Where Do You Go to Get a Mortgage Geared Toward Rentals?
If you have a rental property and want to expand, or you need financing for your first investment real estate purchase, a mortgage is usually the best way to obtain the funds. Mortgages for rental properties work a bit differently than loans taken out for a residence. Not all banks offer extensive financing services for prospective landlords, so you need to know the questions to ask and what you'll need to close the deal.
Defining the Different Types of Lenders
Banks usually have two different ways of offering financing for investment properties: direct loans and underwriters. Working with underwriters means that a third party looks at your financial portfolio and determines your ability to repay the loan. An underwriter may or may not have much experience in the rental market and can pull out of the deal at any time. A sudden loss of financing can leave you struggling to close on time.
With direct lending, the bank agrees to finance your mortgage. There is no third party involved in the process, and you can talk directly to the decision-makers along the way. The more communication between you and your lender, the more likely you are to get through escrow and closing with no hassles.
Loan Limits and Documentation
For a personal mortgage, you need to show proof of income and have a reasonable credit score. In most cases, you'll need to show at least two years of W-2s, though you may be able to use copies of your tax returns if you are self-employed. The same is true to qualify for a mortgage on rental properties. Some of the biggest differences in the requirements for a mortgage on a rental property come into play when you have multiple properties under lien.
Fannie Mae allows real estate investors to sign up to 10 loans for investment properties. Most banks limit lenders to four simultaneous mortgages. For the first four, the requirements are fairly standard. You must have a credit score of at least 630, and you also need a fairly hefty down payment, typically around 20 percent. Of course, if you have a credit score closer to the bottom limit, you are likely to pay more for the same financing. After you sign for the first four mortgages, the credit score requirement jumps up to around 720 and the down payment to 25 percent.
Documenting Your Cash Reserves
Another issue when looking for a mortgage for a rental property is your cash on hand. Most lenders want you to have at least six months of operating costs per property. Having that much of a reserve ensures that your lender will still get paid if you experience extended vacancies or need to do major property maintenance.
The more cash you have on hand, the more comfortable lenders are issuing you a loan. If you don't have the necessary cash reserves, you might find other investors to help land you the financing.
Closing the Loan
As with any mortgage, large banks often have financing options available for prospective landlords. Be sure to talk with a lender, not a broker, whenever possible. A lender is a direct path to financing; a broker is just a pass-through between you and the lender. Shop different banks and check to see if they have an investment branch. That can save you a lot of hassles as you work to line up funding. It's always best to work with a lender that is used to issuing mortgages for landlords.
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