How to get a mortgage for your investment property

Plus: four different options for rental property loans

How to get a mortgage for your investment property

Getting a mortgage for your investment property could make good financial sense for a number of reasons, whether for future development, to flip it, or to enjoy the appreciation when you make the eventual sale. If you think investing in property is right for you, here are seven ways to get a mortgage.

Shop and look around for the best rates

If you want to get a mortgage for your investment property, the first thing you will want to do is shop and look around for the best rates. To do so, you can start by contacting the bank that issued your first mortgage, as well as other lenders, in order to compare terms and rates. You will also be able to enquire about closing costs and other fees.

Always read the fine print

In your pursuit of the best rates offered by various lenders, you should always read the fine print. Combing through any documents or contracts will allow you to uncover extra costs that may arise as well as large fees. These may include unforeseen costs resulting from the number of existing mortgages or loans that you already have.

Make a larger down payment

If possible, you can make a larger down payment on your investment property, thereby reducing the interest rate. To further lower the rate, you could also pay upfront fees, or points. These moves could save you thousand of dollars from your repayment total, if you apply for a larger loan and are planning to hold onto the property for a long time.

Depending on the loan program and the specific lender, you could put down just 3% on a conventional mortgage for a primary residence. If, however, your down payment is under 20%, you will have to pay private mortgage insurance, or PMI. PMI will protect your lender from financial losses if you default on the loan. For investment properties, PMI does not apply. This will force you to make a larger down payment of at least 15-20% to finance a rental property. Multi-unit investment properties are an example of a property that requires a down payment of at least 25%.

Check your credit score

When getting a mortgage for your investment property, you will want to check your credit score. This is an important step to take in the months leading up to your property search. By checking your credit score, you will learn the different kinds of loans you could qualify for. If your credit score has been damaged, this will be a good time to take the steps necessary to improve it. The best way to do this is by paying down as much of your debts as possible or, better yet, paying them off altogether.

When financing a rental property, lenders will generally require a credit score of at least 620. But if you want to get the best terms and interest rates, you will want a credit score of at least 740. Higher than that is considered a very good credit score.

Consider your debt-to-income ratio

Your debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes into paying off your debt. Your DTI should be anywhere from 36-45% to qualify for a mortgage for a rental property. As additional qualifying income to reduce your DTI, you can count 75% of your potential monthly income. In other words, lenders do not consider 100% of rental income to account for possible vacancies. If you do not have any experience as a landlord, your lender might not consider future rental income. In these cases, your personal income may have to be solely responsible for procuring a mortgage for a rental.

Have cash on hand

It is also a good idea to have cash on hand when getting a mortgage for your investment property. Ample reserves of money or other liquid assets would be beneficial as well. To qualify for an investment property mortgage, about six months’ worth of funds are usually needed.

Try to get rental property loans

Another option available to you is to get a rental property loan. Here are the different types of loans that may help you find success in your investment:

Conventional mortgages. For a conventional mortgage, you will likely have to make a down payment of 20% of the purchase price. Lenders could require 30% for investment properties. Your ability to get a conventional mortgage for an investment property will rely on your credit history and your personal credit score. This will also dictate what kind of interest rate will apply to the mortgage.

Hard money loans. Hard money loans are ideal if you want to flip an investment property and less suitable if you want to purchase a property to hold, rent out, or develop. One of the reasons hard money loans work well for flipping houses is that they are usually easier to qualify for than conventional loans.

Private money loans. Private money loans are loans usually from one person to another. Depending on the relationship between you and the lender, interest rates and loan terms usually vary, from predatory to extremely favourable.

Home equity. Another way to secure an investment property is by tapping into your home equity, either through cash-out refinance, a home equity loan, or a home equity line of credit, or HELOC. Typically, you can borrow up to 80% of the property’s equity value to use for the purchase and repair of the home.