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How to Get a Mortgage for an Investment or Rental Property

By on March 7, 2014 in Mortgage

How to Get a Mortgage for an Investment or Rental PropertyRental real estate can be a very lucrative industry if you do your homework. It’s the homework that is a problem because getting started with investment properties can be a bit overwhelming. We’re talking about big commitments of tens of thousands of dollars, finding a cash flow positive property, making an offer, closing the deal, dealing with tenants, and handling maintenance issues as they come up.

However, before you can get started with dealing with any of this you need to be able to buy a property. And unless you plan to pay cash for the whole property you are going to need a mortgage lender that is willing to lend you the money to buy the rental property.

Getting a mortgage for an investment property is definitely not as easy as getting one for your primary residence. It isn’t even close.

How to Get a Rental Property Mortgage

Here are a few things that might surprise you about getting a mortgage for an investment or rental property.

Interest Rate

First, don’t be fooled by today’s low interest rates for primary residence mortgages. While those mortgage rates are incredibly low, you won’t find a rental property rate that low. Investment property mortgage are usually about 1% higher than primary residence mortgages. So while it is a great thing mortgage rates are so low because they have also pulled investment mortgage rates down, the rental property mortgages aren’t quite as low.

Cash Reserves

You may be surprised to find your bank wants you to have six months of cash reserves on hand specifically for the property you are going to buy. They are taking a risk with you in going after the rental market. Generally speaking you should be able to find a solid renter within 6 months. They want to make sure if the first six months of ownership don’t go well that they won’t immediately have to foreclose on the property. Having cash on hand is a good thing you should want to do either way, but it is a requirement for many lenders that you have this regardless if you want to or not.

Down Payment

You won’t be getting away with any 100% financing or 10% down loans with rental property. Investment property mortgage lenders will require you to have 20% down as a bare minimum. In reality most firms want 25% or higher – sometimes as high as 35% down.

This news, combined with the cash reserves, means it takes a ton of cash to play in the rental property space.

Credit Score

Of course just as with any mortgage you are going to need good credit before a mortgage lender is going to give you tens of thousands of dollars. The better your score the better your rate will be. Some lenders may not even touch you if you have a poor credit score. If you can’t be trusted with managing your own finances to a better score, why should they think you will be able to handle your finances plus a rental property?

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