Varieties of Loans for Rental Properties
When it comes to obtaining a mortgage for your primary residence, you have a range of options at your disposal, including government-backed loans offered by the Federal Housing Administration (FHA), Veterans Administration (VA), and U.S. Department of Agriculture (USDA). However, these loan types are typically limited to financing primary residences, making them ineligible for the purchase of rental properties unless the property in question is a multi-unit dwelling and you plan to reside in one of the units.
Generally, the most common loan options available for rental properties are conventional mortgages and jumbo loans. If you are already a homeowner, you might be able to tap into the equity of your current property to finance the purchase of a rental property. This can be achieved through either a home equity loan or a home equity line of credit, providing you with access to the accumulated equity in your home.
Applying for a Rental Property Mortgage: A Step-by-Step Guide
According to Dalzell, the application process for a mortgage remains consistent, whether it's for a primary residence or an investment property. The process involves several essential steps, such as buyer qualification, property appraisal, title research, and loan underwriting.
Typically, you will need a credit score of at least 620 and a debt-to-income (DTI) ratio ranging from 35% to 45%. Additionally, you must provide documentation to demonstrate that your income is sufficient to cover both the rental property mortgage and your other monthly obligations.
One notable difference for investment property mortgages is that projected rental income can sometimes be factored into the qualification process if you plan to generate income through property rental. An appraiser can develop a rental income schedule to estimate the property's potential rental value. The lender can then consider this projected rental income as part of your overall income, which may help you qualify for more favorable terms and offset your mortgage payment.
Many lenders impose additional requirements and documentation specifically for investment property mortgage applications. For instance, banks often treat real estate investors as commercial customers, necessitating a commercial loan relationship with the institution. The document requirements for commercial loans differ significantly from those for mortgages for primary residences.
In commercial loan scenarios, borrowers are typically expected to provide financial statements for the past three years, financial projections for the next 12 months, tax returns for the past three years (usually two years for residential mortgages), current personal financial statements, tax returns of principal owners, and copies of current and projected rent rolls for loans involving rental properties.