More and more people seem to be investing in rental properties as a way to secure their financial future. And it’s no wonder why – rental properties can be a great way to make money, especially if you’re able to keep the property well-maintained and rented out at all times.
But what happens when you want to get a loan for a rental property? Is it harder than getting a loan for other types of properties? And what are the specific rental property loan requirements that lenders look for?
In short, yes – it is generally harder to get a loan for a rental property than it is for a traditional home purchase. This is because rental properties are considered to be a higher risk by lenders, and as such, they often require a higher down payment and have stricter eligibility requirements.
In this article, we’ll provide more information about the specific rental property loan requirements that lenders typically look for, as well as the different types of rental property loans that you may be able to qualify for.
What Is An Investment Property?
An investment property is a property that you purchase with the intention of renting it out to tenants. Unlike a traditional home purchase, an investment property purchase comes with a number of unique considerations.
For one, you’ll need to be prepared to deal with the extra work that comes with being a landlord. This includes things like finding tenants, collecting rent, and dealing with repairs and maintenance issues.
In addition, you’ll need to be familiar with the laws and regulations governing rental properties in your area. Each state and municipality has its own set of rules, and failing to comply can result in costly fines.
All of this might sound like a lot of work, but if you’re prepared to put in the effort, an investment property can be a great way to make money. And when it comes time to get a loan for your rental property, there are a few things you’ll need to keep in mind.
Best Type Of Loan For An Investment Property?
When it comes time to get a loan for your rental property, you’ll need to decide what type of loan is right for you. There are several different options available, each with its own set of benefits and drawbacks.
The most common types of loans for investment properties are:
- Conventional mortgage
- FHA mortgage
- VA mortgage
- USDA mortgage
Each of these loans has its own specific requirements, so it’s important to do your research and find the one that best suits your needs.
Conventional Mortgage
A conventional mortgage is a loan that is backed by Fannie Mae or Freddie Mac. These are the two largest government-sponsored mortgage lenders in the country.
One of the benefits of a conventional mortgage is that they typically have lower interest rates than other types of loans. In addition, you can put as little as 3% down on a rental property with a conventional loan.
FHA Mortgage
A Federal Housing Administration (FHA) mortgage is different from a conventional mortgage in a few key ways. For one, the down payment requirements are lower – you can put as little as 3.5% down on a rental property with an FHA loan.
In addition, FHA loans are available to borrowers with less-than-perfect credit. However, there is a tradeoff to consider here: You’ll likely have to pay for private mortgage insurance (PMI) if you put less than 20% down on your rental property.
VA Mortgage
A VA mortgage is a loan that is guaranteed by the Department of Veterans Affairs. This type of loan is only available to veterans, active-duty military members, and their spouses.
One of the benefits of a VA loan is that you can put 0% down on a rental property. In addition, these loans typically come with lower interest rates than other types of loans. However, there are some tradeoffs to consider as well.
USDA Mortgage
Finally, USDA Mortgages are loans that are guaranteed by the United States Department of Agriculture. These loans are available to borrowers who meet certain income and credit requirements.
Most landlords will find that they do not qualify for USDA mortgages. However, these loans can be a good option for those who do qualify. One of the benefits of these loans is that they typically have lower interest rates than other types of loans.
Rental Property Loan Requirements
Now that you know what type of loan is right for you, it’s time to start the application process. When you’re applying for a loan, there are a few rental property loan requirements you’ll need to keep in mind.
Minimum Credit Score
The first thing you’ll need to consider is your credit score. Your credit score is a major factor in determining whether or not you’ll be approved for a loan. In general, you’ll need a credit score of at least 620 in order to qualify for most rental property loans.
Maximum Debt-to-Income Ratio
Your debt-to-income ratio is another important factor in determining whether or not you’ll be approved for a rental property loan. This ratio is a measure of your monthly debt payments compared to your monthly income.
In general, you’ll need a debt-to-income ratio of 36% or less in order to qualify for most rental property loans.
Down Payment Requirements
The next thing you’ll need to consider is your down payment. The amount of money you’ll need to put down on your rental property will vary depending on the type of loan you’re applying for.
For most conventional loans, you’ll need a down payment of at least 20%. For FHA loans, you can put as little as 3.5% down. And for VA and USDA loans, you may not have to put any money down at all.
Cash Reserves
Finally, you’ll need to have cash reserves in order to qualify for a rental property loan. Lenders will want to see that you have enough money saved up to cover six months’ worth of mortgage payments. This is to ensure that you’ll be able to make your payments even if your rental property isn’t generating enough income.
Is It Hard To Get An Investment Loan?
Yes and no. It can be harder to get an investment loan if you don’t have a strong credit score or a large down payment. However, there are a number of programs available that can make it easier to get an investment loan.
The most important thing is to do your research and understand what you’re looking for in an investment loan. With the right loan, you can make your rental property investment dreams a reality.
What Percentage Can You Borrow On A Rental Property?
The percentage you can borrow on a rental property will vary depending on the type of loan you’re applying for. For most conventional loans, you’ll be able to borrow up to 80% of the purchase price of your rental property.
For FHA loans, you can borrow up to 85% of the purchase price of your rental property. And for VA and USDA loans, you may be able to borrow up to 100% of the purchase price of your rental property.
Bottom Line
When it comes to getting a loan for a rental property, there are some rental property loan requirements you’ll need to consider. From your credit score to your down payment, each factor will play a role in determining whether or not you’ll be approved for a loan.
However, don’t let the process of getting a loan deter you from investing in rental property. With the right loan, you can make your rental property investment dreams a reality.
