How to Get a Mortgage for a Rental Property

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There are plenty of benefits for a real estate investor to own a rental property. If done well, this type of investment can be a cash cow, leading to residual payments through monthly rent and significant tax deductions. 

Yet investors are often surprised to learn that financing a rental property is a bit different than financing a personal home. It’s not impossible to get a mortgage loan for a rental property, but it can be a bit trickier.

With that in mind, here’s a breakdown of what you need to do to get a home loan for a rental property.

Steps to get a mortgage for a rental property 

The good news is that the process isn’t all that different from buying a home. So, investors who have gone through the process before should at least be well-versed in the steps required to do it again. 

Here’s what this entails.

  1. Make sure you’re financially ready
  2. Find a great real estate agent
  3. Get prequalified and preapproved
  4. Check out different loan types
  5. Shop around for lenders
  6. Buy the rental property

1. Make sure you’re financially ready

The first thing you should do when considering real estate investing is to conduct a personal assessment upfront. 

During this exercise, you’ll want to take a look at your overall financial portfolio to check whether real estate makes sense for your needs. It’s also a good idea to make sure you are in a strong position to ask a lender for money.

Check your credit score and determine whether you need to take action to improve your rate by paying down credit card debt. If you have a low credit score or high debt, it’s going to be hard to secure financing for this type of investment. 

That said, there may be some small steps you can take to boost your score. 

Keep in mind that there’s a slew of fees real estate investors need to consider. On top of property taxes and closing costs, you may also have to absorb homeowners association (HOA) fees and property management company expenses, too. Plus, if you’re getting a multi-unit property, there may be additional upkeep and repair costs.

Overall, you don’t want to put yourself in a tenuous financial position in the near term just because you’re excited about the long-term prospects. Make sure you can comfortably afford to jump into this project.

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2. Find a great real estate agent 

Once you determine that it’s a good time for you to buy, find a real estate agent to help source a property. Whether you’re a first-time buyer or an experienced investor, it helps to have someone with deep knowledge of the local market and is a trained negotiator and expert buyer. 

On top of that, a qualified real estate agent should have connections to local lenders who may be able to help get a loan. They should also know about foreclosure opportunities, potentially hooking you up with a lucrative investment opportunity.

3. Get prequalified and preapproved 

Gather your essential paperwork and go through the prequalification and preapproval process.

This is important even if you went through prequalification and preapproval in the past. Chances are, your financial situation has changed since then, and so it’s a good idea to start fresh. Getting prequalified and preapproved can increase your chances of getting a preferred rate.

To get prequalified and preapproved, gather all your important details — like your recent tax returns, proof of employment, bank statements, and a list of all your assets.

4. Check out different loan types

Unfortunately, you’re going to face a limited selection of options from the lender. There simply aren’t as many mortgage options for investment properties as there are for homebuyers who plan on living in the property they purchase. 

For the most part, this is because government-backed loans — such as loans from the Department of Veterans Affairs (VA), Department of Agriculture (USDA), and Federal Housing Administration (FHA) — are only meant to be used for primary residences. 

That said, there are some potential workarounds. If you really want a FHA loan or VA loan, talk to the lender about some potential options — like living in a multifamily home and renting out the units you’re not occupying. There may be some options that you can explore.

To give you a better idea of what your options might look like, here are the main types of investment loans. 

Conventional loans

A conventional loan is a type of loan that isn’t backed by the U.S. government. It requires having a good credit score of at least 620 and a manageable debt-to-income ratio that doesn’t exceed 45%.

Commercial loans

If you’re investing in real estate through an entity like an LLC or S-Corp, then you’ll want to look into commercial loans. Although the interest rates are typically higher and the mortgages have a maximum 20-year amortization schedule, these loans offer more flexibility than conventional loans.

Non-conforming jumbo loans 

A non-conforming jumbo loan is a mortgage that is too expensive for Freddie Mac and Fannie Mae to cover.

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5. Shop around for lenders

Wait and see what the lender offers and then request a copy of the preapproval letter in writing.

Take this preapproval letter and meet with different lenders to see if they can beat the interest rate. Talk to multiple providers and shop around until you have a clear sense of where you stand. Avoid the temptations to take the first offer that comes your way. You can always circle back and agree after you’ve done your due diligence.

It’s easy to get discouraged after talking to a lender or feel stuck with the information that they give you. However, there are usually alternatives available. So, keep looking until you get an answer that you’re happy with. Persistence almost always pays off in real estate. 

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6. Buy the rental property 

If you get a reasonable mortgage rate and have the funds to make a move, then proceed with buying the rental property.

