the terms for your own home because unlike your home, a rental property is not a necessity. Moreover, rental properties have a greater rate of mortgage default than primary homes.

Lenders recognize this and they impose stringent conditions to ensure only people with proven financial competence are able to access these loans. As long as you can show lenders that you have the qualities to competently manage a rental property, you should have no problems getting a loan. What do you need to know to make it easier to get a rental property loan?

What to know about rental property loans

Getting Pre-approval

First, you should know the conditions for getting a mortgage preapproval. Preapproval is different from prequalification. Prequalification does not guarantee you will get the loan; it only gives a rough idea of how much you might qualify for. Conversely, preapproval involves a thorough assessment of your financial standing by the lender. It gives lenders the information they need to make a concrete offer if you qualify.

What do you need to get per-approved for a rental property loan?

-Sufficient cash reserves

You must have enough money in your savings to cover the following upfront costs:

  • Cash for down payment

The standard down payment for a rental property is 20%. You will get very good terms if you pay 20% down, but for the best terms, aim for 25%-30%. Down payments below 20% mean you will be required to buy mortgage insurance.

Note that the money for the down payment cannot be borrowed. It must be legitimately earned. It may be inherited or gifted to you.

  • Cash for closing costs

The closing cost for the loan will be between 3%-6% of the sales price of the property. These are the associated costs of underwriting the mortgage and the fees of everyone who has performed a service in the loan process. These fees include application fees, attorney fees, closing fees, escrow deposits, courier fees, credit report fees, homeowner insurance, and a lot more.

  • Six months’ cash reserves

You must have enough money to cover mortgage payments, insurance, and other costs for the rental property and your own home for a period of six months. This is to ensure that in the event you lose your source of income, you will still be able to meet your financial obligations on the properties.

-Other Conditions For Pr-approval

  • A good credit score

Your credit score determines if you qualify for the loan and the attached conditions. A low or average score results in tougher terms, such as a higher interest rate. Although a score of 640 may be considered, the acceptable score to get an investment property loan is 700+. Additionally, any history of defaults in your credit history will hurt your chances.

  • Proof of sizable income

You need to show evidence that you earn sufficient income and that the income is regular enough to be predictable. If you have a job, the lender will ask for a letter of employment from your employer, not more than 30 days old. They will also want to see pay stubs and a tax assessment. If you run your own business or earn your living from commissions, you may need to present your company registration documents, financial statements, and tax assessments.

  • Your level of indebtedness

You should not be saddled with debts, as it can impede your ability to meet the loan obligations. What is important is not much how much debt you have, but how much debt you have in relation to how much income you earn. What percentage of your gross monthly income is spent on loan repayments? To prevent problems in the future, lenders want a maximum of 35% of your income going into debt payments.

Choosing the right loan option

The following should be kept in view when choosing your preferred financing options:

Thinking About Buying a Rental Property? Here's What You Need to Know About Loans
  • Conventional loans are the most popular option. However, because a lot of people use this option, the requirements are harder.
  • Smaller mortgage institutions, which are not as popular, often have easier terms. They are often local and in the position to offer good advice on buying in their location.
  • Using a mortgage broker will expose you to loan options that you would not know of otherwise.
  • Finally, a fixed-rate loan is preferable because you can predict what your future interest rate will be.
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