How to Get a Rental Property Mortgage

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There are around 20 million rental properties across the US, and the vast majority are owned by individuals as opposed to companies or investment firms.

Rental real estate is one of the best ways to build wealth. Not only will you make a profit each month, as your incoming rent exceeds your expenses, but you’ll also benefit from an asset that appreciates in value over time. 

And the fact that you can get a rental property mortgage means that you can use leverage to multiply your investment potential. That mortgage is then paid down every month by your tenants, and you get to benefit from additional equity in the property.

Most individual investors use rental property mortgages, rather than paying cash, due to the many benefits of leverage. Wondering what it takes to get your first mortgage for a rental? Keep reading our rental property mortgage guide below to find out how. 

Differences Between Residential and Rental Property Mortgage

Mortgages for homeowners and those for investors are very similar. They function exactly the same, as you’ll need a downpayment, pay interest, and likely choose a 30-year fixed-rate mortgage.

The only real difference is the requirements for getting a mortgage, and the interest rates.

To get a rental property mortgage, you typically need between 20 and 30 percent as a down payment, whereas homeowners can provide anywhere between 3.5  and 20 percent to get a mortgage. Typically, the more investment loans you have, the higher the down payment requirements will be.

Interest rates will be a little bit higher for investment properties. Rates are lowest for homeowners because they are far less likely to stop making mortgage payments and walk away from the property than an investor who doesn’t depend on that roof to keep them safe.

You may also find stricter requirements as far as income history and credit score are concerned, though most people interested in getting a rental property mortgage usually don’t struggle in this area. 

Managing Personal Finances

The most important step for getting a rental mortgage is ensuring your personal finances are solid and organized. You’ll want the best credit score you can get. 

Take time before applying for a mortgage to improve your credit score. Look for errors on your report that might be affecting the score. Do your best to pay down any consumer debt that you have, to lower your credit usage which increases your score and borrowing power.

Don’t apply for other types of loans before applying for a mortgage, and make sure to make all current payments on time to avoid any derogatory remarks. 

Prepare your down payment funds ahead of time. If you are borrowing from yourself, in the form of a home equity loan or HELOC, get that taken care of one to two months prior to applying for a mortgage. 

You want the funds in your account and easily accessible by the time you apply. 

On top of down payment funds, you’ll want up to six months of cash reserves on hand a well. No property is rented out 100% of the time, so lenders want to know you can make mortgage payments in the event the property sits vacant for any period of time. 

Income Requirements for Rentals

Getting your first rental property can be tricky because you are likely making mortgage payments on your own home. Your current level of income will need to be enough to cover your existing mortgage and the new mortgage. 

And if you have any other debt, like auto payments, student loans, or credit cards, you’ll need to be able to cover those as well.

Normally, when getting a rental property, you can use the projected rental income to help qualify for the mortgage. But if you are a brand new investor, you won’t be able to.

You need to have one to two years of landlord experience before you can use projected income to qualify for a mortgage. 

After you’ve gotten your first rental, and established yourself as an experienced landlord, lenders will allow you to use projected rental income as part of your overall income, making it easier to acquire future loans. 

But whether it’s your first or fifth rental property, you’ll need a stable job with at least two years of consistent income. Lenders average the amount of money you made over the last two years to determine the amount you can borrow.

Find a Rental Property Mortgage Near Me

Not all lenders offer mortgages on rental properties. In fact, most do not. One of the most important rental property mortgage tips is to find the right lender to work with.

Bigger banks are going to have more strict requirements and can be harder to work with, especially as a new investor. Your best bet is to find a small, local lender in the area you plan to invest in.

After you’ve made a list of possible lenders to work with, send in your rental property mortgage application. Since every lender is different, it helps to get multiple quotes to see which lender is going to be the best to work with.

If you plan to invest in multiple properties over the course of time, establishing a relationship with a direct, local lender will be your key to success. 

Find a Property and Close the Loan

In the past, when real estate wasn’t so competitive, you could find a property first, get it under contract, and then take your time to secure your financing. 

But in 2021 and beyond, the market moves far too fast. You’ll want to get preapproved for your loan before you bother to look for properties.

Once approved, you can start shopping around. When you find a deal, you’ll need to move fast, as homes are being sold within hours of hitting the market. 

You can work with a “we buy houses” company, which often has a wider inventory or rent-ready properties for sale, helping you save time. 

Then, work with your lender by supplying all the documents they need in order to close the loan as fast as possible. 

Also read: Roof replacement cost ideas

Rinse and Repeat

Now that you know what it takes to get a rental property mortgage, you can add real estate to your wealth-building portfolio. Many new investors find that real estate quickly outperforms the assets they have in the stock market.

Whether you liquidate your current holdings and move them all into real estate or not is up to you. But one thing is for sure, once you have one property under your belt, you’re going to want another.

Looking for more tips like this? Visit our blog now to keep reading. 

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