Tips and Tricks to Get a Mortgage for Your Rental Property

Are you looking to get a mortgage for a rental property?
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Are you looking to get a mortgage for a rental property?

Rental properties have an excellent potential for return on investment. More people across the U.S. use investment properties to increase personal income and grow their wealth.

First-time rental property investors may find some obstacles on their way towards passive income. As Paramount Management, a local property management company warns, buying a rental property may be more complicated than first imagined.

In this article, we’ll explore the topic of getting a mortgage for your rental property. After reading this, you will be better equipped to face the mortgage challenges that you might encounter.

#1: Raise Your Credit Score

Did you know that rental property buyers need to show a higher credit score? The most common minimum credit score for investment properties is around 740. Compared to 580 for regular home loans, the difference is substantial. While a credit score lower than 740 won’t necessarily zero out your chance of obtaining a mortgage, you could face more stringent terms. These may include higher fees and interest rates together with reduced loan-to-value ratios.

#2: Prepare Advanced Proof of Income Documents

Proof of income is mandatory for all types of mortgage. But lenders wish to see more proof from buyers applying for a rental property mortgage. In practice, this usually means showing an income of at least 2 years’ worth. Get ready to share your tax returns and W-2s.

#3: Find Investor-Friendly Lenders

Finding a great lender is essential to making your rental property purchase a success. Working directly with a lender gives you more control over the process. Picking the right lender means asking a lot of questions. Here are some sample questions to get you started:

Have you worked with investors before?

Do you currently work with any other investors?

What is the down payment that I need to make?

Do you have personal experience with rental properties?

What are your loan terms?

Do you offer recourse and non-recourse loans?

How will the funding timeline look like?

What type of loan can you offer me?

Are there additional fees besides points and interest?

How many loans can you offer to a single investor?

#4: Learn About Lending Limits

Many institutions will only lend up to four loans. There are some lenders that go up to ten loans at once. You have to do some research to find these lenders and see if you match up with their requirements.

#5: Test the Lending Market

Many starting investors apply with one or two lenders. Then they readily accept whatever the terms they are given. This is not the best approach to getting the best deal. You should apply with multiple lenders to understand what your options really are.

People don’t often do this because they are afraid to hurt their credit score. However, should all of your applications fit within a period of two weeks, they will count that as a single inquiry.

This less-known feature of the FICO credit score formula means you can learn what various lenders have on offer for you. You might be surprised at the stark differences between the quoted loan terms and interest rates.

What else should you focus on?

Getting a mortgage for your rental property is only one of the areas you have to deal with. There are other challenges as well. Don’t forget to find answers to these questions:

How do you plan to screen your tenants?

What is your plan for marketing your rental property?

Who will provide your rental insurance?

Will you self-manage or hire a professional property management company?

What is your approach to the property’s maintenance?

Who is going to help you draft the rental agreement?

How will you ensure legal compliance?

Finding answers to these questions is as important as getting a solid mortgage for your rental property.

In a nutshell: Mortgage for Your Rental Property

Investing in a rental property can be lucrative. But many first-time investors don’t know that it’s harder to get a mortgage for an investment property.

With these tips, you can now take practical steps to increase your chance of getting a rental mortgage with the best terms and interest rates.

Here are some tips and tricks for getting it done:

Learn about your lending limit as an investor

Get your credit score in top shape

Sign an agreement with an investor-friendly lender

Test the market by sending out multiple applications

Prepare all the necessary paperwork for proof of income

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