A Guide to Getting a Mortgage for a Rental Property

Mortgage rates have changed dramatically providing a chance for many prospective real estate investors to become landlords. The ongoing economic instability doesn’t have to stop you from taking a mortgage for rental property. Once you’re a landlord, your rental income could help you navigate the financial chaos more smoothly.

Here’s a look at what’s required to get financing for this type of rental real estate.

What Type of Mortgage Do I Need for a Rental Property?

You should get a rental property mortgage, which is similar to a primary residence mortgage, as both are home loans. However, the application process and requirements for a rental property loan are appreciably different. The mortgage you need for a rental home comes with a unique set of conditions since the risk for the lender is higher.

For starters, most borrowers default on these mortgages when in financial trouble to focus on repaying their primary residence’s mortgage. The higher default rate for rental property loans is the main reason for the increased risk. In turn, lenders often charge slightly higher interest rates on the loans.

Also, your application is likely to be met with more stringent underwriting rules. For example, the minimum down payment for a rental property mortgage is usually higher than for a primary home. Likewise, you may need a higher credit score and a lower debt-to-income (DTI) ratio to qualify.

Getting an Investment Property Loan for Commercial Real Estate

Factors That Affect Mortgage for a Rental Property

Most prospective lenders will scrutinize you for the following qualifications before approving your rental property loan:

  • Credit score: You’ll typically require a credit score of at least 620 to qualify for this type of rental real estate financing. However, a stellar score of 740 or higher would allow you to negotiate better mortgage terms, including lower interest rates.
  • Down payment: To secure a mortgage for a rental property, you’ll most likely need to pay between 15% to 20% upfront. A minimum down payment of 25% is often required for properties like multi-unit homes for rent.
  • DTI: This ratio indicates the proportion of your monthly gross income that’s available for paying off debt. The lower your DTI is (ideally between 36% and 45%), the better qualified you are for a rental property mortgage. Generally, borrowers can include 75% of their future monthly rental income as appraised by the lender in their DTI calculations. Due to potential vacancies, lenders don’t consider 100% of the anticipated rent in DTI assessments. If you’ve never been a landlord before, your lender will probably consider your personal income alone and not future rental earnings when appraising you for the mortgage.
  • Savings: You can boost your qualification to get a mortgage for a rental property by showing that you have enough liquid cash in the bank to cushion you against any financial turmoil. You’re better off with savings worth three or more months of the anticipated mortgage-related outlays. These include the required monthly mortgage payments with the principal amount and interest, taxes, and insurance.

Are complex, rigid lending rules preventing you from investing and building wealth with rental income? At Fidelity Mortgage Lenders, we’ll offer you flexible terms when you need a mortgage for a rental property. Contact us to start working out your personalized real estate financing today!

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