Getting a loan for a tenant-occupied property is not the same as getting a mortgage for an owner-occupied property. While the two situations have some parallels, they also have important variances. Landlords who are considering applying for a loan to purchase a new rental property should look at the requirements thoroughly.
Credit Scores
A few things you should do before you put in an offer to make getting a mortgage and closing on the loan easier. First, make sure your credit score is where it should be. Fannie Mae allows up to 10 loans for investment properties at a given time, but the credit score requirements vary.
- First four loans require a minimum credit score of 630.
- Remaining six loans require a minimum credit score of 720.
Cash Reserves
Cash reserves are required. Most lenders require six months of loan payments in savings to ensure you can make the payments even if your property remains vacant for a period of time. Cash reserves may include the mortgage payment for the rental property and any other loans or expenses you have.
Down Payment and Income
An additional requirement is a higher down payment. You may be required to put down 25 to 30 percent, but the minimum is usually 20 percent. Many investment mortgages have rigorous limits on loan to value. Investment loans may limit the LTV to 70 or 80 percent. You must show stable income on your tax returns. Your rental income may be considered if you have a history as a landlord. An additional benefit is if you have a long-standing relationship with a professional property management firm such as the Pyramis Company in San Antonio. If you are a first-time landlord purchasing an initial rental property, your regular income must be sufficient.
Finding the Right Mortgage Company
Not all lenders are experienced with investment properties. Make sure the lender you choose has handled loans for landlords and investors in the past. Otherwise, you may end up in a horrendous experience with delays.
Rent Loss Insurance
Another requirement you can expect for many investment loans is the need to purchase rent loss insurance. This policy protects you if you should lose out on rental income for reasons that result in damage to the property. This can include fire, water damage, or other natural disasters. This policy is usually included in your property insurance once you let the insurance provider know what kind of property it is.
FHA
You can get an FHA loan for a rental property. Most individuals assume these loans are limited to folks who plan to occupy the residence. In principle, this is true because you are required to live in the property for 12 months. After that time, you can rent it out.
An FHA loan is a feasible option for someone who wants to get started in rental real estate investments with limited cash. Only one loan is allowed from FHA.
Types of Real Estate Investment Loans
If you plan to rent out the property immediately, you have to choose between a residential and a commercial property loan. The residential loan is usually designed for properties with four or fewer units. You still have more rigorous requirements, but not as complex as for commercial investment loans.
Commercial loans require much of the same information as residential investment loans, but the details may be different. For instance, lenders look closely at the amount of cash flow that is expected over just verifying income. They also check your background and experience in managing the properties. Again, having a long term relationship with a professional property management company bodes well with a commercial lender.