Guidelines on Getting a Rental Property Loan

There has been an increased need for the rental property over the years in the country. National Multifamily Housing Council and National Apartment Association have statistics to back this up. These statistics show that by the year 2030, there will be an annual demand of more than 325,000 rentals. With this in mind, it can be extremely beneficial to invest in rental property in terms of revenue generation. It does not matter what you need to do to acquire finances. You can go as far as obtaining rental property loans for real estate.


Your Financial Position

Financial strength is one of the critical factors to consider investing in rental property. Following the risks accompanying rental properties, owners of these properties like it when the agreement between them and the acquirer are strict.

Therefore, before investing, it is wise to consider your financial position and know how to pay for it. Acquiring an investment property mortgage for investing in real estate is quite hard. It is undoubtedly incomparable with getting a mortgage to acquire a primary residential property.

Below are some tips and guidelines on how to get approved for a rental loan or an investment property mortgage.


A 20% Initial Payment

Property management financiers require a minimum of 20% deposit of the initial payment. However, this initial payment rate is not uniform in all states and firms across the country. Ideally, lenders need to see your interest in acquiring the property. If you are a low-income borrower, there are some considerations put in place to allow you access funds. These considerations, however, require you to have made an initial deposit of as low as 3% of the total pay.


Your Financial Position in Acquiring a Rental Property Loan

Purchasing a rental property requires you to show proof of your current financial situation. Some questions that lenders ask you will help you keep on track about the matter. Can you afford to repay the loan on time? Can you afford to acquire a loan while still having a mortgage on your home? What is your debt to income ratio? How capable is your cash reserve?

These and other questions help link lenders, mostly banks, to your financial position. If these questions are satisfactorily answered to the positive side, then you are good to go on the loan. However, there are two main factors to consider: the debt-to-income ratio and cash reserves.


Debt-to-income Ratio

This is the amount of income you get versus what goes to settling your debts. It answers the question, how much debt do other parties owe you, and how much or how far are you in clearing those debts. Most banks will require this ratio to be at a threshold of 45%. Or even better, much lower.

Some banks are lenient enough to add to your income, the projected revenue for your rental property to be. This gives an advantage to accessing the loan, especially if you are stranded with other debts.


Cash At Hand

Cash reserves statements are another parameter that lenders look into when lending to you. The higher the cash reserve to income ratio, the higher the chances of receiving a loan for rental property.


Brace for High Rates

There are a lot of risks involved in lending mortgages or finances for rental property. These risks are perceived as irreversible if they happen. Lenders for this kind of property management seek compensation for this kind of risk. The interest rates, therefore, are set at higher. Their rates sometimes scale four to five times higher than the mortgage rates charged on a primary residence. Others are as low as a 1% difference between the two.

The higher are set by private lenders who issue private loans for recipients interested in renovating and reselling the private property. The timeline for repayment can be as low as five years to as much as 30 years. Keep this in mind, interest rates for rental property loans are either fixed or variable. It is wise to expect the worst-case scenario.


Choose Your Lenders Wisely

Be open and optimistic for a diverse group of lenders. Do not just eye commercial and community banks. Be ready to embrace the different kinds of lenders out there – private and hard-money lenders. These “other” lenders may tend to offer the same loans on much lenient financial strictness. Their rates might be higher but for an extended paying time or vice versa. Do some research on the best loan providers for investment property financing.


Check on Your Credit Score

Leverage your chances of acquiring the loan by bettering your credit score. This is a score that shows how worthy you are in deserving of a loan. FICO credit score is the most commonly used by lenders to assess borrowers.

A score of 670 and above is considered above average in FICO. However, some conventional banks have more strict measurements on credit scores. Other credit score analyzers include LendingOne, which sets a minimum required score of 640. CoreVest looks into your activity on money transactions and your liquidity rather than a specified minimum score.


Parting Short

With all these tips and guidelines in place, there is one thing that you have to keep in mind. Rental properties are considered to be a risky investment area. This is because their management is low, their vacancies are uncertain, and costly repairs van eat up funds meant to clear the loans acquired in purchasing it.

But one thing is, however, inevitable. The revenue generation in rental real estate will be reasonable enough to outweigh the cost of purchase and maintenance.