Just make sure that the property is in solid condition, reasonably priced, and capable of generating a strong and consistent return on investment. This is where it pays to have a quality real estate agent on your team.

Spend the time to run all your expected numbers to make sure your investment makes good financial sense, and ask the real estate agent to take a look and see if your expectations are realistic and achievable. 

Tips for mortgaging a a rental property

Have your finances in order 

Income is one of the most important factors that lenders consider when qualifying borrowers for investment property mortgages. In some cases, you can use projected monthly income to qualify for a mortgage. But in those scenarios, you’re going to have to have a substantial amount to make it work.

In addition, lenders are going to want to see that you have enough money in savings to keep making your payments should you lose your income. So, it’s vital to come to the table with at least six months of emergency savings in liquid cash. 

Watch out for hidden costs

In addition to the six months of emergency funds, it’s a good idea to have an additional few thousand dollars in the bank to cover the numerous hidden costs that you’ll face as a landlord. 

For example, you may need to pay private mortgage insurance (PMI) if you don’t put down enough upfront. You’ll also most likely want to hire a property management company to handle maintenance and upkeep. Take the time to investigate all your potential expenses before committing to anything.

Make sure the investment will generate money 

It’s critical to make sure that the property is capable of producing a strong return.

Location, condition, and property type all play a significant role in determining ROI. The trick is to find a place that is affordable and in good condition in an area where it won’t be hard to find tenants.

Think about why you’re buying 

Buying an investment property is a big decision. That being the case, it’s crucial to think about why you’re doing it before you take the plunge. 

Make sure that you want to take on a property and that you’re committed to going through the process of becoming a landlord. 

You should also consider other options — including real estate investment trusts (REITs) or crowdfunding, which are purely financial investments that won’t require you to buy any property outright. 

Frequently Asked Questions 

Is it hard to get a mortgage for a rental property?

The main problem that investors face when buying rental properties is that lenders are much stricter about financing these types of transactions.

This is typically because rental properties are considered higher risk than primary homes. Since this won’t be your primary residence, mortgage brokers aren’t as quick to hand out hefty sums of cash and attractive mortgage interest rates. Additional steps are required to reduce their risk. 

For example, it’s possible in some cases to secure a personal home with a down payment of 3.5% (e.g., through the Federal Housing Administration). Yet, investment properties typically require down payments of around 20% or more.

As for your ability to qualify, that largely depends on your financial situation. If you’re in good financial shape with plenty of money in savings, then you shouldn’t have that difficult of a time securing a loan.

Do I need to pay PMI on an investment property?

PMI is usually required when taking out a conventional mortgage and paying less than 20% on a down payment.

PMI is different from homeowners insurance because it’s designed to protect the lender in case the owner defaults on their loan. PMI is also not landlord insurance. 

The good news is that it’s possible to avoid PMI. You can either put 20% down or take a loan with PMI and wait for it to expire once you’ve accumulated 20% home equity. 

Otherwise, you may be able to refinance your mortgage once you start making payments and avoid paying PMI. 

Do I need a property loan?

The short answer is yes. It’s almost always a good idea to go through the mortgage process and secure a loan with a monthly payment for a rental property.

Taking out a loan can help finance a property if you don’t have the money to buy it outright. Even if you have enough cash on hand to buy a property, it can still make strong financial sense to take out a loan for cash flow purposes.

Should I have a rental property in addition to my own home?

Every investor is different. Some investors can get by just fine juggling a rental property and a home, while others may struggle to make ends meet. 

Only you can determine if you’re in a position to take on this type of investment. Buying a single-family or multi-family home and having a mortgage is no small undertaking. It’s a big decision.

It’s a good idea to think about this well before you talk to a loan officer. And, remember that this individual is not a financial counselor. Their job is to assess your risk level. If they get the sense you’re not ready for a loan, you may get denied.

The Bottom Line

Buying a rental property can be a great personal finance decision, leading to short-term and long-term benefits and steady cash flow through rental income.

At the end of the day, real estate investors should talk to multiple mortgage lenders to try and secure an attractive loan. It’s not as easy to get a loan on a rental property, but it can be done. Over the years, countless property owners have taken this approach and walked away with financing on their rental properties. 

For investors going this route, it’s also a good idea to work with a tax consultant to help lower liabilities. Doing so could make it easier to take on financing. 

It’s also essential to take your time when buying a rental property and plan it out well in advance. Investors who are well-prepared for this type of purchase stand a far greater chance of being successful. On the flip side, people who rush into real estate often wind up having to sell quickly and taking a loss.

So, do your research, develop a plan, and stick to it. Who knows? You could be well on your way to building a real estate empire.

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