This is the perfect time to buy a rental property. Most real estate investors finance their purchases of rental properties using mortgages. But getting a loan for a house you plan to rent isn’t quite the same as getting a loan for a house you plan to live in.
To get a loan to buy a rental property, you will need a lot more money and a lot less debt. Lenders typically want larger down payments for rental home loans, and they want to see strong evidence of stability and cash reserves from borrowers seeking these types of loans. Here’s how to clean up your financial situation and meet the requirements of a mortgage on a rental property.
Improve your credit score
In theory, you should be able to get a mortgage to buy rental property with a credit score of just 620. But many lenders may want to see an even higher score, and you’ll get the best interest rates if your score is at minus 740. Take steps to improve your credit score, such as paying off high balances, removing inaccurate items from your credit report, paying bills on time, and limiting difficult inquiries.
Save a big down payment
If you’re buying a house to live in yourself, you can get a loan for just 3% less from some lenders, depending on your credit score. But lenders want bigger down payments when you buy the house to rent out. Expect to put at least 20 percent down. To avoid having to purchase private mortgage insurance, you may need to put down a minimum of 25% down. The more you stake, however, the more equity you will have in your home from the start of the loan.
Now save even more
If you manage to get a mortgage to buy a rental property in Charlottesville, Virginia, you will become someone’s landlord, which means you will have the financial responsibility to keep the house in good condition. You should also be prepared for the possibility that your new rental unit may sit empty for months before you find a tenant, and may sit empty between tenants.
You can offset some of that risk by buying quality rental housing in a desirable neighborhood where people want to live. But you’ll need to show that you have enough savings to pay your mortgage and expenses during lean times, when no rent is coming in. You will also need to show that you are prepared for emergency repairs and that you are financially responsible. enough to handle regular maintenance and renovations to your rental property. Plan to save at least six months of operating expenses in addition to your down payment, inspection fees and closing costs.
Minimize your debt
An important factor that lenders use to determine whether or not you are a loan risk is your debt-to-income ratio (DTI). Your DTI is the percentage of your monthly income that goes directly to paying off debt. The more consumer debt you have, the higher your DTI. The higher your DTI, the less capacity you have to take on new debt.
Mortgage lenders like to see a DTI of 36-45% for borrowers seeking a mortgage to purchase rental property. You can reduce your DTI in two ways: pay off your consumer debt or increase your income. Sometimes lenders will allow you to count up to 75% of your future rental property as part of your income for the purposes of calculating DTI. However, this option may not be available to you if you are buying your first rental property, and some lenders may require all borrowers to be approved for the loan based on their personal income.
Do not abandon
You may not find a lender willing to give you a rental property mortgage, at least not right away. This is especially true if you are buying your first rental property, or if your credit score is at rock bottom, or if you have a high DTI ratio. Keep going to different lenders and don’t be afraid to apply to non-bank lenders like credit unions, online mortgage lenders and mortgage brokers. If you look around long enough, you are bound to get loan offers. And even if you don’t suffer from offers, it always pays to shop around and see what different interest rates and terms are offered by different lenders, so you can choose the best ones.
There’s never been a better time to buy a rental property. Put your money in real estate and protect your finances from the uncertain economic times ahead.